U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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For the fiscal year ended December 31, 2007
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Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
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For the transition period from
to
Commission file number 000-33223
Gateway Financial Holdings, Inc.
(Exact name of registrant as specified in its charter)
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North Carolina
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56-2040581
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(State of incorporation)
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(IRS Employer Identification No.)
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1580 Laskin Road, Virginia Beach, Virginia
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23451
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(Address of principal executive offices)
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(Zip code)
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(757) 422-4055
(Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
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Title of each class
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Exchange on which registered
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Common Stock, No Par Value
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The NASDAQ Stock Market, LLC
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Securities registered under Section 12(g) of the Act: None.
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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
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No
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Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act).
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large accelerated filer
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accelerated filer
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non-accelerated filer
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smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined Rule 12b-2 of the Act).
Yes
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No
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State issuers revenues for its most recent fiscal year $127.3 million.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the registrants most recently
completed second fiscal quarter: $160.7 million.
As of March 10, 2008, (the most recent practicable date), the registrant had outstanding 12,650,985
shares of common stock, no par value per share.
Documents Incorporated By Reference
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Document
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Where Incorporated
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1.
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Proxy Statement for the Annual Meeting of Shareholders
to be held May 19, 2008 to be mailed to shareholders
within 120 days of December 31, 2007.
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Part III
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Form 10-K Table of Contents
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Gateway Financial Holdings, Inc. is a financial holding company incorporated under the laws of
North Carolina to serve as the holding company for Gateway Bank & Trust Co., a North Carolina
chartered commercial bank with banking and insurance agency offices in eastern North Carolina and
eastern Virginia. The bank began operations on December 1, 1998, and, effective October 1, 2001,
became our wholly owned subsidiary.
Since inception, we have aggressively pursued the primary objective of building a full-service
commercial banking operation, while effectively supplementing our banking activities with other
financial services intended to generate significant non-interest income. Accordingly, a key
component of our growth strategy has been expanding our franchise through the opening of newly
constructed financial centers and strategic financial center acquisitions. We have grown into a
regional community bank with a total of thirty-three full-service financial centers nineteen in
Virginia: Virginia Beach (7), Richmond (6), Chesapeake (3), Suffolk, Norfolk and Emporia; and
fourteen in North Carolina: Elizabeth City (3), Edenton, Kitty Hawk (2), Raleigh (3), Moyock, Nags
Head, Plymouth, Roper, and Wilmington. We acquired The Bank of Richmond, N.A., effective June 1,
2007, and operate the six financial centers in the Richmond metropolitan area and one loan
production office in Charlottesville, Virginia, under the assumed name The Bank of Richmond.
Consistent with our long-range strategic objectives, we will continue to consider acquisition
opportunities including whole bank or financial center locations. We will also continue to explore
de novo financial center opportunities in markets that we consider attractive. We currently intend
to open five additional new financial centers in 2008, including our first financial centers in
Chapel Hill and Wake Forest, North Carolina, and Charlottesville and Lynchburg, Virginia, as well
as our second office in Emporia, Virginia
The bank has four wholly-owned operating subsidiaries. Gateway Insurance Services, Inc., an
insurance agency with offices in Edenton, Hertford, Elizabeth City, Plymouth, Moyock and Kitty
Hawk, North Carolina, and the Hampton Roads area of Virginia, sells insurance products to
businesses and individuals. Gateway Investment Services, Inc., assists Bank customers in their
securities brokerage activities through an arrangement with an unaffiliated broker-dealer. As
prescribed by this arrangement, Gateway Investment Services earns revenue through a commission
sharing arrangement with the unaffiliated broker-dealer. Gateway Bank Mortgage, Inc., provides
mortgage banking services with products that are sold on the secondary market. Gateway Title
Agency, Inc., engages in title insurance and settlement services for real estate transactions. In
an ongoing effort to create significant sources of non-interest income, we will continue to look
for ways to expand non-traditional banking activities in our insurance and investment services
subsidiaries.
Since inception, we have concentrated our efforts on building a franchise and infrastructure that
can deliver and sustain long-term profitability. We have been profitable for twenty-four
consecutive quarters, producing net income of $3.9 million in 2005, $5.3 million in 2006, and $11.0
million during the year ended December 31, 2007. While we anticipate continued profitability,
future expansion activity can be expected to generate significant additional costs that can
negatively impact earnings as we pursue our growth strategies.
Market Area and Growth Strategy
Our current market area consists of the following five geographic regions: (1) the Richmond,
Virginia metropolitan statistical area; (2) the Greater Metropolitan Hampton Roads area of
Virginia; (3) the Northeastern coastal region of North Carolina (geographically contiguous to
Hampton Roads), including the Outer Banks; (4) the Research Triangle area of North Carolina
(includes Raleigh); and, most recently, (5) the Southeastern coastal region of North Carolina
(includes Wilmington). The Hampton Roads area, which includes the cities of Norfolk, Virginia
Beach, Suffolk and Chesapeake, is the second largest urban concentration in the southern United
States with a 2006 population, estimated by the U.S. Census Bureau, of over 1.67 million.
Additionally, Virginia Beach is the largest city, as measured by population, in the Commonwealth of
Virginia. The Northeastern coastal region of North Carolina is a bedroom community for the Hampton
Roads area and the Outer Banks includes such prime vacation areas as Corolla, Duck, Kitty Hawk,
Kill Devil Hills, Manteo, Nags Head, and Southern Shores. According to the Environmental Systems
Research Institute (ESRI), a leading national demographic forecaster, the projected population
growth from 2005 to 2010 in the Hampton Roads and Northeastern North Carolina banking markets is
7.8% compared to 6.3% for the entire United States.
The Raleigh-Cary Metropolitan area is the 51
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largest metropolitan area in the United
States with a 2006 population,
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estimated by the U.S. Census Bureau, of almost 994 thousand. According to ESRI, the MSA of Raleigh
has a projected population growth of 15.8% from 2005 to 2010. Richmond, Virginia is the
45
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largest metropolitan area in the United States with a 2006 population, estimated by
the U.S. Census Bureau, of over 1.13 million.
We emphasize personalized service, access to decision makers, and a quick turn around time on
lending decisions. Our slogan is Real
People . . .
Real Solutions. We have a management team
with extensive experience in our local markets. We intend to leverage the core relationships we
build by providing a variety of services to our customers. With that focus, we target:
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Small-and medium-sized businesses;
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Professionals and middle managers of locally based companies;
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Residential real estate developers; and
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Individual consumers.
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We believe that these segments are the most under-served by local financial centers of national and
super-regional financial institutions. We also intend to continue to diversify our revenue in
order to continue to generate significant non-interest income. We presently offer investment
brokerage and insurance services, and we originate mortgage loans for sale in the secondary market.
We believe that economic growth and bank consolidation have created a growing number of businesses
and consumers in need of high quality banking and other financial services delivered with
personalized attention. Consolidation in the banking market has dislocated experienced and
talented management and lending personnel. As a result, we believe we have a substantial
opportunity to attract experienced management, loan officers and banking customers both within our
current markets and other markets in which we might expand in Virginia and North Carolina. Our
business plan is to capitalize on this opportunity by developing a financial center network in
growing areas within Virginia and North Carolina where we can hire experienced bankers with a loyal
following of deposit and loan customers. Our plan has been to start new financial centers after we
have identified either an experienced banker who will have responsibility for that market or an
existing office in a location with favorable growth characteristics that is being sold by another
bank. We believe that it takes a combination of an attractive location and experienced, talented
people to be successful in expanding our franchise. We intend to build upon existing relationships
and create new relationships and new markets by de novo expansion, further financial center
acquisitions, or potential whole bank acquisitions which make strategic and economic sense.
We intend to achieve our primary goal of maximizing long-term returns to stockholders by focusing
on the following objectives:
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Emphasize relationship banking.
We have been successful in building client
relationships because our regional model enables us to deliver products and services that
are comparable to that of our largest competitors and high customer service levels that are
most commonly associated with community banks. The Bank has divided its markets into six
regions. Each region has its own Market President whose knowledge of his region, presence
in his community and ability to make prompt credit decisions, strengthens our ability to
develop local relationships. We typically render commercial loan decisions within 48 hours
and retail loans within an hour. Localized decision making and personalized customer
service form the core of our relationship banking strategy, and we plan to maintain this
approach as we continue to grow in both our existing markets and new markets.
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Grow organically in our existing markets.
Our markets have been subject to significant
bank consolidation. We believe there is a large customer base in our markets that prefers
doing business with a local institution and may be dissatisfied with the service received
from national and super-regional banks. By providing our customers with personalized
service and a big bank product suite, we expect to continue our strong growth.
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Expand franchise in high growth markets.
We will actively consider both acquisitions
and de novo financial center opportunities in existing and new market areas. During 2007,
we have acquired The Bank of Richmond, N.A., and opened three new de novo financial centers
(two in Raleigh, North Carolina, and our first financial center in Wilmington, North
Carolina). We are focused on markets in central and eastern Virginia and central and
eastern North Carolina that possess favorable growth characteristics and in which we have
identified experienced bankers to help execute our strategy. For example, we intend to
open our next financial centers in Chapel Hill and Wake Forest, North Carolina, and
Charlottesville and Lynchburg, Virginia.
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Grow insurance agency through acquisitions.
Our independent insurance agency was
created through the acquisition and integration of three independent insurance agencies.
During 2007, we successfully
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integrated the acquisitions of two insurance agencies we acquired in the fourth quarter of
2006, and acquired, as a separate subsidiary, a mortgage insurance and real estate
settlement agency in the Greater Hampton Roads area of Virginia. We will actively consider
acquisitions in both our existing market areas and in other growing markets in eastern and
central Virginia and eastern and central North Carolina that have favorable market
demographics for our insurance agency subsidiary.
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Grow non-interest income through mortgage subsidiary.
We operate our own mortgage
subsidiary. We intend to actively seek mortgage originations in both our existing market
areas and in other growing markets in eastern and central Virginia and eastern and central
North Carolina.
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Improve our core profitability.
We believe as we grow our franchise that we will be
able to take advantage of the economies of scale typically enjoyed by larger organizations.
We believe the investments we have made in the expansion of our financial center network
and technology infrastructure are sufficient to support a much larger organization, and
therefore believe increases in our expense base going forward should be lower than our
proportional increase in assets and revenues.
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Continue our disciplined execution.
We believe our success as a banking organization
depends on a disciplined approach to originating loans and monitoring the performance of
our loan portfolio. Despite our growth, we have consistently maintained strong asset
quality. We believe our strong asset quality is the result of conservative underwriting
standards, experienced loan officers and the strength of the local economies in which we
operate.
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Competition
Our subsidiary bank faces considerable competition in its market areas for deposits and loans from
other depository institutions. Many of the banks depository institution competitors have
substantially greater resources, broader geographic markets, and higher lending limits than the
bank and are also able to provide more services and make greater use of media advertising. In
recent years, intense market demands, economic pressures, and increased customer awareness of
products and services, and the availability of electronic services have forced banks to diversify
their services and become more cost-effective. Also, with the elimination of restrictions on
interstate banking, our bank may be required to compete with out-of-state financial institutions
that are not presently in its market area. Our bank presently faces strong competition in
attracting and retaining deposits and loans. Based upon FDIC data as of June 30, 2007, in the
Greater Hampton Roads Metropolitan Statistical Area, there were 376 financial centers operated by
32 banking institutions with approximately $18.4 billion in deposits. Our banks total deposits
were approximately $496.3 million in the Hampton Roads market and $641.2 in the adjacent
Northeastern North Carolina markets on that date. Based upon FDIC data as of June 30, 2007, in the
Raleigh-Cary Metropolitan Statistical Area, there were 276 financial centers operated by 32 banking
institutions with approximately $15.6 billion in deposits. The bank had almost $75.7 million in
deposits in Raleigh on that date. On that date, FDIC data indicated that the Richmond area market
had 374 financial centers operated by 38 banking institutions with over $34.8 billion in deposits
and the bank had almost $208.4 million in deposits in the Richmond area on that date.
The bank also competes with credit unions, brokerage firms, insurance companies, money market
mutual funds, consumer finance companies, mortgage companies and other financial companies, some of
which are not subject to the same degree of regulation and restrictions as the bank in attracting
deposits and making loans. Interest rates on deposit accounts, convenience of facilities, products
and services, and marketing are all significant factors in the competition for deposits.
Competition for loans comes from other commercial banks, savings institutions, insurance companies,
consumer finance companies, credit unions, mortgage banking firms and other institutional lenders.
We primarily compete for loan originations through our handling of loans and the overall quality of
service. Competition is affected by the availability of lendable funds, general and local economic
conditions, interest rates, and other factors that are not readily predictable.
We expect competition will continue in the future due to statewide financial center laws and the
entry of additional bank and nonbank competitors in our markets.
Other Products and Services
Other Banking Products and Services.
To enable our bank to offer more personalized service to its customers, we offer a range of
products and services, including 24-hour internet banking, direct deposit, travelers checks, safe
deposit boxes, United States savings bonds and automatic account transfers. We earn fees for most
of these services. We also receive ATM transaction fees
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from transactions performed by our customers participating in a shared network of automated teller
machines and a debit card system that our customers can use throughout our market areas and in
other states.
Other Financial Services.
Through its subsidiary, Gateway Investment Services, Inc., our bank uses a networking arrangement
to make available securities brokerage products to its customers. We also offer property, casualty,
life and health insurance products to businesses and individuals through our banks insurance
subsidiary, Gateway Insurance Services, Inc. Gateway Insurance Services is an independent insurance
agency that does not engage in insurance underwriting. It has offices in Edenton, Hertford,
Elizabeth City, Moyock, Plymouth and Kitty Hawk, North Carolina, and Chesapeake and Newport News,
Virginia. The banks subsidiary, Gateway Title Agency, Inc., engages in title insurance and
settlement services for real estate transactions and its mortgage banking subsidiary, Gateway Bank
Mortgage, Inc., offers our customers a range of mortgage products that are sold on the secondary
market.
Employees
The Company had 420 full-time equivalent employees at December 31, 2007. None of the Companys
employees are covered by a collective bargaining agreement. The Company considers its relations
with its employees to be good.
SUPERVISION AND REGULATION
Banking is a complex, highly regulated industry. The primary goals of the bank regulatory scheme
are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary
policy. In furtherance of these goals, Congress has created several largely autonomous regulatory
agencies and enacted numerous laws that govern banks, bank holding companies and the banking
industry. The descriptions of and references to the statutes and regulations below are brief
summaries and do not purport to be complete. The descriptions are qualified in their entirety by
reference to the specific statutes and regulations discussed.
Gateway Financial Holdings, Inc.
We are a bank holding company that has elected to be treated as a financial holding company. As a
bank holding company under the Bank Holding Company Act of 1956, as amended, we are registered with
and subject to regulation by the Federal Reserve. We are required to file annual and other reports
with, and furnish information to, the Federal Reserve. The Federal Reserve conducts periodic
examinations of us and may examine any of our subsidiaries, including the bank.
The Bank Holding Company Act provides that a bank holding company must obtain the prior approval of
the Federal Reserve for the acquisition of more than five percent of the voting stock or
substantially all the assets of any bank or bank holding company. In addition, the Bank Holding
Company Act restricts the extension of credit to any bank holding company by its subsidiary bank.
The Bank Holding Company Act also provides that, with certain exceptions, a bank holding company
may not engage in any activities other than those of banking or managing or controlling banks and
other authorized subsidiaries or own or control more than five percent of the voting shares of any
company that is not a bank. The Federal Reserve has deemed limited activities to be closely related
to banking and therefore permissible for a bank holding company.
Subject to various limitations, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999
permits a bank holding company to elect to become a financial holding company. A financial
holding company greatly expands the scope of activities in which a bank holding company may engage
by allowing it to affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature. Among the activities that are deemed financial in
nature are, in addition to traditional lending activities, securities underwriting, dealing in or
making a market in securities, sponsoring mutual funds and investment companies, insurance
underwriting and agency activities, certain merchant banking activities, as well as activities that
the Federal Reserve considers to be closely related to banking.
A bank holding company may become a financial holding company under the Modernization Act if each
of its subsidiary banks is well-capitalized under the Federal Deposit Insurance Corporation
Improvement Act prompt corrective action provisions, is well managed and has at least a
satisfactory rating under the Community
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Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal
Reserve that the bank holding company wishes to become a financial holding company. A bank holding
company that falls out of compliance with these requirements may be required to cease engaging in
some of its activities.
Under the Modernization Act, the Federal Reserve serves as the primary umbrella regulator of
financial holding companies, with supervisory authority over each parent company and limited
authority over its subsidiaries. Expanded financial activities of financial holding companies
generally will be regulated according to the type of such financial activity: banking activities by
banking regulators, securities activities by securities regulators and insurance activities by
insurance regulators. The Modernization Act also imposes additional restrictions and heightened
disclosure requirements regarding private information collected by financial institutions.
Enforcement Authority
. We will be required to obtain the approval of the Federal Reserve prior to
engaging in or, with certain exceptions, acquiring control of more than 5% of the voting shares of
a company engaged in, any new activity. Prior to granting such approval, the Federal Reserve must
weigh the expected benefits of any such new activity to the public (such as greater convenience,
increased competition, or gains in efficiency) against the risk of
possible adverse effects of such activity (such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices). The Federal Reserve has
cease-and-desist powers over bank holding companies and their nonbanking subsidiaries where their
actions would constitute a serious threat to the safety, soundness or stability of a subsidiary
bank. The Federal Reserve also has authority to regulate debt obligations (other than commercial
paper) issued by bank holding companies. This authority includes the power to impose interest
ceilings and reserve requirements on such debt obligations. A bank holding company and its
subsidiaries are also prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
Interstate Acquisitions
. Federal banking law generally provides that a bank holding company may
acquire or establish banks in any state of the United States, subject to certain aging and deposit
concentration limits. In addition, North Carolina banking laws permit a bank holding company which
owns stock of a bank located outside North Carolina to acquire a bank or bank holding company
located in North Carolina. Federal banking law will not permit a bank holding company to own or
control banks in North Carolina if the acquisition would exceed 20% of the total deposits of all
federally-insured deposits in North Carolina.
Capital Adequacy
. The Federal Reserve has promulgated capital adequacy regulations for all bank
holding companies with assets in excess of $150 million. The Federal Reserves capital adequacy
regulations are based upon a risk-based capital determination, whereby a bank holding companys
capital adequacy is determined in light of the risk, both on- and off-balance sheet, contained in
the companys assets. Different categories of assets are assigned risk weightings and are counted
at a percentage of their book value.
The regulations divide capital between Tier 1 capital (core capital) and Tier 2 capital. For a bank
holding company, Tier 1 capital consists primarily of common stock, related surplus, noncumulative
perpetual preferred stock, minority interests in consolidated subsidiaries and a limited amount of
qualifying cumulative preferred securities. Goodwill and certain other intangibles are excluded
from Tier 1 capital. Tier 2 capital consists of an amount equal to the allowance for loan and lease
losses up to a maximum of 1.25% of risk-weighted assets, limited other types of preferred stock not
included in Tier 1 capital, hybrid capital instruments and term subordinated debt. Investments in
and loans to unconsolidated banking and finance subsidiaries that constitute capital of those
subsidiaries are excluded from capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying
total capital. The Tier 1 component must comprise at least 50% of qualifying total capital.
Every bank holding company has to achieve and maintain a minimum Tier 1 capital ratio of at least
4.0% and a minimum total capital ratio of at least 8.0%. In addition, banks and bank holding
companies are required to maintain a minimum leverage ratio of Tier 1 capital to average total
consolidated assets (leverage capital ratio) of at least 3.0% for the most highly-rated,
financially sound banks and bank holding companies and a minimum leverage ratio of at least 4.0%
for all other banks. The Federal Deposit Insurance Corporation and the Federal Reserve define
Tier 1 capital for banks in the same manner for both the leverage ratio and the risk-based capital
ratio. However, the Federal Reserve defines Tier 1 capital for bank holding companies in a slightly
different manner. As of December 31, 2007, our Tier 1 leverage capital ratio and total capital were
9.76% and 11.40%, respectively.
The guidelines also provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially above the minimum
supervisory level, without significant reliance on intangible assets. The guidelines also indicate
that the Federal Reserve will continue to consider a Tangible Tier 1 Leverage Ratio in evaluating
proposals for expansion or new activities. The Tangible Tier 1
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Leverage Ratio is the ratio of Tier 1 capital, less intangibles not deducted from Tier 1 capital,
to quarterly average total assets. As of December 31, 2007, the Federal Reserve had not advised us
of any specific minimum Tangible Tier 1 Leverage Ratio applicable to us.
Source of Strength for Subsidiary.
Bank holding companies are required to serve as a source of
financial strength for their depository institution subsidiaries, and, if their depository
institution subsidiaries become undercapitalized, bank holding companies may be required to
guarantee the subsidiaries compliance with capital restoration plans filed with their bank
regulators, subject to certain limits.
Dividends.
As a holding company that does not, as an entity, currently engage in separate business
activities of a material nature, our ability to pay cash dividends depends upon the cash dividends
received from our subsidiary bank and management fees paid by the bank. We must pay our operating
expenses from funds we receive from the bank. Therefore, shareholders may receive cash dividends
from us only to the extent that funds are available after payment of operating expenses. In
addition, the Federal Reserve generally prohibits bank holding companies from paying cash dividends
except out of operating earnings, provided that the prospective rate of earnings retention appears
consistent with the bank holding companys capital needs, asset quality and overall financial
condition. As a North Carolina corporation, our payment of cash dividends is subject to the
restrictions under North Carolina law on the declaration of cash dividends. Under such provisions,
cash dividends may not be paid if a corporation will not be able to pay its debts as they become
due in the usual course of business after paying such a cash dividend or if the corporations total
assets would be less than the sum of its total liabilities plus the amount that would be needed to
satisfy certain liquidation preferential rights.
Change of Control.
State and federal banking law restricts the amount of voting stock of a bank
that a person may acquire without the prior approval of banking regulators. The Bank Holding
Company Act requires that a bank holding company obtain the approval of the Federal Reserve before
it may merge with a bank holding company, acquire a subsidiary bank, acquire substantially all of
the assets of any bank, or before it may acquire ownership or control of any voting shares of any
bank or bank holding company if, after such acquisition, it would own or control, directly or
indirectly, more than 5% of the voting shares of that bank or bank holding company. The overall
effect of such laws is to make it more difficult to acquire our company by tender offer or similar
means than it might be to acquire control of another type of corporation. Consequently, our
shareholders may be less likely to benefit from rapid increases in stock prices that often result
from tender offers or similar efforts to acquire control of other types of companies.
Gateway Bank & Trust Co.
The bank is subject to various requirements and restrictions under the laws of the United States
and the State of North Carolina. As a North Carolina bank, the bank is subject to regulation,
supervision and regular examination by the North Carolina Banking Commission. As a member of the
Federal Reserve, the bank is subject to regulation, supervision and regular examination by the
Federal Reserve. The North Carolina Banking Commission and the Federal Reserve have the power to
enforce compliance with applicable banking statutes and regulations. These requirements and
restrictions include requirements to maintain reserves against deposits, restrictions on the nature
and amount of loans that may be made and the interest that may be charged thereon and restrictions
relating to investments and other activities of the bank.
Transactions with Affiliates
. The bank may not engage in specified transactions (including, for
example, loans) with its affiliates unless the terms and conditions of those transactions are
substantially the same or at least as favorable to the Bank as those prevailing at the time for
comparable transactions with or involving other nonaffiliated entities. In the absence of
comparable transactions, any transaction between the bank and its affiliates must be on terms and
under circumstances, including credit standards, which in good faith would be offered or would
apply to nonaffiliated companies. In addition, transactions referred to as covered transactions
between the Bank and its affiliates may not exceed 10% of the banks capital and surplus per
affiliate and an aggregate of 20% of its capital and surplus for covered transactions with all
affiliates. Certain transactions with affiliates, such as loans, also must be secured by collateral
of specific types and amounts. The bank also is prohibited from purchasing low-quality assets from
an affiliate. Every company under common control with the bank, including our company, is deemed to
be an affiliate of the bank.
Loans to Insiders
. Federal law also constrains the types and amounts of loans that the bank may
make to its executive officers, directors and principal shareholders. Among other things, these
loans are limited in amount, must be approved by the banks board of directors in advance, and must
be on terms and conditions as favorable to the bank as those available to an unrelated person.
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Regulation of Lending Activities
. Loans made by the bank are also subject to numerous federal and
state laws and regulations, including the Truth-In-Lending Act, Federal Consumer Credit Protection
Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and adjustable
rate mortgage disclosure requirements. Remedies to the borrower or consumer and penalties to the
bank are provided if the bank fails to comply with these laws and regulations. The scope and
requirements of these laws and regulations have expanded significantly in recent years.
Financial Centers
. All banks located in North Carolina are authorized to financial center
statewide. Accordingly, a bank located anywhere in North Carolina has the ability, subject to
regulatory approval, to establish financial center facilities near any of our facilities and within
our market area. If other banks were to establish financial center facilities near our facilities,
it is uncertain whether these financial center facilities would have a material adverse effect on
our business.
Federal law provides for nationwide interstate banking, and subject to certain aging and deposit
concentration limits that may be imposed under applicable state laws. Applicable North Carolina
statutes permit regulatory authorities to approve de novo financial center in North Carolina by
institutions located in states that would permit North Carolina institutions to financial center on
a de novo basis into those states. Federal regulations prohibit an out-of-state bank from using
interstate financial center authority primarily for the purpose of deposit production. These
regulations include guidelines to insure that interstate financial centers operated by an
out-of-state bank in a host state are reasonably helping to meet the credit needs of the host state
communities served by the out-of-state bank.
Pursuant to a regulatory agreement between the state banking regulatory authorities in North
Carolina and Virginia, we are permitted to open and operate financial centers in Virginia. The
Virginia banking regulator has the opportunity to comment on our operations in Virginia, but the
banks Virginia operations are subject to regulation, supervision and regular examination by the
North Carolina Commissioner of Banks.
Reserve Requirements.
Pursuant to regulations of the Federal Reserve, the bank must maintain
average daily reserves against its transaction accounts. During 2007, no reserves were required to
be maintained on the first $8.5 million of transaction accounts, but reserves equal to 3.0% were
required on the aggregate balances of those accounts between $8.5 million and $45.8 million, and
additional reserves were required on aggregate balances in excess of $45.8 million in an amount
equal to 10.0% of the excess. These percentages are subject to annual adjustment by the Federal
Reserve, which has advised that for 2008, no reserves will be required to be maintained on the
first $9.3 million of transaction accounts, but reserves equal to 3.0% will be required on the
aggregate balances of those accounts between $9.3 million and $43.9 million, and additional
reserves are required on aggregate balances in excess of $43.9 million in an amount equal to 10.0%
of the excess. Because required reserves must be maintained in the form of vault cash or in a
non-interest-bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce the amount of the institutions interest-earning assets. As of December 31, 2007, the bank
met its reserve requirements.
Community Reinvestment.
Under the Community Reinvestment Act (CRA), as implemented by
regulations of the federal bank regulatory agencies, an insured 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 CRA does not
establish specific lending requirements or programs for banks, nor does it limit a banks
discretion to develop the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the federal bank regulatory
agencies, in connection with their examination of insured banks, to assess the banks records of
meeting the credit needs of their communities, using the ratings of outstanding, satisfactory,
needs to improve, or substantial noncompliance, and to take that record into account in its
evaluation of certain applications by those banks. All banks are required to make public
disclosure of their CRA performance ratings. The bank received a satisfactory rating in its most
recent CRA examination.
Governmental Monetary Policies
. The commercial banking business is affected not only by general
economic conditions but also by the monetary policies of the Federal Reserve. Changes in the
discount rate on member bank borrowings, control of borrowings, open market transactions in United
States government securities, the imposition of and changes in reserve requirements against member
banks and deposits and assets of foreign financial centers, and the imposition of and changes in
reserve requirements against certain borrowings by banks and their affiliates are some of the
monetary policies available to the Federal Reserve. Those monetary policies influence to a
significant extent the overall growth of all bank loans, investments and deposits and the interest
rates charged on loans or paid on time and savings deposits in order to mitigate recessionary and
inflationary pressures. These
Page 9
techniques are used in varying combinations to influence overall growth and distribution of bank
loans, investments, and deposits, and their use may also affect interest rates charged on loans or
paid for deposits.
The monetary policies of the Federal Reserve Board have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in the future. In
view of changing conditions in the national economy and money markets, as well as the effect of
actions by monetary and fiscal authorities, no prediction can be made as to possible future changes
in interest rates, deposit levels, loan demand or the business and earnings of the bank.
Dividends
. All dividends paid by the bank are paid to our company, the sole shareholder of the
bank. The general dividend policy of the bank is to pay dividends at levels consistent with
maintaining liquidity and preserving applicable capital ratios and servicing obligations. The
payment of dividends is subject to the discretion of the board of directors of the bank and will
depend upon such factors as future earnings, financial condition, cash needs, capital adequacy,
compliance with applicable statutory and regulatory requirements and general business conditions.
The ability of the bank to pay dividends is restricted under applicable law and regulations. Under
North Carolina banking law, dividends must be paid out of retained earnings and no cash dividends
may be paid if payment of the dividend would cause the banks surplus to be less than 50% of its
paid-in capital. Also, under federal banking law, no cash dividend may be paid if the bank is
undercapitalized or insolvent or if payment of the cash dividend would render the bank
undercapitalized or insolvent, and no cash dividend may be paid by the bank if it is in default of
any deposit insurance assessment due to the Federal Deposit Insurance Corporation.
The exact amount of future dividends on the stock of the bank will be a function of the
profitability of the bank in general and applicable tax rates in effect from year to year. The
banks ability to pay dividends in the future will directly depend on its future profitability,
which cannot be accurately estimated or assured.
Capital Adequacy
. The capital adequacy regulations which apply to state banks, such as the bank,
are similar to the Federal Reserve requirements promulgated with respect to bank holding companies
discussed above.
Changes in Management
. Any depository institution that has been chartered less than two years, is
not in compliance with the minimum capital requirements of its primary federal banking regulator,
or is otherwise in a troubled condition must notify its primary federal banking regulator of the
proposed addition of any person to the board of directors or the employment of any person as a
senior executive officer of the institution at least 30 days before such addition or employment
becomes effective. During this 30-day period, the applicable federal banking regulatory agency may
disapprove of the addition of such director or employment of such officer. The bank is not subject
to any such requirements.
Enforcement Authority
. The federal banking laws also contain civil and criminal penalties
available for use by the appropriate regulatory agency against certain institution-affiliated
parties primarily including management, employees and agents of a financial institution, as well
as independent contractors such as attorneys and accountants and others who participate in the
conduct of the financial institutions affairs and who caused or are likely to cause more than
minimum financial loss to or a significant adverse affect on the institution, who knowingly or
recklessly violate a law or regulation, breach a fiduciary duty or engage in unsafe or unsound
practices. These practices can include the failure of an institution to timely file required
reports or the submission of inaccurate reports. These laws authorize the appropriate banking
agency to issue cease and desist orders that may, among other things, require affirmative action to
correct any harm resulting from a violation or practice, including restitution, reimbursement,
indemnification or guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets or take other action as determined by the primary federal
banking agency to be appropriate.
Prompt Corrective Action
. Banks are subject to restrictions on their activities depending on their
level of capital. Federal prompt corrective action regulations divide banks into five different
categories, depending on their level of capital. Under these regulations, a bank is deemed to be
well-capitalized if it has a total risk-based capital ratio of 10% or more, a core capital ratio
of six percent or more and a leverage ratio of five percent or more, and if the bank is not subject
to an order or capital directive to meet and maintain a certain capital level. Under these
regulations, a bank is deemed to be adequately capitalized if it has a total risk-based capital
ratio of eight percent or more, a core capital ratio of four percent or more and a leverage ratio
of four percent or more (unless it receives the highest composite rating at its most recent
examination and is not experiencing or anticipating significant growth, in which instance it must
maintain a leverage ratio of three percent or more). Under these regulations, a bank is deemed to
be undercapitalized if it has a total risk-based capital ratio of less than eight percent, a core
capital ratio of less than four percent or a leverage ratio of less than three percent. Under these
regulations, a bank is
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deemed to be significantly undercapitalized if it has a risk-based capital ratio of less than six
percent, a core capital ratio of less than three percent and a leverage ratio of less than three
percent. Under such regulations, a bank is deemed to be critically undercapitalized if it has a
leverage ratio of less than or equal to two percent. In addition, the applicable federal banking
agency has the ability to downgrade a banks classification (but not to critically
undercapitalized) based on other considerations even if the bank meets the capital guidelines. If
a state member bank, such as the Bank, is classified as undercapitalized, the bank is required to
submit a capital restoration plan to the Federal Reserve. An undercapitalized bank is prohibited
from increasing its assets, engaging in a new line of business, acquiring any interest in any
company or insured depository institution, or opening or acquiring a new financial center office,
except under certain circumstances, including the acceptance by the Federal Reserve of a capital
restoration plan for that bank.
If a state member bank is classified as undercapitalized, the Federal Reserve may take certain
actions to correct the capital position of the bank. If a state member bank is classified as
significantly undercapitalized, the Federal Reserve would be required to take one or more prompt
corrective actions. These actions would include, among other things, requiring sales of new
securities to bolster capital, changes in management, limits on interest rates paid, prohibitions
on transactions with affiliates, termination of certain risky activities and restrictions on
compensation paid to executive officers. If a bank is classified as critically undercapitalized,
the bank must be placed into conservatorship or receivership within 90 days, unless the Federal
Deposit Insurance Corporation determines otherwise.
The capital classification of a bank affects the frequency of examinations of the bank and impacts
the ability of the bank to engage in certain activities and affects the deposit insurance premiums
paid by the bank. The Federal Reserve is required to conduct a full-scope, on-site examination of
every member bank at least once every twelve months.
Banks also may be restricted in their ability to accept brokered deposits, depending on their
capital classification. Well-capitalized banks are permitted to accept brokered deposits, but all
banks that are not well-capitalized are not permitted to accept such deposits. The Federal Reserve
may, on a case-by-case basis, permit member banks that are adequately capitalized to accept
brokered deposits if the Federal Reserve determines that acceptance of such deposits would not
constitute an unsafe or unsound banking practice with respect to the bank.
Deposit Insurance.
The banks deposits are insured up to $100,000 per insured non-IRA account and
up to $250,000 per IRA account by the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation. The bank is required to pay deposit insurance assessments set by the FDIC. The FDIC
determines the Banks deposit insurance assessment rates on the basis of four risk categories. The
banks assessment will range from 0.02 to 0.04% at the lowest assessment category up to a maximum
assessment of 0.40% of the banks average deposit base, with the exact assessment determined by the
banks assets, its capital and the FDICs supervisory opinion of its operations. The insurance
assessment rate may change periodically and was significantly increased for all depository
institutions during 2007. Increases in the assessment rate may have an adverse effect on the
banks operating results. The FDIC has the authority to terminate deposit insurance.
Future legislation and regulations.
Our management and the banks management cannot predict what other legislation might be enacted or
what other regulations might be adopted or the effects thereof. Any change in applicable law or
regulation, state or federal, may have a material adverse effect on their business.
ITEM 1A
RISK FACTORS
An investment in our common stock involves risks. Shareholders should carefully consider the risks
described below in conjunction with the other information in this Form 10K and information
incorporated by reference in this Form 10K, including our consolidated financial statements and
related notes. If any of the following risks or other risks which have not been identified or which
we may believe are immaterial or unlikely, actually occur, our business, financial condition and
results of operations could be harmed. This could cause the price of our stock to decline, and
shareholders could lose part or all of their investment. This Form 10K contains forward-looking
statements that involve risks and uncertainties, including statements about our future plans,
objectives, intentions and expectations. Many factors, including those described below, could cause
actual results to differ materially from those discussed in our forward-looking statements.
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Our business strategy includes the continuation of significant growth plans, and our
financial condition and results of operations could be negatively affected if we fail to grow or
fail to manage our growth effectively.
We intend to continue pursuing a significant growth strategy for our business. Our prospects
must be considered in light of the risks, expenses and difficulties frequently encountered by
companies in significant growth stages of development. We cannot assure you we will be able to
expand our market presence in our existing markets or successfully enter new markets or that any
such expansion will not adversely affect our results of operations. Failure to manage our growth
effectively could have a material adverse effect on our business, future prospects, financial
condition or results of operations, and could adversely affect our ability to successfully
implement our business strategy. Also, if our growth occurs more slowly than anticipated or
declines, our operating results could be materially adversely affected.
Our business is subject to the success of the local economies where we operate.
Our success significantly depends upon the growth in population, income levels, deposits and
housing starts in our primary and secondary markets. If the communities in which we operate do not
grow or if prevailing economic conditions locally or nationally are unfavorable, our business may
not succeed. Adverse economic conditions in our specific market area could reduce our growth rate,
affect the ability of our customers to repay their loans to us and generally affect our financial
condition and results of operations. We are less able than a larger institution to spread the risks
of unfavorable local economic conditions across a large number of diversified economies. Moreover,
we cannot give any assurance we will benefit from any market growth or favorable economic
conditions in our primary market areas if they do occur.
Any adverse market or economic conditions in Virginia and North Carolina may
disproportionately increase the risk that our borrowers will be unable to make their loan payments.
In addition, the market value of the real estate securing loans as collateral could be adversely
affected by unfavorable changes in market and economic conditions. Any sustained period of
increased payment delinquencies, foreclosures or losses caused by adverse market or economic
conditions in Virginia and North Carolina could adversely affect the value of our assets, our
revenues, results of operations and financial condition.
We may face risks with respect to future expansion.
As a strategy, we have sought to increase the size of our franchise by aggressively pursuing
business development opportunities, and we have grown rapidly since our incorporation. We have
purchased a number of banking offices of other financial institutions as a part of that strategy
and have acquired a number of insurance agencies. We may acquire other financial institutions and
insurance agencies or parts of those entities in the future. Acquisitions and mergers involve a
number of risks, including:
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the time and costs associated with identifying and evaluating potential
acquisitions and merger partners;
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the estimates and judgments used to evaluate credit, operations, management and
market risks with respect to the target entity may not be accurate;
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the time and costs of evaluating new markets, hiring experienced local management
and opening new offices, and the time lags between these activities and the
generation of sufficient assets and deposits to support the costs of the expansion;
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our ability to finance an acquisition and possible ownership and economic dilution
to our current shareholders and to investors purchasing common stock in this
offering;
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the diversion of our managements attention to the negotiation of a transaction,
and the integration of the operations and personnel of the combining businesses;
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entry into new markets where we lack experience;
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the introduction of new products and services into our business;
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the incurrence and possible impairment of goodwill associated with an acquisition
and possible adverse short-term effects on our results of operations; and
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the risk of loss of key employees and customers.
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We may incur substantial costs to expand, and we can give no assurance such expansion will
result in the levels of profits we seek. There can be no assurance integration efforts for any
future mergers or acquisitions will be successful. Also, we may issue equity securities, including
common stock, and securities convertible into shares of our common stock in connection with future
acquisitions, which could cause ownership and economic dilution to our current shareholders. There
is no assurance that, following any future mergers or acquisition, our integration efforts will be
successful or our company, after giving effect to the acquisition, will achieve profits comparable
to or better than our historical experience.
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If the value of real estate in our core market areas were to decline materially, a significant
portion of our loan portfolio could become under-collateralized, which could have a material
adverse effect on us.
With most of our loans concentrated in the Richmond and Greater Metropolitan Hampton Roads
areas of Virginia and the coastal and eastern Piedmont region of North Carolina, a decline in local
economic conditions could adversely affect the values of our real estate collateral. Consequently,
a decline in local economic conditions may have a greater effect on our earnings and capital than
on the earnings and capital of larger financial institutions whose real estate loan portfolios are
geographically diverse.
In addition to the financial strength and cash flow characteristics of the borrower in each
case, the bank often secures loans with real estate collateral. At December 31, 2007, approximately
80% of the banks loans have real estate as a primary or secondary component of collateral. The
real estate collateral in each case provides an alternate source of repayment in the event of
default by the borrower and may deteriorate in value during the time the credit is extended. If we
are required to liquidate the collateral securing a loan to satisfy the debt during a period of
reduced real estate values, our earnings and capital could be adversely affected.
An inadequate allowance for loan losses would reduce our earnings and capital.
Our loan losses could exceed the allowance for loan losses we have set aside. Our average
loan size continues to increase. Reliance on historic loan loss experience may not be indicative of
future loan losses. Approximately 78.0% of our loan portfolio is composed of construction,
acquisition and development, commercial mortgage and commercial and industrial loans. Repayment of
such loans is generally considered more subject to market risk than residential mortgage loans.
Industry experience shows that a portion of loans will become delinquent and a portion of the loans
will require partial or entire charge-off. Regardless of the underwriting criteria we utilize,
losses may be experienced as a result of various factors beyond our control, including, among other
things, changes in market conditions affecting the value of our loan collateral and problems
affecting the credit of our borrowers.
Management makes various assumptions and judgments about the ultimate collectibility of the
loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding
balances and for specific loans when their ultimate collectibility is considered questionable. If
managements assumptions and judgments prove to be incorrect and the allowance for loan losses is
inadequate to absorb losses, or if the bank regulatory authorities require the bank to increase the
allowance for loan losses as a part of their examination process, the banks earnings and capital
could be significantly and adversely affected.
A significant part of our loan portfolio is unseasoned.
Since the beginning of 2006, our loan portfolio has more than doubled in size, growing by
approximately $856 million. It is difficult to assess the future performance of this part of our
loan portfolio due to the recent origination of these loans. Industry experience shows that it
takes several years for loan difficulties to become apparent. We can give no assurance that
these loans will not become non-performing or delinquent, which could adversely affect our future
performance.
Our reliance on time deposits, including out-of-market certificates of deposit, as a source of
funds for loans and our other liquidity needs could have an adverse effect on our operating
results.
Among other sources of funds, we rely heavily on deposits for funds to make loans and provide
for our other liquidity needs. However, our loan demand has exceeded the rate at which we have
been able to build core deposits so we have relied heavily on time deposits, including
out-of-market certificates of deposit, as a source of funds. Those deposits may not be as stable
as other types of deposits and, in the future, depositors may not renew those time deposits when
they mature, or we may have to pay a higher rate of interest to attract or keep them or to replace
them with other deposits or with funds from other sources. Not being able to attract those
deposits or to keep or replace them as they mature would adversely affect our liquidity. Paying
higher deposit rates to attract, keep or replace those deposits could have a negative effect on our
interest margin and operating results.
Page 13
The building of market share through our de novo financial center strategy could cause our
expenses to increase faster than our revenues.
We intend to continue to build market share through our de novo financial center strategy.
During 2007, we opened two new financial centers in Raleigh, North Carolina and our first financial
center in Wilmington, North Carolina. We currently intend to open five additional new financial
centers in 2008. There are considerable costs involved in opening financial centers. New financial
centers generally do not generate sufficient revenues to offset their costs until they have been in
operation for at least a year or more. Accordingly, our new financial centers can be expected to
negatively impact our earnings for some period of time until the financial centers reach certain
economies of scale. Our expenses could be further increased if we encounter delays in the opening
of any of our new financial centers. Finally, we have no assurance our new financial centers will
be successful even after they have been established.
Our recent results may not be indicative of our future results.
We may not be able to sustain our historical rate of growth or may not even be able to grow
our business at all. In addition, our recent and rapid growth may distort some of our historical
financial ratios and statistics. In the future, we may not have the benefit of several recently
favorable factors, such as a generally stable interest rate environment, a strong residential
mortgage market, or the ability to find suitable expansion opportunities. Various factors, such as
economic conditions, regulatory and legislative considerations and competition, may also impede or
prohibit our ability to expand our market presence. If we experience a significant decrease in our
historical rate of growth, our results of operations and financial condition may be adversely
affected due to a high percentage of our operating costs being fixed expenses.
We may be adversely affected by interest rate changes.
Changes in interest rates may affect our level of interest income, the primary component of
our gross revenue, as well as the level of our interest expense, our largest recurring expenditure.
Net interest income is the difference between income from interest-earning assets, such as loans,
and the expense of interest-bearing liabilities, such as deposits and our borrowings, including our
outstanding junior subordinated debentures. We may not be able to effectively manage changes in
what we charge as interest on our earning assets and the expense we must pay on interest-bearing
liabilities, which may significantly reduce our earnings. The Federal Reserve has made significant
reductions in interest rates during the first quarter of 2008. Since rates charged on loans often
tend to react to market conditions faster than do rates paid on deposit accounts, these rate
changes are expected to have a negative impact on our earnings until we can make appropriate
adjustments in our deposit rates. In addition, there are costs associated with our risk management
techniques, and these costs could be material. Fluctuations in interest rates are not predictable
or controllable and, therefore, there can be no assurances of our ability to continue to maintain a
consistent positive spread between the interest earned on our earning assets and the interest paid
on our interest-bearing liabilities.
Our operations and customers might be affected by the occurrence of a natural disaster or other
catastrophic event in our market area.
Because substantially all of our loans are with customers and businesses located in the
central and coastal portions of Virginia and North Carolina, catastrophic events, including natural
disasters, such as hurricanes which historically have struck the east coast of the United States
with some regularity, or terrorist attacks, could disrupt our operations. Any of these natural
disasters or other catastrophic events could have a negative impact on most or all of our offices
and customer base, as well as the strength of our loan portfolio. Even though we carry business
interruption insurance policies, make contingency plans and typically have provisions in our
contracts that protect us in certain events, we might suffer losses as a result of business
interruptions that exceed the coverage available under our insurance policies or for which we do
not have coverage. Any natural disaster or catastrophic event affecting us could have a significant
negative impact on our operations.
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Competition from financial institutions and other financial service providers may adversely
affect our profitability.
The banking business is highly competitive and we experience competition in each of our
markets from many other financial institutions. We compete with commercial banks, credit unions,
savings and loan associations, mortgage banking firms, consumer finance companies, securities
brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other
super-regional, national and international financial institutions that operate offices in our
primary market areas and elsewhere.
We compete with these institutions both in attracting deposits and in making loans. In
addition, we have to attract our customer base from other existing financial institutions and from
new residents. Many of our competitors are well-established, larger financial institutions. While
we believe we can and do successfully compete with these other financial institutions in our
primary markets, we may face a competitive disadvantage as a result of our smaller size, lack of
geographic diversification and inability to spread our marketing costs across a broader market.
Although we compete by concentrating our marketing efforts in our primary markets with local
advertisements, personal contacts, and greater flexibility and responsiveness in working with local
customers, we can give no assurance this strategy will be successful.
We are subject to extensive regulation that could limit or restrict our activities.
We are a public company that operates in a highly regulated industry and are subject to
examination, supervision, and comprehensive regulation by various federal and state agencies. Our
compliance with these regulations is costly and restricts certain of our activities, including
payment of dividends, mergers and acquisitions, investments, loans and interest rates charged,
interest rates paid on deposits and locations of offices. We are also subject to capitalization
guidelines established by our regulators, which require us to maintain adequate capital to support
our growth.
The laws and regulations applicable to public companies and the banking industry could change
at any time, and we cannot predict the effects of these changes on our business and profitability.
Because government regulation greatly affects the business and financial results of all commercial
banks and bank and financial holding companies, our cost of compliance could adversely affect our
ability to operate profitably.
Our directors and executive officers own a significant portion of our common stock
Our directors and executive officers, as a group, beneficially owned approximately 15% of our
outstanding common stock as of December 31, 2007 (approximately 21% upon the exercise of
outstanding vested options). As a result of their ownership, the directors and executive officers
will have the ability, by voting their shares in concert, to significantly influence the outcome of
all matters submitted to our shareholders for approval, including the election of directors.
Our continued success is dependent upon the services of our management team.
Our future success and profitability is substantially dependent upon the management and
banking abilities of our senior executives. We believe that our continued growth and future results
will depend in part upon our attracting and retaining highly skilled and qualified management and
sales and marketing personnel. Competition for such personnel is intense, and we cannot assure you
that we will be successful in attracting or retaining such personnel. We also cannot guarantee that
members of our executive management team will remain with us. Changes in key personnel and their
responsibilities may be disruptive to our business and could have a material adverse effect on our
business, financial condition and results of operations.
Our continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of
capital to support our operations. During 2007 we issued $26.2 million of common stock and $25
million in trust preferred securities to acquire The Bank of Richmond, N.A. Additionally, we
conducted a private placement of $23.3 million in preferred stock to support our continued growth.
We may at some point need to again raise additional capital to support our continued growth. Our
ability to raise additional capital, if needed, will depend on conditions in the capital markets at
that time, which are outside our control, and on our financial performance. Accordingly, we cannot
assure you of
Page 15
our ability to raise additional capital if needed on terms acceptable to us. If we cannot
raise additional capital when needed, our ability to further expand our operations through internal
growth and acquisitions could be materially impaired.
Our future capital needs could result in dilution of your investment.
Our board of directors may determine from time to time there is a need to obtain additional
capital through the issuance of additional shares of our common stock or other securities. These
issuances would likely dilute the ownership interests of the investors in this offering and may
dilute the per share book value of our common stock. New investors may also have rights,
preferences and privileges senior to our current shareholders which may adversely impact our
current shareholders.
The trading volume in our common stock is low and the sale of substantial amounts of our common
stock in the public market could depress the price of our common stock.
The average daily trading volume of our shares on The Nasdaq Global Select Market for the
three months ended March 10, 2008 was approximately 32,000 shares. Lightly traded stock can be more
volatile than stock trading in an active public market. We cannot predict the extent to which an
active public market for our common stock will develop or be sustained. During the last half of
2007, the market prices for the securities of many banks and bank holding companies have
experienced wide price fluctuations that have not necessarily been related to their operating
performance. Therefore, our shareholders may not be able to sell their shares at the volumes,
prices, or times that they desire.
We cannot predict the effect, if any, that future sales of our common stock in the market, or
availability of shares of our common stock for sale in the market, will have on the market price of
our common stock. We therefore can give no assurance that sales of substantial amounts of our
common stock in the market, or the potential for large amounts of sales in the market, would not
cause the price of our common stock to decline or impair our ability to raise capital through sales
of our common stock.
Our ability to pay dividends is limited and we may be unable to pay future dividends.
Our ability to pay dividends is limited by regulatory restrictions and the need to maintain
sufficient consolidated capital. The ability of our bank subsidiary to pay dividends to us is
limited by their obligations to maintain sufficient capital and by other general restrictions on
their dividends under federal and state bank regulatory requirements. If we do not satisfy these
regulatory requirements, we will be unable to pay dividends on our common stock.
Holders of our junior subordinated debentures have rights that are senior to those of our common
shareholders.
We have supported our continued growth through the issuance of trust preferred securities from
special purpose trusts and accompanying junior subordinated debentures. At December 31, 2007, we
had outstanding trust preferred securities and accompanying junior subordinated debentures totaling
$56.1 million. Payments of the principal and interest on the trust preferred securities of this
special purpose trust are conditionally guaranteed by us. Further, the accompanying junior
subordinated debentures we issued to the special purpose trust are senior to our shares of common
stock. As a result, we must make payments on the junior subordinated debentures before any
dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or
liquidation, the holders of the junior subordinated debentures must be satisfied before any
distributions can be made on our common stock. We have the right to defer distributions on our
junior subordinated debentures (and the related trust preferred securities) for up to five years,
during which time no dividends may be paid on our common stock.
Certain provisions under our Articles of Incorporation and applicable law may make it difficult
for others to obtain control of our corporation even if such a change in control may be favored
by some shareholders.
Certain provisions in our Articles of Incorporation and applicable North Carolina corporate
and banking law may have the effect of discouraging a change of control of GFH even if such a
transaction is favored by some of our shareholders and could result in shareholders receiving a
substantial premium over the current market price of our shares. The primary purpose of these
provisions is to encourage negotiations with our management by persons interested in acquiring
control of our corporation. These provisions may also tend to perpetuate present
Page 16
management and make it difficult for shareholders owning less than a majority of the shares to
be able to elect even a single director.
Our securities are not FDIC insured.
Our common stock is not a savings or deposit account or other obligation of the bank, and is
not insured by the Bank Insurance Fund of Federal Deposit Insurance Corporation or any other
governmental agency and is subject to investment risk, including the possible loss of principal.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
The Company currently operates out of the banking and insurance offices as set forth below:
|
|
|
|
|
|
|
|
|
|
|
Approximate Square
|
|
Year Established/
|
Office Location
|
|
Footage
|
|
Acquired
|
Edenton
- 322 S Broad St (4)
|
|
|
5,400
|
|
|
|
2006
|
|
Elizabeth City
112 Corporate Dr (6)
|
|
|
25,000
|
|
|
|
2006
|
|
Elizabeth City
- 1145 N Road St (1)
|
|
|
9,000
|
|
|
|
1999
|
|
Elizabeth City
- 1404 W Ehringhaus St (3)
|
|
|
2,000
|
|
|
|
2003
|
|
Elizabeth City
400 W Ehringhaus St (4)
|
|
|
5,000
|
|
|
|
2004
|
|
Elizabeth City
802 W Ehringhaus St (2)
|
|
|
3,200
|
|
|
|
2004
|
|
Hertford
- 147 N Church St (2)
|
|
|
2,000
|
|
|
|
2002
|
|
Kitty Hawk
- 3600 Croatan Hwy (1)
|
|
|
6,500
|
|
|
|
2002
|
|
Kitty Hawk
- 5406 Croatan Hwy (1)
|
|
|
4,200
|
|
|
|
2006
|
|
Moyock
- 100 Moyock Commons Dr (4)
|
|
|
4,000
|
|
|
|
2004
|
|
Nags Head
- 2808 @ Croatan Hwy (5)
|
|
|
4,800
|
|
|
|
2004
|
|
Plymouth
- 433 US Hwy 64 E (4)
|
|
|
5,200
|
|
|
|
2000
|
|
Raleigh
- 2209 Century Dr (3)
|
|
|
2,500
|
|
|
|
2006
|
|
Raleigh
-8470 Falls of Neuse Rd (3)
|
|
|
4,486
|
|
|
|
2007
|
|
Raleigh
- 2235 Access Medical Dr (3)
|
|
|
46,989
|
|
|
|
2007
|
|
Roper
- 102 W Buncomb St (3)
|
|
|
550
|
|
|
|
2000
|
|
Wilmington
- 901 Military Cutoff Rd (3)
|
|
|
7,600
|
|
|
|
2007
|
|
Chesapeake
- 111 Gainsboro Square (5)
|
|
|
7,200
|
|
|
|
2002
|
|
Chesapeake
- 575 Cedar Rd (3)
|
|
|
2,400
|
|
|
|
2003
|
|
Chesapeake
- 1403 Greenbrier Parkway (3)
|
|
|
3,800
|
|
|
|
2006
|
|
Emporia
- 5205 Main St (3)
|
|
|
6,500
|
|
|
|
2004
|
|
Midlothian
- 13804 Hull St (3)
|
|
|
5,928
|
|
|
|
2007
|
|
Newport News
- 753 Thimble Shoals Blvd (2)
|
|
|
2,800
|
|
|
|
2006
|
|
Norfolk
- 539 21st St (3)
|
|
|
10,000
|
|
|
|
2006
|
|
Richmond
- 5300 Patterson Ave (3)
|
|
|
5,948
|
|
|
|
2007
|
|
Richmond
- 2730 Buford Rd (3)
|
|
|
2,768
|
|
|
|
2007
|
|
Richmond
- 8905 Fargo Rd (3)
|
|
|
1,568
|
|
|
|
2007
|
|
Richmond
- 8209 W Broad St (3)
|
|
|
3,588
|
|
|
|
2007
|
|
Richmond
- 12090 W Broad St (3)
|
|
|
9,462
|
|
|
|
2007
|
|
Suffolk
- 2825 Godwin Dr (3)
|
|
|
3,200
|
|
|
|
2004
|
|
Virginia Beach
- 4460 Corporation Lane Suite 100 (3)
|
|
|
4,000
|
|
|
|
2000
|
|
Virginia Beach
- 713 Independence Blvd (3)
|
|
|
2,200
|
|
|
|
2003
|
|
Virginia Beach
- 1580 Laskin Rd (5)
|
|
|
7,500
|
|
|
|
2005
|
|
Virginia Beach
- 641 Lynnhaven Parkway (3)
|
|
|
20,000
|
|
|
|
2006
|
|
Virginia Beach
- 3801 Pacific Ave (3)
|
|
|
1,200
|
|
|
|
2006
|
|
Page 17
|
|
|
|
|
|
|
|
|
|
|
Approximate Square
|
|
Year Established/
|
Office Location
|
|
Footage
|
|
Acquired
|
Virginia Beach
- 2098 Princess Anne Rd (3)
|
|
|
2,500
|
|
|
|
2005
|
|
Virginia Beach
- 3001 Shore Dr (3)
|
|
|
2,000
|
|
|
|
2003
|
|
|
|
|
(1)
|
|
Includes banking, investment brokerage and insurance
services.
|
|
(2)
|
|
Insurance services only.
|
|
(3)
|
|
Banking services only.
|
|
(4)
|
|
Only banking and insurance services.
|
|
(5)
|
|
Only banking and investment brokerage services.
|
|
(6)
|
|
Operations building.
|
The properties we own, including land, buildings and improvements, furniture, equipment and
vehicles, had a net book value at December 31, 2007 of $73.6 million. In the opinion of the
Companys management, such properties are adequately covered by insurance, are in good operating
condition, ordinary wear and tear excepted, and are adequate and suitable for the ordinary and
regular conduct and operation of our business.
ITEM 3 LEGAL PROCEEDINGS
The Company is aware of no material legal proceeding to which the Company or any of its
subsidiaries is a party or of which any of their properties is subject.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is traded on the Nasdaq Global Select Market under the symbol GBTS. The
following table sets forth the high and low published closing prices for shares of our common stock
for the periods indicated. Where appropriate, prices have been adjusted for the effects of an
11-for-10 stock split in the form of a 10% stock dividend payable May 15, 2006 to holders of record
as of the close of business on April 28, 2006. The last reported sales price of the common stock
on March 10, 2008 was $10.14 per share. As of December 31, 2007, Gateway Bank had approximately
5,600 shareholders of record.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Dividend
|
2006
|
|
|
|
First Quarter
|
|
$
|
15.74
|
|
|
$
|
14.90
|
|
|
$
|
0.03
|
|
|
|
|
|
Second Quarter
|
|
|
15.69
|
|
|
|
14.45
|
|
|
|
0.03
|
|
|
|
|
|
Third Quarter
|
|
|
15.01
|
|
|
|
14.01
|
|
|
|
0.05
|
|
|
|
|
|
Fourth Quarter
|
|
|
14.73
|
|
|
|
13.95
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
First Quarter
|
|
$
|
14.44
|
|
|
$
|
13.80
|
|
|
$
|
0.05
|
|
|
|
|
|
Second Quarter
|
|
|
14.71
|
|
|
|
13.17
|
|
|
|
0.08
|
|
|
|
|
|
Third Quarter
|
|
|
15.83
|
|
|
|
12.74
|
|
|
|
0.08
|
|
|
|
|
|
Fourth Quarter
|
|
|
14.41
|
|
|
|
11.85
|
|
|
|
0.08
|
|
As a holding company, we are dependent upon our subsidiary, Gateway Bank, to provide funding for
our operating expenses and dividends. North Carolina banking law will permit the payment of
dividends only out of retained earnings and will prohibit the payment of cash dividends if payment
of the dividend would cause Gateway Banks surplus to be less than 50% of its paid-in capital.
Also, under federal banking law, no cash dividend may be paid if
Page 18
Gateway Bank is undercapitalized
or insolvent or if payment of the cash dividend would render Gateway Bank undercapitalized or
insolvent, and no cash dividend may be paid by Gateway Bank if it is in default of any deposit
insurance assessment due to the FDIC. Subject to these restrictions, our Board of Directors will
consider the payment of dividends when it is deemed prudent to do so.
The Companys stock repurchase program, as approved by the Board of Directors on April 30, 2007,
provides for the purchase of up to 500,000 shares. There have been 400,637 shares purchased under
the 2007 plan during the year ended December 31, 2007.
The following table presents information with respect to shares of common stock repurchased by the
Company during the forth quarter of 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Shares That
|
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
|
May Yet Be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced
|
|
|
Purchased Under
|
|
Period
|
|
Shares Purchased
|
|
|
Paid Per Share
|
|
|
Program
|
|
|
the Program (1)
|
|
October 1, 2007 to October 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
200,000
|
|
November 1, 2 007 to November 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
December 1, 2007 to December 31, 2007
|
|
|
100,637
|
|
|
|
12.33
|
|
|
|
100,637
|
|
|
|
99,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.637
|
|
|
$
|
12.33
|
|
|
|
100,637
|
|
|
|
99,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 19
ITEM 6 SELECTED FINANCIAL DATA
The information presented below is derived in part from the audited consolidated financial
statements and notes thereto of the Company. This information presented below does not purport to
be complete and should be read in conjunction with the Companys consolidated financial statements
appearing elsewhere in this annual report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
109,559
|
|
|
$
|
73,097
|
|
|
$
|
39,679
|
|
|
$
|
19,632
|
|
|
$
|
13,486
|
|
Total interest expense
|
|
|
60,474
|
|
|
|
36,099
|
|
|
|
16,376
|
|
|
|
6,691
|
|
|
|
5,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
49,085
|
|
|
|
36,998
|
|
|
|
23,303
|
|
|
|
12,941
|
|
|
|
8,145
|
|
Provision for loan losses
|
|
|
4,900
|
|
|
|
3,400
|
|
|
|
2,200
|
|
|
|
1,425
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
44,185
|
|
|
|
33,598
|
|
|
|
21,103
|
|
|
|
11,516
|
|
|
|
6,945
|
|
Total non-interest income
|
|
|
17,765
|
|
|
|
9,270
|
|
|
|
8,067
|
|
|
|
5,857
|
|
|
|
4,485
|
|
Total non-interest expense
|
|
|
44,941
|
|
|
|
34,974
|
|
|
|
23,266
|
|
|
|
14,653
|
|
|
|
10,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
17,009
|
|
|
|
7,894
|
|
|
|
5,904
|
|
|
|
2,720
|
|
|
|
1,200
|
|
Provision for income taxes
|
|
|
5,990
|
|
|
|
2,625
|
|
|
|
1,965
|
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,019
|
|
|
$
|
5,269
|
|
|
$
|
3,939
|
|
|
$
|
2,010
|
|
|
$
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic
|
|
$
|
0.91
|
|
|
$
|
0.49
|
|
|
$
|
0.48
|
|
|
$
|
0.37
|
|
|
$
|
0.30
|
|
Net income diluted
|
|
|
0.89
|
|
|
|
0.47
|
|
|
|
0.46
|
|
|
|
0.34
|
|
|
|
0.29
|
|
Dividends
|
|
|
0.29
|
|
|
|
0.16
|
|
|
|
0.09
|
|
|
|
0.02
|
|
|
|
|
|
Book value per common share
|
|
|
11.24
|
|
|
|
9.99
|
|
|
|
9.46
|
|
|
|
7.98
|
|
|
|
6.20
|
|
Tangible book value
per common share
|
|
|
7.17
|
|
|
|
8.84
|
|
|
|
8.4
|
|
|
|
7 6.66
|
|
|
|
5.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,868,185
|
|
|
$
|
1,207,477
|
|
|
$
|
883,373
|
|
|
$
|
535,728
|
|
|
$
|
314,826
|
|
Loans receivable
|
|
|
1,522,401
|
|
|
|
994,592
|
|
|
|
666,652
|
|
|
|
381,956
|
|
|
|
231,740
|
|
Allowance for loan losses
|
|
|
15,339
|
|
|
|
9,405
|
|
|
|
6,283
|
|
|
|
4,163
|
|
|
|
2,759
|
|
Deposits
|
|
|
1,408,919
|
|
|
|
923,725
|
|
|
|
646,262
|
|
|
|
406,259
|
|
|
|
238,452
|
|
Borrowings
|
|
|
282,102
|
|
|
|
166,929
|
|
|
|
134,665
|
|
|
|
63,926
|
|
|
|
50,000
|
|
Stockholders equity
|
|
|
164,407
|
|
|
|
109,640
|
|
|
|
98,744
|
|
|
|
64,318
|
|
|
|
24,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.71
|
%
|
|
|
0.51
|
%
|
|
|
0.58
|
%
|
|
|
0.49
|
%
|
|
|
0.43
|
%
|
Return on average equity
|
|
|
8.45
|
%
|
|
|
5.06
|
%
|
|
|
5.77
|
%
|
|
|
5.12
|
%
|
|
|
4.93
|
%
|
Net interest margin (2)
|
|
|
3.49
|
%
|
|
|
3.87
|
%
|
|
|
3.81
|
%
|
|
|
3.59
|
%
|
|
|
3.24
|
%
|
Net interest spread (3)
|
|
|
3.12
|
%
|
|
|
3.35
|
%
|
|
|
3.44
|
%
|
|
|
3.33
|
%
|
|
|
2.98
|
%
|
Non-interest income as a
percentage of
net interest income and
non-interest
income
|
|
|
26.57
|
%
|
|
|
20.04
|
%
|
|
|
25.72
|
%
|
|
|
31.16
|
%
|
|
|
35.51
|
%
|
Non-interest income as a
percentage of
average assets
|
|
|
1.15
|
%
|
|
|
0.89
|
%
|
|
|
1.19
|
%
|
|
|
1.44
|
%
|
|
|
1.61
|
%
|
Non-interest expense
to average assets
|
|
|
2.90
|
%
|
|
|
3.35
|
%
|
|
|
3.43
|
%
|
|
|
3.59
|
%
|
|
|
3.67
|
%
|
Efficiency ratio (4)
|
|
|
67.23
|
%
|
|
|
75.80
|
%
|
|
|
74.17
|
%
|
|
|
77.95
|
%
|
|
|
81.00
|
%
|
Page 20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to period-end loans
|
|
|
0.22
|
%
|
|
|
0.33
|
%
|
|
|
0.03
|
%
|
|
|
0.13
|
%
|
|
|
0.52
|
%
|
Allowance for loan losses to period-end
loans
|
|
|
1.01
|
%
|
|
|
0.95
|
%
|
|
|
0.94
|
%
|
|
|
1.09
|
%
|
|
|
1.19
|
%
|
Allowance for loan losses to
nonperforming loans
|
|
|
450.22
|
%
|
|
|
287.70
|
%
|
|
|
3079.90
|
%
|
|
|
849.59
|
%
|
|
|
228.02
|
%
|
Nonperforming assets to total
assets (5)
|
|
|
0.21
|
%
|
|
|
0.27
|
%
|
|
|
0.02
|
%
|
|
|
0.09
|
%
|
|
|
0.38
|
%
|
Net loan charge-offs to average
loans outstanding
|
|
|
0.09
|
%
|
|
|
0.04
|
%
|
|
|
0.02
|
%
|
|
|
0.01
|
%
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios:
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
11.40
|
%
|
|
|
12.99
|
%
|
|
|
15.17
|
%
|
|
|
17.40
|
%
|
|
|
12.68
|
%
|
Tier 1 risk-based capital
|
|
|
10.43
|
%
|
|
|
12.11
|
%
|
|
|
14.31
|
%
|
|
|
16.41
|
%
|
|
|
11.59
|
%
|
Leverage ratio
|
|
|
9.76
|
%
|
|
|
11.38
|
%
|
|
|
13.73
|
%
|
|
|
13.89
|
%
|
|
|
9.33
|
%
|
Equity to assets ratio
|
|
|
8.80
|
%
|
|
|
9.08
|
%
|
|
|
10.19
|
%
|
|
|
12.01
|
%
|
|
|
7.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of banking offices
|
|
|
33
|
|
|
|
24
|
|
|
|
18
|
|
|
|
16
|
|
|
|
10
|
|
Number of full time equivalent employees
|
|
|
420
|
|
|
|
327
|
|
|
|
247
|
|
|
|
191
|
|
|
|
123
|
|
|
|
|
(1)
|
|
Restated for 11 for- 10 stock split in 2006, 11 for- 10 stock split in 2005, 21-for-20
stock split in 2004, and 21-for-20 stock split occurring during 2003.
|
|
(2)
|
|
Net interest margin is net interest income divided by average interest-earning assets.
|
|
(3)
|
|
Net interest spread is the difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities.
|
|
(4)
|
|
Efficiency ratio is non-interest expense divided by the sum of net interest income and
non-interest income.
|
|
(5)
|
|
Nonperforming assets consists of nonaccrual loans, restructured loans, and real estate owned,
where applicable.
|
|
(6)
|
|
Capital ratios are for the Company.
|
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AND
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The purpose of this discussion is to focus on significant changes in the financial condition and
results of operation of the company during the past three years. The discussion and analysis are
intended to supplement and highlight information contained in the accompanying consolidated
financial statements and the selected financial data presented elsewhere in this Annual Report on
Form 10-K. Prior period information has been restated as applicable in order to provide the reader
a better comparison between periods.
FORWARD LOOKING STATEMENTS
Statements contained in this annual report, which are not historical facts, are forward-looking
statements, as that term is defined in the Private Securities Litigation Reform Act of 1995.
Amounts herein could vary as a result of market and other factors. Such forward-looking statements
are subject to risks and uncertainties which could cause actual results to differ materially from
those currently anticipated due to a number of factors, which include, but are not limited to,
factors discussed in documents filed by the Company with the Securities and Commission from time to
time. Such forward-looking statements may be identified by the use of such words as believe,
expect, anticipate, should, planned, estimated, and potential. Examples of
forward-looking statements include, but are not limited to, estimates with respect to the financial
condition, expected or anticipated revenue, results of operations and business of the Company that
are subject to various factors which could cause actual results to differ
Page 21
materially from these
estimates. These factors include, but are not limited to, general economic conditions, changes in
interest rates, deposit flows, loan demand, real estate values, and competition; changes in
accounting principles, policies, or guidelines; changes in legislation or regulations; and other economic, competitive,
governmental, regulatory, and technological factors affecting the Companys operations, pricing,
products and services.
Managements discussion and analysis is intended to assist readers in the understanding and
evaluation of the financial condition and results of operations of Gateway Financial Holdings, Inc.
It should be read in conjunction with the audited consolidated financial statements and
accompanying notes included in this annual report and the supplemental financial data appearing
throughout this discussion and analysis. On April 25, 2006 the Companys Board of Directors
declared an 11 for-10 stock split effected in the form of a 10% stock dividend, which was
distributed May 15, 2006 to stockholders of record on April 28, 2006. On May 16, 2005 the Companys
Board of Directors declared an 11 for-10 stock split effected in the form of a 10% stock dividend,
which was distributed June 20, 2005 to stockholders of record on May 30, 2005. All references in
this discussion and analysis to per share results and weighted average shares outstanding have been
adjusted to reflect the effects of these stock splits.
OVERVIEW
Gateway Financial Holdings, Inc. is a financial holding company incorporated under the laws of
North Carolina to serve as the holding company for Gateway Bank & Trust Co., a North Carolina
chartered commercial bank. The bank began operations on December 1, 1998 and, effective October 1,
2001, became our wholly owned subsidiary.
Since inception, we have aggressively pursued the primary objective of building a full-service
commercial banking operation, while effectively supplementing our banking activities with other
financial services intended to generate significant non-interest income. Accordingly, a key
component of our growth strategy has been expanding our franchise through the opening of newly
constructed financial centers and strategic financial center acquisitions. We have grown into a
regional community bank with a total of thirty-three full-service financial centers nineteen in
Virginia: Virginia Beach (7), Richmond (6), Chesapeake (3), Suffolk, Norfolk and Emporia; and
fourteen in North Carolina: Elizabeth City (3), Edenton, Kitty Hawk (2), Raleigh (3), Moyock, Nags
Head, Plymouth, Roper, and Wilmington. We acquired The Bank of Richmond, N.A., effective June 1,
2007, and operate the six financial centers in the Richmond metropolitan area and one loan
production office in Charlottesville, Virginia, under the assumed name The Bank of Richmond.
Consistent with our long-range strategic objectives, we will continue to consider acquisition
opportunities including whole bank or financial center locations. We will also continue to explore
de novo financial center opportunities in markets that we consider attractive. We currently intend
to open five additional new financial centers in 2008, including our first financial centers in
Chapel Hill and Wake Forest, North Carolina, and Charlottesville and Lynchburg, Virginia, as well
as our second office in Emporia, Virginia
The bank has four wholly-owned operating subsidiaries, which have contributed to our market
presence. Gateway Insurance Services, Inc., an insurance agency with offices in Edenton, Hertford,
Elizabeth City, Plymouth, Moyock and Kitty Hawk, North Carolina, and the Hampton Roads area of
Virginia, sells insurance products to businesses and individuals. Gateway Investment Services,
Inc., assists Bank customers in their securities brokerage activities through an arrangement with
an unaffiliated broker-dealer. As prescribed by this arrangement, Gateway Investment Services
earns revenue through a commission sharing arrangement with the unaffiliated broker-dealer.
Gateway Bank Mortgage, Inc., provides mortgage banking services with products that are sold on the
secondary market. Gateway Title Agency, Inc., engages in title insurance and settlement services
for real estate transactions. In an ongoing effort to create significant sources of non-interest
income, we will continue to look for ways to expand non-traditional banking activities in our
insurance and investment services subsidiaries.
Since inception, we have concentrated our efforts on building a franchise and infrastructure that
can deliver and sustain long-term profitability. We have been profitable for twenty-four
consecutive quarters, producing net income of $3.9 million in 2005, $5.3 million in 2006, and $11.0
million during the year ended December 31, 2007. While we anticipate continued profitability,
future expansion activity can be expected to generate significant additional costs that can
negatively impact earnings as we pursue our growth strategies.
In addition to our banking activities, the Bank has focused on insurance, mortgage and brokerage
services to develop sustainable and growth-oriented sources of non-interest income. In the fourth
quarter of 2006 Gateway Insurance Services acquired two agencies in Virginia (The Insurance Center
and C D West & Company) opening the door for further expansion in the Hampton Roads area of
Virginia. In February 2007, The Bank acquired Gateway Title Agency, Inc., which engages in title
insurance and settlement services for real estate transactions. In addition, the Bank organized
Gateway Investment Services in September 1999 to assist customers in their securities brokerage
activities through a networking arrangement with an unaffiliated broker-dealer. Through this
arrangement, Gateway
Page 22
Investment Services earns revenues through commission sharing from the
unaffiliated broker-dealer. In June 2006 we opened our wholly owned mortgage origination company in
Raleigh, North Carolina with offices also in
Elizabeth City, and Kitty Hawk, North Carolina and offices in Norfolk and Virginia Beach, Virginia.
The Bank will continue to look for ways to expand non-traditional banking activities in its
insurance subsidiary and securities networking arrangement, which create significant sources of
non-interest income.
FINANCIAL CONDITION
December 31, 2007 and 2006
The Company continued its pattern of steady growth during 2007, with total assets increasing by
$660.7 million, or 54.7%, to $1.87 billion at December 31, 2007 from $1.2 billion at December 31,
2006. This growth was principally driven by increased loans from our franchise expansion, the
completion of our acquisition of The Bank of Richmond on June 1, 2007, the purchase of investment
securities used primarily for balance sheet management and liquidity purposes, and the purchase of
premises and equipment associated with the opening of three de novo financial centers during the
second half of 2007, including a regional headquarters building in Raleigh, North Carolina. Assets
acquired through the acquisition of The Bank of Richmond aggregated $235.7 million, including $36.7
million of goodwill. Total loans increased by $527.8 million, or 53.1%, from $994.6 million at
December 31, 2006 to $1.5 billion at December 31, 2007. Of this increase, $168.0 million was
related to loans from the acquisition of The Bank of Richmond. Therefore, organic loan growth for
2007 aggregated $359.8 million or 36.2%. This increase was attributed to the seasoning of our
financial centers and our private banking center during the year and the steady economies of the
markets in which we operate. The increases in loans were comprised principally of increases of
$222.5 million, $124.4 million, and $92.1 million of construction, acquisition and development,
commercial and industrial, and commercial real estate loans, respectively areas of lending that
the Company targets. This growth was concentrated mainly in the Raleigh and Wilmington North
Carolina and Richmond and greater Hampton Roads areas of Virginia. As of December 31, 2007, 78.0%
of our loan portfolio was represented by commercial, industrial, real estate, and construction and
acquisition and development loans. The Company has maintained liquidity at what it believes to be
an appropriate level. Liquid assets, consisting of cash and due from banks, interest-earning
deposits in other banks and trading and investment securities available for sale, were
$170.4 million, or 9.1% of total assets, at December 31, 2007 as compared to $120.3 million, or
10.0% of total assets at December 31, 2006.
Funding for the growth in assets and loans was provided by an increase in deposits of $485.2
million to $1.4 billion, and an increase in total borrowings of $115.2 million. Of the increase in
deposits, $177.6 million was related to deposits from the acquisition of The Bank of Richmond.
Therefore, non-acquisition related deposits grew $307.6 million or 33.3%, from $923.7 million at
December 31, 2006. Non-interest-bearing demand deposits increased by 14.7% or $15.9 million to
$123.9 million from the $108.0 million balance at December 31, 2006. Savings, money market and NOW
accounts increased by 49.8% or $133.9 million to $402.5 million, from the $268.7 million balance at
December 31, 2006. These increases resulted from the maturing of our branch network, especially
those financial centers opened during the last half of the year in Wilmington and Raleigh, North
Carolina. Additionally, we introduced a new Platinum money market account during the second
quarter of 2007, and an U-sweep and Clear Advantage NOW account during the fourth quarter of 2007
that has been very successful, as well as, our low cost business checking and sweep account
programs. Time deposits totaled $882.5 million at December 31, 2007 as compared to $547.1 million
at December 31, 2006. This increase of $335.5 million was driven primarily by retail CDs special
offerings that are very competitive in our market place, an increase in brokered CDs of
$130.7 million, and CDs related to the acquisition of The Bank of Richmond of $125.8 million. Time
deposits of more than $100,000 were $271.3 million, or 19.3% of total deposits at December 31, 2007
as compared with $205.5 million, or 22.2% of total deposits at December 31, 2006. The Company
continued using brokered deposits to fund growth. The total brokered time deposits increased to
$225.9 million as of December 31, 2007 compared to $95.2 million at December 31, 2006. As a
percentage of total deposits, our brokered deposits increased to 16.0% of total deposits as
compared to 10.3% at December 31, 2006. Brokered deposits were used primarily to fund loan growth
in our loan production offices in Wilmington, Greenville and Chapel Hill, North Carolina, and
Charlottesville, Virginia; and our private banking center in Raleigh. Loans for these offices
aggregated $429.3 million as of December 31, 2007, an increase of $248.4 million during 2007. As of
December 31, 2007 we had $282.1 million in total borrowings outstanding, as compared with $166.9
million outstanding at December 31, 2006. The Company issued an additional $25.7 million of junior
subordinated debentures (commonly referred to as trust preferred securities) during the second
quarter of 2007 which was used to fund the cash portion of the consideration for The Bank of
Richmond acquisition. Additionally, the Company borrowed an additional $58 million from the Federal
Home Loan Bank of Atlanta during 2007 that supported our loan and franchise growth not covered by
deposit growth. These advances were primarily five year convertible advances with call provisions
that provided a lower cost of funding.
Page 23
Total stockholders equity increased by $54.8 million to $164.4 million from December 31, 2006,
primarily as a
result of issuing approximately 1.85 million shares of Company stock to fund the stock portion of
the consideration to acquire The Bank of Richmond, the issuance of $23.2 million of non-cumulative
perpetual preferred stock in a private placement in December 2007, and net income of $11.0 million;
offset by cash dividends of $3.5 million during the year, and the repurchase and retirement of $5.6
million of its common stock. The capital ratios of the Company and the Bank continue to be in
excess of the minimums required to be deemed well-capitalized by regulatory authorities.
NET INTEREST INCOME
Like most financial institutions, the primary component of earnings for the Company is net interest
income. Net interest income is the difference between interest income, principally from loan and
investment securities portfolios, and interest expense, principally on customer deposits and
borrowings. Changes in net interest income result from changes in volume, spread and margin. For
this purpose, volume refers to the average dollar level of interest-earning assets and
interest-bearing liabilities, spread refers to the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to
net interest income divided by average interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of
non-interest-bearing liabilities. During the years ended December 31, 2007, 2006 and 2005, average
interest-earning assets were $1.4 billion, $956.8 million and $611.1 million, respectively. During
these same years, the Companys net interest margins were 3.49%, 3.87% and 3.81%, respectively.
Page 24
Average Balances and Average Rates Earned and Paid.
The following table sets forth, for the
periods indicated, information with regard to average balances of assets and liabilities, as well
as the total dollar amounts of interest income from interest-earning assets and interest expense on
interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread,
net interest margin, and ratio of average interest-earning assets to average interest-bearing
liabilities. In preparing the table, nonaccrual loans are included in the average loan balance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,262,516
|
|
|
$
|
102,041
|
|
|
|
8.08
|
%
|
|
$
|
835,527
|
|
|
$
|
67,517
|
|
|
|
8.08
|
%
|
|
$
|
523,492
|
|
|
$
|
36,358
|
|
|
|
6.95
|
%
|
Interest-earning deposits
|
|
|
5,628
|
|
|
|
341
|
|
|
|
6.06
|
%
|
|
|
2,707
|
|
|
|
140
|
|
|
|
5.17
|
%
|
|
|
3,668
|
|
|
|
138
|
|
|
|
3.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading and investment securities available
for sale taxable
|
|
|
113,777
|
|
|
|
5,909
|
|
|
|
5.19
|
%
|
|
|
102,506
|
|
|
|
4,632
|
|
|
|
4.52
|
%
|
|
|
72,579
|
|
|
|
2,731
|
|
|
|
3.76
|
%
|
Investment securities available for
sale tax exempt
|
|
|
11,243
|
|
|
|
423
|
|
|
|
3.76
|
%
|
|
|
6,850
|
|
|
|
238
|
|
|
|
3.47
|
%
|
|
|
6,327
|
|
|
|
204
|
|
|
|
3.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB/FRB stock
|
|
|
12,594
|
|
|
|
845
|
|
|
|
6.71
|
%
|
|
|
9,175
|
|
|
|
570
|
|
|
|
6.21
|
%
|
|
|
5,038
|
|
|
|
248
|
|
|
|
4.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,405,758
|
|
|
|
109,559
|
|
|
|
7.79
|
%
|
|
|
956,765
|
|
|
|
73,097
|
|
|
|
7.64
|
%
|
|
|
611,104
|
|
|
|
39,679
|
|
|
|
6.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
143,989
|
|
|
|
|
|
|
|
|
|
|
|
86,553
|
|
|
|
|
|
|
|
|
|
|
|
67,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,549,747
|
|
|
|
|
|
|
|
|
|
|
$
|
1,043,318
|
|
|
|
|
|
|
|
|
|
|
$
|
679,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW, and money market
|
|
$
|
330,980
|
|
|
|
11,491
|
|
|
|
3.47
|
%
|
|
$
|
245,038
|
|
|
|
7,918
|
|
|
|
3.23
|
%
|
|
$
|
178,577
|
|
|
|
3,579
|
|
|
|
2.00
|
%
|
Time deposits
|
|
|
751,226
|
|
|
|
38,103
|
|
|
|
5.07
|
%
|
|
|
450,786
|
|
|
|
20,571
|
|
|
|
4.56
|
%
|
|
|
267,494
|
|
|
|
9,115
|
|
|
|
3.41
|
%
|
Borrowings
|
|
|
211,830
|
|
|
|
10,880
|
|
|
|
5.14
|
%
|
|
|
145,725
|
|
|
|
7,610
|
|
|
|
5.22
|
%
|
|
|
91,005
|
|
|
|
3,682
|
|
|
|
4.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,294,036
|
|
|
|
60,474
|
|
|
|
4.67
|
%
|
|
|
841,549
|
|
|
|
36,099
|
|
|
|
4.29
|
%
|
|
|
537,076
|
|
|
|
16,376
|
|
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
116,190
|
|
|
|
|
|
|
|
|
|
|
|
93,346
|
|
|
|
|
|
|
|
|
|
|
|
72,369
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
9,130
|
|
|
|
|
|
|
|
|
|
|
|
4,216
|
|
|
|
|
|
|
|
|
|
|
|
1,317
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
130,391
|
|
|
|
|
|
|
|
|
|
|
|
104,207
|
|
|
|
|
|
|
|
|
|
|
|
68,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,549,747
|
|
|
|
|
|
|
|
|
|
|
$
|
1,043,318
|
|
|
|
|
|
|
|
|
|
|
$
|
679,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread
|
|
|
|
|
|
$
|
49,085
|
|
|
|
3.12
|
%
|
|
|
|
|
|
$
|
36,998
|
|
|
|
3.35
|
%
|
|
|
|
|
|
$
|
23,303
|
|
|
|
3.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.49
|
%
|
|
|
|
|
|
|
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
3.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to
average interest-bearing liabilities
|
|
|
108.63
|
%
|
|
|
|
|
|
|
|
|
|
|
113.69
|
%
|
|
|
|
|
|
|
|
|
|
|
113.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 25
RATE/VOLUME ANALYSIS
The following table analyzes the dollar amount of changes in interest income and interest expense
for major components of interest-earning assets and interest-bearing liabilities. The table
distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior
periods rate), (ii) changes attributable to rate (changes in rate multiplied by the prior periods
volume), and (iii) net change (the sum of the previous columns). The change attributable to both
rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to
both the changes attributable to volume and the changes attributable to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2007 vs. 2006
|
|
|
December 31, 2006 vs. 2005
|
|
|
|
Increase (Decrease) Due to
|
|
|
Increase (Decrease) Due to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
34,507
|
|
|
$
|
17
|
|
|
$
|
34,524
|
|
|
$
|
23,443
|
|
|
$
|
7,716
|
|
|
$
|
31,159
|
|
Interest-earning deposits
|
|
|
164
|
|
|
|
37
|
|
|
|
201
|
|
|
|
(43
|
)
|
|
|
45
|
|
|
|
2
|
|
Trading and investment securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
547
|
|
|
|
730
|
|
|
|
1,277
|
|
|
|
1,239
|
|
|
|
662
|
|
|
|
1,901
|
|
Tax-exempt
|
|
|
159
|
|
|
|
26
|
|
|
|
185
|
|
|
|
18
|
|
|
|
16
|
|
|
|
34
|
|
FHLB/FRB stock
|
|
|
221
|
|
|
|
54
|
|
|
|
275
|
|
|
|
230
|
|
|
|
92
|
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
35,598
|
|
|
|
864
|
|
|
|
36,462
|
|
|
|
24,887
|
|
|
|
8,531
|
|
|
|
33,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW, and
money market
|
|
|
2,880
|
|
|
|
693
|
|
|
|
3,573
|
|
|
|
1,740
|
|
|
|
2,599
|
|
|
|
4,339
|
|
Time deposits
|
|
|
14,475
|
|
|
|
3,057
|
|
|
|
17,532
|
|
|
|
7,305
|
|
|
|
4,151
|
|
|
|
11,456
|
|
Borrowings
|
|
|
3,430
|
|
|
|
(160
|
)
|
|
|
3,270
|
|
|
|
2,701
|
|
|
|
1,227
|
|
|
|
3,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
20,785
|
|
|
|
3,590
|
|
|
|
24,375
|
|
|
|
11,746
|
|
|
|
7,977
|
|
|
|
19,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
increase
|
|
$
|
14,813
|
|
|
$
|
(2,726
|
)
|
|
$
|
12,087
|
|
|
$
|
13,141
|
|
|
$
|
554
|
|
|
$
|
13,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESULTS OF OPERATIONS
Years Ended December 31, 2007 and 2006
Overview.
The Company reported net income of $11.0 million or $0.89 per share (diluted) for
the year ended December 31, 2007, as compared with net income of $5.3 million or $0.47 per share
(diluted) for the year ended December 31, 2006, an increase of $5.8 million in net income and $0.42
in earnings per share (diluted). During 2007 cash dividends totaling $0.29 per share were paid as
compared to $0.16 per share for the same period in 2006.
The results for both periods presented were affected by the fluctuations in fair value and net cash
settlements on the economic hedge (interest rate swap) that it entered into in December 2005 to
hedge the interest rate of its variable loan portfolio. Non-interest income included a gain and net
cash settlements on the economic hedge of $584,000 for the year ended December 31, 2007, and a loss
and net cash settlement on the economic hedge of $1.9 million for the year ended December 31, 2006,
primarily as a result of fluctuations (both favorable and unfavorable) in the LIBOR swap interest
rate and market conditions during the periods presented. The Company terminated its position in the
economic hedge during the third quarter of 2007, and received a termination fee of $115,000 that
was included in the above gain for 2007. The fair value of the interest rate swap can be volatile
from quarter to quarter, and thus can affect net income positively or negatively depending on
interest rate conditions and other factors. As a result of the Company terminating its position in
the economic hedge, there will be no income or loss associated with the hedge going forward.
Additionally, the results for 2007 included a fair value gain of $960,000 related to certain of its
trust preferred debt securities that it had elected fair value option treatment effective January
1, 2007. This gain, which was included in other non-interest income, was the result of the unusual
credit conditions the financial industry
Page 26
faced during the last half of the year, which saw credit
spreads on these types of securities widen significantly. It
would not be anticipated that the Company would experience a fair value gain of this magnitude in
the future, and in all likelihood would show a fair value loss if credit market conditions become
more normalized.
The Companys primary focus (banking, mortgage loan origination, insurance, and investment
services) continues to grow with de novo development of its branch network and subsidiary
operations, and the completed acquisition of The Bank of Richmond on June 1, 2007. The acquisition
and the opening of three de novo financial centers during the last half of the year (two in
Raleigh, North Carolina and our first full financial center in Wilmington, North Carolina)
increased our total financial centers to 33, along with a private banking center in Raleigh and
four loan production offices. Our franchise has generated consistently high levels of net interest
income and non-interest income since inception. During the year ended December 31, 2007, total
revenue (defined as net interest income and non-interest income) increased $20.6 million or 44.5%
to $66.9 million over the prior year. The significant increase in revenues was the primary reason
for the increase in net income, partially offset by increases in non-interest expenses, loan loss
provision, and income taxes. The Company has incurred additional non-interest expenses as a result
of the franchise growth from period to period, increased FDIC insurance costs, higher franchise tax
costs, and the acquisition of The Bank of Richmond (which increased non-interest expenses by
approximately $2.4 million for the year ended December 31, 2007).
Net Interest Income.
Total interest income increased to $109.6 million for the year ended
December 31, 2007, a $36.5 million or 49.9% increase from the $73.1 million earned in 2006. Total
interest income benefited from a 46.9% increase in average earning assets, driven primarily from a
$427 million or 51.1% growth in average loans as compared with the prior year. The average yield on
interest-earning assets increased 15 basis points from 7.64% to 7.79% due to restructuring the
investment portfolio during the second quarter of this year, which increased the investment yield
from 4.59% for the prior year to 5.22% for the year ended December 31, 2007. The yield on loans was
flat year over year at 8.08%. However, loan yields in the fourth quarter of 2007 decreased to 7.93%
from 8.20% for the fourth quarter of last year as a result of the 100 basis points cut in interest
rate during the last four months of 2007. The current trend with interest rates is for them to
continue to fall during the first part of 2008 with uncertainty as to which direction interest
rates will take later in the year.
Average total interest-bearing liabilities increased by $452.5 million, or 53.8%, for the year
ended December 31, 2007 as compared with the prior year, consistent with the increase in
interest-earning assets. The average cost of interest-bearing liabilities increased by 38 basis
points over the same time period from 4.29% to 4.67% primarily as a result of several factors
including: (1) funding $130.7 million of the growth over the last 12 months (primarily from loan
production offices and our private banking center) with wholesale brokered CDs (which typically
have a higher all-in interest rate than bank core deposits); (2) our portfolio of CDs re-pricing
upwards during the first half of the year as a result of interest rates continuing to increase due
to competition for deposits, and (3) the introduction of a higher cost money market account and CD
special during the second quarter of this year. Our costs for CDs increased from 4.56% in 2006 to
5.07% in 2007, and our interest bearing transaction accounts increased from 3.23% to 3.49%. The
rise in the cost of interest-bearing liabilities mitigated somewhat during the fourth quarter, as
costs for the fourth quarter only increased 9 basis points as compared with the fourth quarter of
last year, primarily as a result of the drop in interest rates which had an immediate effect or
our short-term borrowings, and allowed us to immediately start re-pricing our interest bearing
transaction deposit accounts. The cost of our transaction accounts decreased to 3.42% for the
fourth quarter of this year as compared with 3.47% for the entire year and 3.43% for the fourth
quarter of last year.
As a result of the leveling of loan yields, and the increase in funding costs as discussed above,
the interest rate spread decreased 23 basis points from 3.35% for the year ended December 31, 2006
to 3.12% for the current year; and the net interest margin decreased 38 basis points from 3.87% for
the year ended December 31, 2006 to 3.49% for 2007. Despite this drop in interest margin during
2007, net interest income increased $12.1 million or 32.7% in the current year over 2006, driven
primarily by the increased volume of $427 million higher average loans in 2007 as compared with the
prior year.
Provision for Loan Losses.
The Company recorded a $4.9 million provision for loan losses
for the year ended December 31, 2007, an increase of $1.5 million over the $3.4 million provision
for loan losses recorded for the prior year. Provisions for loan losses are charged to income to
bring the allowance for loan losses to a level deemed appropriate by Management. In evaluating the
allowance for loan losses, Management considers factors that include growth, composition and
industry diversification of the portfolio, historical loan loss experience, current delinquency
levels, adverse situations that may affect a borrowers ability to repay, estimated value of any
underlying collateral, prevailing economic conditions and other relevant qualitative factors. In
both 2007 and 2006, the provision for loan losses was made principally in response to growth in
loans, as well as changes in conditions
Page 27
related to the above factors. Net charge-offs as a
percentage of average loans increased to 0.09% for the year ended
December 31, 2007 from 0.04% in the prior year; and the Companys level of nonperforming assets has
increased slightly to $3.4 million at December 31, 2007, however, as a percentage to total loans
outstanding, decreased from 0.33% at December 31, 2006 to 0.22% at December 31, 2007. Loan growth
for the year ended December 31, 2007 (excluding the loans acquired through the acquisition of The
Bank of Richmond) was $359.8 million as compared with $327.9 million for the year ended December
31, 2006. Impaired loans increased from $4.1 million at December 31, 2006 to $15.2 million at
December 31, 2007, resulting in an approximate $682,500 increase in the allowance. At December 31,
2007 and December 31, 2006, respectively, the allowance for loan losses was $15.3 million and $9.4
million, representing 1.01% and 0.95%, respectively, of loans outstanding at the end of each
period. Other than the nonaccrual loans listed under the caption Asset Quality, the Companys
loan portfolio continues to perform very well.
Non-Interest Income.
Non-interest income aggregated $17.8 million for the year ended
December 31, 2007 as compared with $9.3 million for the year ended December 31, 2007, an increase
of $8.5 million or 91.6%. Both years were affected by the fluctuations in the fair value and net
cash settlements of the economic hedge. Non-interest income included a gain and net cash
settlements of the economic hedge of $584,000 for the year ended December 31, 2007; and a loss and
net cash settlements of the economic hedge of $1.9 million for the year ended December 31, 2006.
The change in fair value was primarily as a result of fluctuations (both favorable and unfavorable)
in LIBOR swap interest rate and market conditions during both years. The Company terminated its
position in the economic hedge during the third quarter of 2007, and received a termination fee of
$115,000 that was included in the above gain for 2007. Revenues from the Companys non-banking
activities over the past 12 months have continued to increase. Since inception, the Company has
actively pursued additional non-interest income sources outside of traditional banking operations,
including income from insurance, mortgage, brokerage operations and title insurance. Revenue from
Gateways insurance operations increased $2.4 million or 81.9% to $5.2 million for the year ended
December 31, 2007 as compared with the prior year. The increase in insurance revenues was due
primarily to the acquisition of two agencies in Virginia in the fourth quarter of 2006 and a title
insurance company during the first quarter of 2007, as well as, internal growth from cross-selling
bank customers and building our customer base as our bank franchise has grown. Revenue from the
mortgage subsidiary increased $1.4 million or 91.2% in 2007 to $3.0 million over the prior year.
The increase in mortgage revenue is attributable to having a full year of operations in 2007 as
compared with 2006 in which Gateway Bank Mortgage, Inc. only commenced operations in June. Mortgage
revenues in the fourth quarter of the current year decreased 15.4% from the fourth quarter of the
prior year attributed primarily to the nationwide issues that affected the mortgage industry during
the last half of 2007. Although Gateway Bank Mortgage, Inc. essentially does no sub-prime lending,
the limited access to the secondary markets had a negative effect on selling mortgages into the
secondary markets, thus slowing revenues during the latter part of the year.
Service charges on deposit accounts increased $644,000 or 19.6% for the year ended December 31,
2007, as compared with the prior year as a result of the Companys growth in transaction deposit
accounts from period to period from its expanding financial center network.
Other income increased $945,000 million for the year ended December 31, 2007 as compared with the
prior year primarily as a result of the gain in the fair value of its trust preferred debt
securities of $960,000 during 2007. The Company elected the fair value option for certain of its
trust preferred securities effective January 1 of this year, to hedge its short-term trading
investment portfolio. As a result of the unusual credit conditions the financial industry faced
during the last half of the year, the credit spreads on these debt securities widened significantly
resulting in the gain. It would not be anticipated that the Company would experience a market value
gain of this magnitude in the future, and in all likelihood would show a market value loss if
credit market conditions become more normalized.
As a result of Gateways continuous efforts to introduce new products and services in order to
better service its customers as well as enhance the overall diversification of its revenue base,
non-interest income as a percent of total revenue was 26.6% for the year ended December 31, 2007 as
compared with 20.0% for the prior year. Proforma non-interest income (non-interest income
excluding the effects of the economic hedge on both periods discussed above) as a percent of total
revenue was 25.9% for 2007 as compared with 23.7% for the prior year. Due to the volatility and
lack of comparability caused by the economic hedge management believes presentation of an
unadjusted non-GAAP pro-forma non-interest income and related percent to the revenues provides
useful information to investors.
Non-Interest Expenses.
Non-interest expenses aggregated $44.9 million for the year ended
December 31, 2007, an increase of $10.0 million or 28.5% over the $34.9 million reported for the
prior year. Substantially all of this increase resulted from the Banks growth and franchise
development throughout all of 2006 in which the Bank opened six de novo financial centers, built a
state of the art operations center, opened a private banking center, launched a new mortgage
subsidiary and made two insurance agency acquisitions; and the opening of three de novo financial
centers during the last half of 2007. Additionally, the acquisition of The Bank of Richmond added
$2.4
Page 28
million of non-interest expense during the last seven months of 2007. The acquisition and the
significant expansion over the past two years resulted in personnel costs increasing by
$7.7 million, or 44.5% to $25.0 million for the year
ended December 31, 2007 from $17.3 million for prior year. During the past year the Company had 93
new hires (of which 40 were related to The Bank of Richmond), while the costs of occupancy and
equipment costs increased by $1.4 million, or 20.2% to $8.3 million from $6.9 million for the prior
year. Other expenses increased $549,000 or 6.0% for the year ended December 31, 2007 as compared
with the prior year. The increase was related to approximately $690,000 in higher FDIC premiums
that resulted from the FDIC increasing insurance premiums effective January 1 of this year,
$204,000 higher franchise taxes that has resulted from the increase in our financial centers in
Virginia, and $160,000 higher intangibles amortization that has resulted from acquisitions since
the third quarter of last year; offset by lower promotion and consultant expenses.
Provision for Income Taxes.
The Companys effective tax rate was approximately 35.2% and
33.3% for the years ended December 31, 2007 and 2006, respectively. The reason that the effective
rate was lower for the year ended December 31, 2006 was due to the effect tax-exempt income from
municipal securities and BOLI had on lower pre-tax income for that year. As a result of the
Companys sustained pattern of profitability we expect our tax rate to remain near the level
incurred for the current year. Deferred tax assets have increased primarily due to increases in our
loan loss provision.
RESULTS OF OPERATIONS
Years Ended December 31, 2006 and 2005
Overview.
The Company reported net income of $5.3 million or $.47 per diluted share for
the year ended
December 31, 2006, as compared with net income of $3.9 million or $.46 per diluted share for 2005,
an increase of $1.3 million or 33.8% in net income, and an increase of $.01 or 2.1% in net income
per diluted share. The results from operations were negatively affected during the year by the
change in fair value of its interest rate swap that was entered into in December 2005 to hedge the
interest rate of its variable loan portfolio. The change in the fair value of this economic hedge
reduced non-interest income by $1.2 million, and in total the loss and net cash settlement on the
economic hedge was $1.9 million for the year. This loss (net of taxes using a 37.5 % blended rate)
reduced net income by $1.2 million or $0.11 per diluted share. The market value of the interest
rate swap can be volatile from quarter to quarter, and thus can affect net income positively or
negatively depending on interest rate conditions and other factors.
The Companys primary focus continues to be on growth and development of its financial center
network and subsidiary operations, sacrificing some profitability in the near term. The Bank
opened our first financial center in Raleigh, North Carolina in January 2006 and Norfolk, Virginia
in February 2006. In March 2006 the Bank opened another financial center in Virginia Beach,
Virginia and opened a newly constructed financial center in Kitty Hawk, North Carolina in April
2006. In addition, we opened two financial centers in August, one in Chesapeake and Virginia Beach
adding to our presence in those markets. These new locations increased the number of full-service
financial centers to twenty four. The Company has incurred additional non-interest expenses both as
a result of growth from period to period, and also as a result of staff additions and other costs
incurred as a result of the financial center expansion during 2006. In 2004 interest rates
obtained at or near forty year historical lows and steadily rose until June 2006. During 2006,
Wall Street Journal Prime increased from 7.25% at December 31, 2005 to 8.25% at the end of June and
has remained at 8.25% through December 31, 2006. The Companys interest rate spread has increased
primarily due to the Banks management of the interest rates on its loan and deposit portfolios
while maintaining an upward growth trend.
Net Interest Income.
Net interest income increased to $37.0 million for the year ended
December 31, 2006, a $13.7 million or 58.8% increase from the $23.3 million earned during 2005.
Total interest income benefited from growth in the level of average earning assets during the year.
Asset growth combined with higher asset yields caused by the increase in market interest rates
during periods reported contributed to this rise in income. Average total interest-earning assets
increased $345.7 million, or 56.6%, for 2006 as compared to 2005, while the average yield increased
by 115 basis points from 6.49% to 7.64%. Average total interest-bearing liabilities increased by
$304.5 million, or 56.7% for 2006 as compared to 2005, while the average cost of interest-bearing
liabilities increased by 124 basis points from 3.05% to 4.29%. Our cost of funds increased at a
higher pace than our yield on interest-earning assets as a result of deposits steadily repricing at
higher rates throughout the entire year, while the yield on our loan and investment portfolio has
remained relatively flat for the last half of 2006 since the last increase in interest rates
occurred in June 2006. This resulted in a 9 basis point decrease in interest rate spread. However,
despite the decrease in interest rate spread, because we were able increase our interest earning
assets by $41.2 million more than our interest bearing liabilities (primarily as a result of $21.0
million increase in average demand deposit accounts), our interest rate margin improved during 2006
by 6 basis points. For the year ended December 31, 2006, the net interest rate spread was 3.35%
Page 29
and
the net interest margin was 3.87%. For the year ended December 31, 2005, the net interest spread
was 3.44% and the net interest margin was 3.81%.
Provision for Loan Losses.
The Company recorded a $3.4 million provision for loan losses
in 2006, representing an increase of $1.2 million from the $2.2 million provision made in 2005.
Provisions for loan losses are charged to income to bring the allowance for loan losses to a level
deemed appropriate by Management. In evaluating the allowance for loan losses, Management considers
factors that include growth, composition and industry diversification of the portfolio, historical
loan loss experience, current delinquency levels, adverse situations that may affect a borrowers
ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and
other relevant factors. In both 2006 and 2005 the provision for loan losses was made principally in
response to growth in loans, as total loans outstanding increased by $327.9 million in 2006 and by
$284.7 million in 2005. Additionally, the 2006 provision was also increased as a result of the
increase in impaired loans. At December 31, the allowance for loan losses was $9.4 million for
2006 and $6.3 million for 2005, representing .95% and .94%, respectively, of loans outstanding.
Non-Interest Income.
Non-interest income totaled $9.3 million for the year ended December
31, 2006 as compared with $8.1 million for 2006, an increase of $1.2 million, or 14.9%. Since
inception, the Company has actively pursued additional non-interest income sources outside of
traditional banking operations, including income from insurance, mortgage banking, and brokerage
networking operations. Non-interest income was negatively affected in 2006 by the loss and net
cash settlement on economic hedge of $1.9 million. Of this loss, $1.2 million was related to the
drop in fair value of the economic hedge that resulted from the rise in rates primarily during the
first half of 2006. The fair value of the economic hedge can be volatile from quarter to quarter
and thus effect non-interest income either positively or negatively depending on interest rate
conditions and other factors. Excluding the effect of the economic hedge, non-interest income was
$11.2 million which represented a $3.1 million or 38.7% increase during 2005.
The 2006 increases were broad based and include $986,000 in service charges on deposit accounts,
$495,000 in income from insurance operations, $88,000 in income from brokerage operations, $185,000
from bank owned life insurance, $748,000 from mortgage operations, $560,000 from gain on the sale
of securities and $396,000 from other service fee income. The increase in service charges was a
direct result of the increase in the number of deposit accounts opened during 2006 that came from
the financial center expansion and Haberfeld High Performance Checking program. The increase in
insurance operations resulted also from the franchise expansion, growth in lines of business, and
the two insurance company acquisitions made in the fourth quarter of 2006. The increase in
brokerage revenues resulted from expanding our brokerage services into Virginia during the first
quarter with the hiring of an experienced broker in Virginia Beach. The increase in income from
bank owned life insurance was the result of purchasing an additional $7.0 million of bank owned
life insurance during the third quarter of 2006. During mid 2006 the bank dissolved its 49%
ownership of Gateway First Mortgage, LLC (Gateway First) which provided mortgage banking services
to the Bank and to other lenders and replaced it with our wholly owned mortgage subsidiary,
Gateway Bank Mortgage, Inc., which accounted for the increase in mortgage revenues in 2006 as
compared with the prior year.
Non-Interest Expenses.
Non-interest expenses totaled $35.0 million for the year ended
December 31, 2006, an increase of $11.7 million or 50.3% over the $23.3 million reported for 2005.
In comparison, total assets averaged $1.0 billion for 2006, an increase of 53.7% over average total
assets of $679.0 million for the year ended December 31, 2005. Substantially all of the increase in
non-interest expenses resulted from the Companys growth and franchise expansion, and reflects the
additional expenses in the current year associated with the opening of six new financial centers,
increasing the number of full-service banking locations to twenty four; a private banking center,
launching a new mortgage subsidiary, opening a new state of the art operations center, starting two
new loan production offices, and making two insurance agency acquisitions. Eighteen of the twenty
four financial centers were fully operational throughout 2006 and sixteen of the eighteen financial
centers were fully operational throughout all of 2005. As a result of such expansion, personnel
costs increased by $5.7 million, or 49.2%, the costs of occupancy, data processing and equipment
costs increased by $3.0 million or 53.9%, and other non-interest expenses increased by $3.0 million
or 49.1%. The increase in other expense included $1.03 million of expenses related to the
Haberfeld High Performance Checking account program in 2006 (there were none of these expenses in
2005), and an increase of $237,000 related to other promotional and advertising costs, increased
franchise taxes related to Virginia financial center expansion of $500,000, increased consulting
and professional costs of $318,000, and increased travel and business development expenses of
$340,000. Despite these higher expenses as a percentage of average total assets, total
non-interest expenses decreased to 3.35% for 2006 from 3.43% for 2005.
Income Taxes.
Income tax expense was $2.6 million for 2006 as compared with $2.0 million
for 2005. The Companys effective tax rate for both tax years was approximately 33.3%. As a
result of the Companys sustained pattern of profitability we expect our tax rate to remain near
this level in 2007. Deferred taxes increased primarily due to increases in our allowance for loan
losses and the unrealized loss related to our economic hedge.
Page 30
LIQUIDITY AND CAPITAL RESOURCES
The Companys sources of funds are customer deposits, cash and demand balances due from other
banks, interest-earning deposits in other banks and trading and investment securities available for
sale. These funds, together with loan repayments, are used to make loans and to fund continuing
operations. In addition, at December 31, 2007, the Bank had credit availability with the Federal
Home Loan Bank of Atlanta (FHLB) of approximately $195.0 million, with $174.0 million outstanding
secured by commercial loans and investment securities; federal funds lines of credit with six other
financial institutions in the aggregate amount of $106.5 million from which $28 million was
borrowed at December 31, 2007; and a line of credit with a bank of $20.0 million from which $4.0
million was borrowed at December 31, 2007. The Company also utilizes the wholesale brokered CD
market to fund liquidity on an as needed basis.
Total deposits were $1.4 billion and $923.7 million at December 31, 2007 and 2006, respectively. As
a result of the Companys loan demand exceeding the rate at which core deposits have been built,
the Company has relied significantly on time deposits as a source of funds. Certificates of deposit
are the only deposit accounts that have stated maturity dates. Such deposits are generally
considered to be rate sensitive. At December 31, 2007, time deposits represented 62.6% of the
Companys total deposits, up from 59.2% of total deposits at December 31, 2006. Certificates of
deposit of $100,000 or more represented 19.3% and 22.2%, respectively, of the Banks total deposits
at December 31, 2007 and 2006. At December 31, 2007, the Company had $225.9 million in brokered
time deposits, representing 16.0% of total deposits at that date, up from 10.3% of total deposits
at December 31, 2006. The bank has primarily used brokered deposits to fund its loan production
offices and private banking center. While the Company will need to pay competitive rates to retain
these deposits at their maturities, there are other subjective factors that will determine their
continued retention. Based upon prior experience, the Company anticipates that a substantial
portion of outstanding certificates of deposit will renew upon maturity.
Management anticipates that the Company will rely primarily upon customer deposits, loan
repayments, current earnings, brokered deposits, and as necessary, additional borrowings, to
provide liquidity, and will use funds thus generated to make loans and to purchase securities,
primarily securities issued by the federal government and its agencies, corporate securities, and
mortgage-backed securities.
At December 31, 2007 and 2006, the Companys tangible equity to asset ratio was 6.07% and 8.04%,
respectively. All capital ratios place the Bank in excess of the minimum required to be deemed a
well-capitalized bank by regulatory measures. The regulatory capital position of both the Company
and the Bank was enhanced during December 2007 with the issuance of $23.2 million in perpetual
non-cumulative preferred stock and $25.7 million of trust preferred securities in May 2007 that
qualify, subject to certain limitations, as Tier 1 capital. The Companys Tier 1 capital ratio at
December 31, 2007 and 2006 was 10.43% and 12.11%, respectively.
CAPITAL RATIOS
The Bank is subject to minimum capital requirements. See SUPERVISION AND REGULATION. As the
following table indicates, at December 31, 2007, the Bank exceeded regulatory capital requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
Actual
|
|
Minimum
|
|
Well-Capitalized
|
|
|
Ratio
|
|
Requirement
|
|
Requirement
|
Total risk-based capital ratio
|
|
|
11.19
|
%
|
|
|
8.0
|
%
|
|
|
10.0
|
%
|
Tier 1 risk-based capital ratio
|
|
|
10.24
|
%
|
|
|
4.0
|
%
|
|
|
6.0
|
%
|
Leverage ratio
|
|
|
9.46
|
%
|
|
|
4.0
|
%
|
|
|
5.0
|
%
|
Management expects that the Bank will remain well-capitalized for regulatory purposes, although
there can be no assurance that additional capital will not be required in the near future due to
greater-than-expected growth, or otherwise.
Page 31
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
In the normal course of business there are various outstanding contractual obligations of the
Company that will require future cash outflows. In addition, there are commitments and contingent
liabilities, such as commitments to extend credit that may or may not require future cash outflows.
The following table reflects contractual obligations of the Company outstanding as of December 31,
2007.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
On Demand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Or Within
|
|
|
|
|
|
|
|
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
Federal funds purchased
|
|
$
|
28,000
|
|
|
$
|
28,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
FHLB advances
|
|
|
174,000
|
|
|
|
5,000
|
|
|
|
6,500
|
|
|
|
145,000
|
|
|
|
17,500
|
|
Reverse purchase agreements
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Junior subordinated debentures
|
|
|
56,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,102
|
|
Line of credit with a bank
|
|
|
4,000
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
Lease obligations
|
|
|
19,010
|
|
|
|
1,574
|
|
|
|
2,737
|
|
|
|
2,349
|
|
|
|
12,350
|
|
Deposits
|
|
|
1,408,919
|
|
|
|
1,349,704
|
|
|
|
42,826
|
|
|
|
16,368
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
1,710,031
|
|
|
$
|
1,384,277
|
|
|
$
|
56,063
|
|
|
$
|
173,717
|
|
|
$
|
95,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects other commitments of the company outstanding as of December 31,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
Within
|
|
|
|
|
|
|
|
|
|
|
After
|
|
Other Commitments
|
|
Committed
|
|
|
1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
Undisbursed home equity credit lines
|
|
$
|
69,789
|
|
|
$
|
69,789
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Other commitments and credit lines
|
|
|
269,640
|
|
|
|
269,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undisbursed portion of construction loans
|
|
|
122,475
|
|
|
|
122,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
|
19,411
|
|
|
|
19,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate mortgage
Loans, fixed and variable rate
|
|
|
12,181
|
|
|
|
12,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments
|
|
$
|
493,496
|
|
|
$
|
493,496
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the normal course of business, the Company may enter into purchase agreements for goods or
services. In managements opinion, the dollar amount of such agreements at December 31, 2007 is
not material and has not been included in the above table.
ASSET/LIABILITY MANAGEMENT
The Companys results of operations depend substantially on its net interest income. Like most
financial institutions, the Banks interest income and cost of funds are affected by general
economic conditions and by competition in the market place. The purpose of asset/liability
management is to provide stable net interest income growth by protecting the Companys earnings
from undue interest rate risk, which arises from volatile interest rates and changes in the balance
sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk,
market risk, and capital adequacy. The Company maintains, and has complied with, a Board approved
asset/liability management policy that provides guidelines for controlling exposure to interest
rate risk by utilizing the following ratios and trend analysis: liquidity, equity, volatile
liability dependence, portfolio maturities, maturing assets and maturing liabilities. The Companys
policy is to control the exposure of its earnings to changing interest rates by generally
endeavoring to maintain a position within a narrow range around an earnings neutral position,
which is defined as the mix of assets and liabilities that generate a net interest margin that is
least affected by interest rate changes.
Page 32
When suitable lending opportunities are not sufficient to utilize available funds, the Company has
generally invested such funds in securities, primarily U.S. Treasury securities, securities issued
by governmental agencies, mortgage-backed securities and corporate obligations. The securities
portfolio contributes to the Companys profits and plays an important part in the overall interest
rate management. However, management of the securities portfolio alone cannot balance overall
interest rate risk. The securities portfolio must be used in combination with other asset/liability
techniques to actively manage the balance sheet. The primary objectives in the overall management
of the securities portfolio are safety, liquidity, yield, asset/liability management (interest rate
risk), and investing in securities that can be pledged for public deposits.
In reviewing the needs of the Company with regard to proper management of its asset/liability
program, the Companys management estimates its future needs, taking into consideration historical
periods of high loan demand and low deposit balances, estimated loan and deposit increases (due to
increased demand through marketing), and forecasted interest rate changes. A number of measures are
used to monitor and manage interest rate risk, including income simulations and interest
sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the
direction and magnitude of changes in net interest income resulting from changes in interest rates.
Key assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and
maturities of other investment securities, loan and deposit volumes and pricing. These assumptions
are inherently uncertain and, as a result, the model cannot precisely estimate net interest income
or precisely predict the impact of higher or lower interest rates on net interest income. Actual
results will differ from simulated results due to timing, magnitude and frequency of interest rate
changes and changes in market conditions and management strategies, among other factors.
Based on the results of the income simulation model as of November 30, 2007, the Company would
expect an increase in net interest income of $1.6 million if interest rates increase from rates as
of December 31, 2007 by 200 basis points and a decrease in net interest income of $6.0 million if
interest rates decrease from rates as of December 31, 2007 by 200 basis points.
The analysis of an institutions interest rate gap (the difference between the repricing of
interest-earning assets and interest-bearing liabilities during a given period of time) is another
standard tool for the measurement of the exposure to interest rate risk. The Company believes that
because interest rate gap analysis does not address all factors that can affect earnings
performance, it should be used in conjunction with other methods of evaluating interest rate risk.
The following table sets forth the amounts of interest-earning assets and interest-bearing
liabilities outstanding at December 31, 2007 which are projected to reprice or mature in each of
the future time periods shown. Except as stated below, the amounts of assets and liabilities shown
which reprice or mature within a particular period were determined in accordance with the
contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due
at the end of the next upcoming adjustment period. Money market deposit accounts and negotiable
order of withdrawal or other transaction accounts are assumed to be subject to immediate repricing
and depositor availability and have been placed in the shortest period. In making the gap
computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay
rates have been used for any interest-earning assets or interest-bearing liabilities. In addition,
the table does not reflect scheduled principal payments which will be received throughout the lives
of the loans. The interest rate sensitivity of the Companys assets and liabilities illustrated in
the following table would vary substantially if different assumptions were used or if actual
experience differs from that indicated by such assumptions.
Page 33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms to Repricing at December 31, 2007
|
|
|
|
|
|
|
|
Over 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
3 Months
|
|
|
Months to
|
|
|
Within
|
|
|
Over 12
|
|
|
|
|
|
|
or Less
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Months
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
911,465
|
|
|
$
|
93,632
|
|
|
$
|
1,005,097
|
|
|
$
|
517,304
|
|
|
$
|
1,522,401
|
|
Interest-earning deposits
|
|
|
1,092
|
|
|
|
|
|
|
|
1,092
|
|
|
|
|
|
|
|
1,092
|
|
Investment securities available for sale
|
|
|
5,720
|
|
|
|
492
|
|
|
|
6,212
|
|
|
|
120,538
|
|
|
|
126,750
|
|
Trading securities
|
|
|
23,011
|
|
|
|
|
|
|
|
23,011
|
|
|
|
|
|
|
|
23,011
|
|
FHLB/FRB stock
|
|
|
15,660
|
|
|
|
|
|
|
|
15,660
|
|
|
|
|
|
|
|
15,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
956,948
|
|
|
$
|
94,124
|
|
|
$
|
1,051,072
|
|
|
$
|
637,842
|
|
|
$
|
1,688,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total interest-earning assets
|
|
|
56.66
|
%
|
|
|
5.57
|
%
|
|
|
62.23
|
%
|
|
|
37.77
|
%
|
|
|
100.00
|
%
|
Cumulative percentage to total interest-
earning assets
|
|
|
56.66
|
%
|
|
|
62.23
|
%
|
|
|
62.23
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW and money market
|
|
$
|
402,523
|
|
|
$
|
|
|
|
$
|
402,523
|
|
|
$
|
|
|
|
$
|
402,523
|
|
Time
|
|
|
274,389
|
|
|
|
548,907
|
|
|
|
823,296
|
|
|
|
59,215
|
|
|
|
882,511
|
|
Borrowings
|
|
|
88,102
|
|
|
|
5,000
|
|
|
|
93,102
|
|
|
|
189,000
|
|
|
|
282,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
765,014
|
|
|
$
|
553,907
|
|
|
$
|
1,318,921
|
|
|
$
|
248,215
|
|
|
$
|
1,567,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total interest-bearing liabilities
|
|
|
48.82
|
%
|
|
|
35.34
|
%
|
|
|
84.16
|
%
|
|
|
15.84
|
%
|
|
|
100.00
|
%
|
Cumulative percentage of total interest-
bearing liabilities
|
|
|
48.82
|
%
|
|
|
84.16
|
%
|
|
|
84.16
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
Interest sensitivity gap
|
|
$
|
191,934
|
|
|
$
|
(459,783
|
)
|
|
$
|
(267,849
|
)
|
|
$
|
389,627
|
|
|
$
|
121,778
|
|
|
|
|
|
|
Cumulative interest sensitivity gap
|
|
$
|
191,934
|
|
|
$
|
(267,849
|
)
|
|
$
|
(267,849
|
)
|
|
$
|
121,778
|
|
|
$
|
121,778
|
|
|
|
|
|
|
Cumulative interest sensitivity gap as a
percentage of total interest-earning assets
|
|
|
11.36
|
%
|
|
|
(15.86
|
)%
|
|
|
(15.86
|
)%
|
|
|
7.21
|
%
|
|
|
7.21
|
%
|
|
|
|
|
|
Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities
|
|
|
125.09
|
%
|
|
|
79.69
|
%
|
|
|
79.69
|
%
|
|
|
107.77
|
%
|
|
|
107.77
|
%
|
The table illustrates that if assets and liabilities reprice in the time intervals indicated in the
table, the Company is asset sensitive in the very short-term (three months or less), becomes
liability sensitive between three and twelve months, and then becomes asset sensitive again over
twelve months. As stated above, certain shortcomings are inherent in the method of analysis
presented in the foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates on other types may
lag behind changes in market interest rates. For instance, while the table is based on the
assumption that interest-bearing demand accounts, money market accounts and savings accounts are
immediately sensitive to movements in rates, the Company expects that in a changing rate
environment the amount of the adjustment in interest rates for such accounts would be less than the
adjustment in categories of assets which are considered to be immediately sensitive. Additionally,
certain assets have features which restrict changes in the interest rates of such assets both on a
short-term basis and over the lives of such assets. Further, in the event of a change in market
interest rates, prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the tables. Finally, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an increase in market interest rates. Due to
these shortcomings, the Company places primary emphasis on its income simulation model when
managing its exposure to changes in interest rates.
CRITICAL ACCOUNTING POLICIES
The preparation of the Companys audited consolidated financial statements and the information
included in managements discussion and analysis is governed by policies that are based on
accounting principles generally accepted in the United States of America and general practices
within the banking industry. Among the more
Page 34
significant policies are those that govern accounting
for loans and allowance for loan losses, stock based
compensation, derivatives and goodwill. These policies are discussed in Note B of the Notes To
Consolidated Financial Statements included in this Annual Report.
A critical accounting policy is one that is both very important to the portrayal of the Companys
financial condition and results, and requires a difficult, subjective or complex judgment by
management. What makes these judgments difficult, subjective and/or complex is the need to make
estimates about the effects of matters that are inherently uncertain. Estimates and judgments are
integral to our accounting for certain items, and those estimates and judgments affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and
liabilities. The Company periodically evaluates its estimates, including those related to the
allowance for loan losses, goodwill, intangible assets, and stock based compensation. While we
base our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, actual results may differ from these estimates under different
assumptions or conditions. Further information regarding the accounting policies that we consider
to be critical is provided below.
Allowance for loan losses
. The Companys most significant critical accounting policy is the
determination of its allowance for loan losses. The allowance for loan losses reflects the
estimated losses that will result from the inability of our customers to make required payments.
The allowance for loan losses results from managements evaluation of the risk characteristics of
the loan portfolio under current economic conditions and considers such factors as the financial
condition of the borrower, fair market value of collateral and other items that, in our opinion,
deserve current recognition in estimating possible credit losses. Our evaluation process is based
on historical evidence and current trends among delinquencies, defaults and nonperforming assets.
Our estimate of the allowance for loan losses does not include the impact of events that might
occur in the future.
Management considers the established allowance adequate to absorb losses that relate to loans
outstanding at December 31, 2007, although future additions to the allowance may be necessary based
on changes in economic conditions and other factors. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the allowance for loan losses.
Such agencies may require adjustments to the allowance based on their judgments of information
available to them at the time of their examination. If the financial condition of our borrowers
were to deteriorate, resulting in an impairment of their ability to make payments, our estimates
would be updated, and additional provisions may be required. For further information on the
allowance for loan losses, see Financial Condition in Managements Discussion and Analysis and
Note D of the Notes to Consolidated Financial Statements included in this Annual Report.
Goodwill and Other Intangible Assets.
Intangible assets include goodwill and other identifiable
assets, such as core deposit premiums, resulting from acquisitions. Core deposit premiums are
amortized primarily on a straight-line basis over a ten-year life based upon historical studies of
core deposits. Intangible assets related to insurance agency acquisitions are amortized over the
expected life of the book of business acquired. Goodwill is not amortized but is tested annually
for impairment or at any time an event occurs or circumstances change that may trigger a decline in
the value of the reporting unit. Examples of such events or circumstances include adverse changes
in legal factors, business climate, unanticipated competition, change in regulatory environment or
loss of key personnel.
The Company tests for impairment in accordance with SFAS No. 142. Potential impairment of goodwill
exists when the carrying amount of a reporting unit exceeds its fair value. The fair value of a
reporting unit is computed using one or a combination of the following three methods: income,
market value or cost method. The income method uses a discounted cash flow analysis to determine
fair value by considering a reporting units capital structure and applying a risk-adjusted
discount rate to forecast earnings based on a capital asset pricing model. The market value method
uses recent transaction analysis or publicly traded comparable analysis for similar assets and
liabilities to determine fair value. The cost method assumes the net assets of a recent business
combination accounted for under the purchase method of accounting will be recorded at fair value if
no event or circumstance has occurred triggering a decline in the value. To the extent a reporting
units carrying amount exceeds its fair value, an indication exists that the reporting units
goodwill may be impaired, and a second step of impairment test will be performed. In the second
step, the implied fair value of the reporting units goodwill, determined by allocating the
reporting units fair value to all of its assets (recognized and unrecognized) and liabilities as
if the reporting unit had been acquired in a business combination at the date of the impairment
test. If the implied fair value of reporting unit goodwill is lower than its carrying amount,
goodwill is impaired and is written down to its implied fair value. The loss recognized is limited
to the carrying amount of goodwill. Once an impairment loss is recognized, future increases in fair
value will not result in the reversal of previously recognized losses.
Stock Compensation Plans
. Effective January 1, 2006, the Company adopted SFAS No. 123 (revised
2004), Share-
Page 35
Based Payment, (SFAS No. 123R) which was issued by the FASB in December 2004. SFAS
No. 123R revises SFAS No. 123 Accounting for Stock Based Compensation, and supersedes APB No. 25,
Accounting for Stock
Issued to Employees, (APB No. 25) and its related interpretations. SFAS No. 123R requires
recognition of the cost of employee services received in exchange for an award of equity
instruments in the financial statements over the period the employee is required to perform the
services in exchange for the award (presumptively the vesting period). SFAS No. 123R also requires
measurement of the cost of employee services received in exchange for an award based on the
grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95 Statement of Cash
Flows, to require that excess tax benefits be reported as financing cash inflows flows, rather
than as a reduction of taxes paid, which is included within operating cash flows.
The Company adopted SFAS No. 123R using the modified prospective application as permitted under
SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application,
the Company is required to record compensation expense for all awards granted after the date of
adoption and for the unvested portion of previously granted awards that remain outstanding at the
date of adoption.
Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed
by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices
equal to the fair market value of the Companys common stock on the date of the grant.
OFF-BALANCE SHEET ARRANGEMENTS
Information about the Companys off-balance sheet risk exposure is presented in Note K to the
accompanying consolidated financial statements. As part of its ongoing business, the Company does
not participate in transactions that generate relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as special purpose entities (SPEs),
which generally are established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As of December 31, 2007, except as otherwise
disclosed in Note G to the accompanying consolidated financial statements, the Company is not
involved in any unconsolidated SPE transactions.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note B to the consolidated financial statements for a full description of recent accounting
pronouncements including the respective expected dates of adoption and effects on results of
operations and financial condition.
LENDING ACTIVITIES
General
. The Company provides to its customers a full range of short- to medium-term commercial
and industrial, real estate, agricultural, Small Business Administration guaranteed, Farmers Home
Administration guaranteed, mortgage, construction and consumer loans, both secured and unsecured.
The Companys loan policies and procedures establish the basic guidelines governing its lending
operations. Generally, the guidelines address the types of loans that the Company seeks, target
markets, underwriting and collateral requirements, terms, interest rate and yield considerations
and compliance with laws and regulations. All loans or credit lines are subject to approval
procedures and amount limitations. These limitations apply to the borrowers total outstanding
indebtedness to the Company, including the indebtedness of any guarantor. The policies are reviewed
and approved at least annually by the Board of Directors of the Company. The Company supplements
its own supervision of the loan underwriting and approval process with periodic loan audits by
internal loan examiners and outside professionals experienced in loan review work. The Company has
focused its portfolio lending activities on typically higher yielding commercial, construction and
consumer loans rather than lower yielding 1-4 family mortgages which the Company typically sells in
the secondary market. The following table sets forth at the dates indicated the Companys loan
portfolio composition by type of loan:
Page 36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial & industrial
|
|
$
|
263,283
|
|
|
|
17.3
|
%
|
|
$
|
137,658
|
|
|
|
13.8
|
%
|
Real estate construction
|
|
|
604,335
|
|
|
|
39.7
|
%
|
|
|
381,788
|
|
|
|
38.4
|
%
|
Real estate commercial mortgage
|
|
|
321,806
|
|
|
|
21.1
|
%
|
|
|
229,752
|
|
|
|
23.1
|
%
|
Real estate 1-4 family mortgage
|
|
|
193,549
|
|
|
|
12.7
|
%
|
|
|
128,920
|
|
|
|
13.0
|
%
|
Consumer
|
|
|
22,133
|
|
|
|
1.4
|
%
|
|
|
15,347
|
|
|
|
1.5
|
%
|
Mortgage loans held for sale
|
|
|
5,624
|
|
|
|
.4
|
%
|
|
|
15,576
|
|
|
|
1.6
|
%
|
Home equity lines of credit
|
|
|
113,191
|
|
|
|
7.4
|
%
|
|
|
85,882
|
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,523,921
|
|
|
|
100.0
|
%
|
|
|
994,923
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(15,339
|
)
|
|
|
|
|
|
|
(9,405
|
)
|
|
|
|
|
Unamortized net deferred (fees) costs
|
|
|
(1,520
|
)
|
|
|
|
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
1,507,062
|
|
|
|
|
|
|
$
|
985,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
75,935
|
|
|
|
11.4
|
%
|
|
$
|
69,075
|
|
|
|
18.0
|
%
|
Real estate construction
|
|
|
256,720
|
|
|
|
38.4
|
%
|
|
|
131,431
|
|
|
|
34.4
|
%
|
Real estate commercial mortgage
|
|
|
155,396
|
|
|
|
23.3
|
%
|
|
|
90,197
|
|
|
|
23.6
|
%
|
Real estate 1-4 family mortgage
|
|
|
97,215
|
|
|
|
14.6
|
%
|
|
|
51,768
|
|
|
|
13.5
|
%
|
Consumer
|
|
|
12,962
|
|
|
|
1.9
|
%
|
|
|
10,641
|
|
|
|
2.8
|
%
|
Home equity lines of credit
|
|
|
69,246
|
|
|
|
10.4
|
%
|
|
|
29,350
|
|
|
|
7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
667,474
|
|
|
|
100.0
|
%
|
|
|
382,462
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(6,283
|
)
|
|
|
|
|
|
|
(4,163
|
)
|
|
|
|
|
Unamortized net deferred (fees) costs
|
|
|
(822
|
)
|
|
|
|
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
660,369
|
|
|
|
|
|
|
$
|
377,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2003
|
|
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
$
|
52,554
|
|
|
|
22.7
|
%
|
Real estate construction
|
|
|
55,970
|
|
|
|
24.2
|
%
|
Real estate commercial mortgage
|
|
|
68,094
|
|
|
|
29.3
|
%
|
Real estate 1-4 family mortgage
|
|
|
32,191
|
|
|
|
13.9
|
%
|
Consumer
|
|
|
10,458
|
|
|
|
4.5
|
%
|
Home equity lines of credit
|
|
|
12,615
|
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
231,882
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(2,759
|
)
|
|
|
|
|
Unamortized net deferred (fees) costs
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
228,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 37
The following table presents, at December 31, 2007, (i) the aggregate maturities or repricings of
loans in the named categories of the Companys loan portfolio and (ii) the aggregate amounts of
such loans maturing or repricing after one year by fixed and variable rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
|
1-5 Years
|
|
|
After 5 Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Real estate construction
|
|
$
|
498,226
|
|
|
$
|
79,947
|
|
|
$
|
26,163
|
|
|
$
|
604,336
|
|
Commercial and industrial
|
|
|
173,267
|
|
|
|
77,902
|
|
|
|
12,116
|
|
|
|
263,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
671,493
|
|
|
$
|
157,849
|
|
|
$
|
38,279
|
|
|
$
|
867,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
187,794
|
|
Variable rate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
196,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial Loans.
Commercial business lending is a primary focus of the Companys
lending activities. At December 31, 2007, the Companys commercial and industrial loan portfolio
equaled $263.3 million or 17.3% of total loans, as compared with $137.7 million or 13.8% of total
loans at December 31, 2006. Commercial and industrial loans include both secured and unsecured
loans for working capital, expansion, and other business purposes. Short-term working capital loans
generally are secured by accounts receivable, inventory and/or equipment. The Company also makes
term commercial loans secured by equipment and real estate. Lending decisions are based on an
evaluation of the financial strength, management and credit history of the borrower, and the
quality of the collateral securing the loan. With few exceptions, the Company requires personal
guarantees and secondary sources of repayment.
Commercial loans generally provide greater yields and reprice more frequently than other types of
loans, such as real estate loans. More frequent repricing means that yields on our commercial loans
adjust with changes in interest rates.
Real Estate Loans.
Real estate loans are made for purchasing, constructing and refinancing one to
four family, five or more family and commercial properties. The Company offers fixed and adjustable
rate options. The Company provides customers access to long-term conventional real estate loans
through its mortgage subsidiary which makes Federal National Mortgage Association (FNMA)
conforming loans for the account of third parties.
At December 31, 2007, the Companys residential one to four family loans amounted to $193.5 million
or 12.7% of total loans as compared with $128.9 million or 13.0% of total loans at December 31,
2006. The Companys residential mortgage loans are secured by properties located within the
Companys market area. Some of the one to four family residential mortgage loans that the Company
makes are originated for the account of third parties, either through the Bank or Gateway Bank
Mortgage, Inc. Such loans are booked as loans held for resale until the loan is sold. At December
31, 2007 such loans aggregated $5.6 million as compared with $15.6 million at December 31, 2006.
The Company receives fees for each such loan originated and/or sold, with such fees included in
income from mortgage operations which aggregated $3.0 million for the year ended December 31, 2007
and $1.6 million for the year ended December 31, 2006. The Company anticipates that it will
continue to be an active originator of residential loans.
The Company has made, and anticipates continuing to make, commercial real estate loans. Commercial
real estate loans equaled $321.8 or 21.1% of total loans at December 31, 2007 and $229.8 million or
23.1% of total loans at December 31, 2006. This lending has involved loans secured principally by
commercial buildings for office, storage and warehouse space, and by agricultural properties.
Generally in underwriting commercial real estate loans, the Company requires the personal guaranty
of borrowers and a demonstrated cash flow capability sufficient to service the debt. Loans secured
by commercial real estate may be in greater amount and involve a greater degree of risk than one to
four family residential mortgage loans. Payments on such loans are often dependent on successful
operation or management of the properties.
The Company originates one to four family residential construction loans for the construction of
custom homes (where the home buyer is the borrower) and provides financing to builders and
consumers for the construction of pre-sold homes and development of properties. The Company also
makes commercial real estate construction loans, generally for owner-occupied properties. Real
estate construction, acquisition and development loans amounted to
Page 38
$604.3 million or 39.7% of total loans at December 31, 2007 and $381.8 million or 38.4% of total
loans at December 31, 2006. The Company generally receives a pre-arranged permanent financing
commitment from an outside entity prior to financing the construction of pre-sold homes. The
Company lends to builders and developers who have demonstrated a favorable record of performance
and profitable operations and who are building in markets that management believes it understands
and in which it is comfortable with the economic conditions. The Company further endeavors to limit
its construction lending risk through adherence to established underwriting procedures. Also, the
Company generally requires documentation of all draw requests and utilizes loan officers to inspect
the project prior to paying any draw requests from the builder. With few exceptions, the Company
requires personal guarantees and secondary sources of repayment on construction loans.
Consumer Loans and Home Equity Lines of Credits.
Loans to individuals include automobile loans,
boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous
secured and unsecured personal loans. Consumer loans generally can carry significantly greater
risks than other loans, even if secured, if the collateral consists of rapidly depreciating assets
such as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may
not provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to
job loss, illness and other personal factors. The Company attempts to manage the risks inherent in
consumer lending by following established credit guidelines and underwriting practices designed to
minimize risk of loss.
Loan Approvals.
The Companys loan policies and procedures establish the basic guidelines
governing its lending operations. Generally, the guidelines address the type of loans that the
Company seeks, target markets, underwriting and collateral requirements, terms, interest rate and
yield considerations and compliance with laws and regulations. All loans or credit lines are
subject to approval procedures and amount limitations. These limitations apply to the borrowers
total outstanding indebtedness to the Company, including the indebtedness of any guarantor. The
policies are reviewed and approved at least annually by the Board of Directors of the Company. The
Company supplements its own supervision of the loan underwriting and approval process with periodic
loan audits by independent, outside professionals experienced in loan review work.
Commitments and Contingent Liabilities
In the ordinary course of business, the Company enters into various types of transactions that
include commitments to extend credit that are not included in loans receivable, net, presented on
the Companys consolidated balance sheets. The Company applies the same credit standards to these
commitments as it uses in all its lending activities and has included these commitments in its
lending risk evaluations. The Companys exposure to credit loss under commitments to extend credit
is represented by the amount of these commitments. See NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
Asset Quality
The Company considers asset quality to be of primary importance, and employs a formal internal loan
review process to ensure adherence to the Lending Policy as approved by the Board of Directors. It
is the responsibility of each lending officer to assign an appropriate risk grade to every loan
originated. Credit Administration, through the loan review process, validates the accuracy of the
initial risk grade assessment. In addition, as a given loans credit quality improves or
deteriorates, it is Credit Administrations responsibility to change the borrowers risk grade
accordingly. The function of determining the allowance for loan losses is fundamentally driven by
the risk grade system. In determining the allowance for loan losses and any resulting provision to
be charged against earnings, particular emphasis is placed on the results of the loan review
process. Consideration is also given to historical loan loss experience, the value and adequacy of
collateral, economic conditions in the Companys market area and other factors. For loans
determined to be impaired, the allowance is based on discounted cash flows using the loans initial
effective interest rate or the fair value of the collateral for certain collateral dependent loans.
This evaluation is inherently subjective as it requires material estimates, including the amounts
and timing of future cash flows expected to be received on impaired loans that may be susceptible
to significant change. The allowance for loan losses represents managements estimate of the
appropriate level of reserve to provide for probable losses inherent in the loan portfolio.
The Companys policy regarding past due loans normally requires a prompt charge-off to the
allowance for loan losses following timely collection efforts and a thorough review. Further
efforts are then pursued through various means available. Loans carried in a non-accrual status are
generally collateralized and probable losses are considered in the determination of the allowance
for loan losses.
Page 39
Nonperforming Assets
The table sets forth, for the period indicated, information with respect to the Companys
nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured
loans), and total nonperforming assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loans
|
|
$
|
3,407
|
|
|
$
|
3,269
|
|
|
$
|
204
|
|
|
$
|
490
|
|
|
$
|
1,210
|
|
Restructured loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
3,407
|
|
|
|
3,269
|
|
|
|
204
|
|
|
|
490
|
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
3,889
|
|
|
$
|
3,269
|
|
|
$
|
204
|
|
|
$
|
490
|
|
|
$
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past due 90 days or more
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Allowance for loan losses
|
|
|
15,339
|
|
|
|
9,405
|
|
|
|
6,283
|
|
|
|
4,163
|
|
|
|
2,759
|
|
Nonperforming loans to period end loans
|
|
|
.22
|
%
|
|
|
0.33
|
%
|
|
|
0.03
|
%
|
|
|
0.13
|
%
|
|
|
0.52
|
%
|
Allowance for loan losses to
period end loans
|
|
|
1.01
|
%
|
|
|
0.95
|
%
|
|
|
0.94
|
%
|
|
|
1.09
|
%
|
|
|
1.19
|
%
|
Allowance for loan losses to
nonperforming loans
|
|
|
450.22
|
%
|
|
|
287.70
|
%
|
|
|
3,079.90
|
%
|
|
|
849.59
|
%
|
|
|
228.02
|
%
|
Nonperforming assets to total assets
|
|
|
.21
|
%
|
|
|
0.27
|
%
|
|
|
0.02
|
%
|
|
|
0.09
|
%
|
|
|
0.38
|
%
|
Our consolidated financial statements are prepared on the accrual basis of accounting, including
the recognition of interest income on loans, unless we place a loan on nonaccrual basis. We account
for loans on a nonaccrual basis when we have serious doubts about the collectability of principal
or interest. Generally, our policy is to place a loan on nonaccrual status when the loan becomes
past due 90 days. We also place loans on nonaccrual status in cases where we are uncertain whether
the borrower can satisfy the contractual terms of the loan agreement. Amounts received on
nonaccrual loans generally are applied first to principal and then to interest only after all
principal has been collected. Restructured loans are those for which concessions, including the
reduction of interest rates below a rate otherwise available to that borrower or the deferral of
interest or principal, have been granted due to the borrowers weakened financial condition. We
accrue interest on restructured loans at the restructured rates when we anticipate that no loss of
original principal will occur. Potential problem loans are loans which are currently performing and
are not included in nonaccrual or restructured loans above, but about which we have serious doubts
as to the borrowers ability to comply with present repayment terms. These loans are likely to be
included later in nonaccrual, past due or restructured loans, so they are considered by management
in assessing the adequacy of our allowance for loan losses. At December 31, 2007, we had $11.8
million of potential problem loans. Real estate owned consists of foreclosed, repossessed and
idled properties. At December 31, 2007 the Company had $482,000 of real estate owned.
Analysis of Allowance for Loan Losses
Our allowance for loan losses is established through charges to earnings in the form of a provision
for loan losses. We increase our allowance for loan losses by provisions charged to operations and
by recoveries of amounts previously charged off, and we reduce our allowance by loans charged off.
We evaluate the adequacy of the allowance at least quarterly. In addition, on a monthly basis our
board of directors reviews our loan portfolio, conducts an evaluation of our credit quality and
reviews our computation of the loan loss provision, recommending changes as may be required. In
evaluating the adequacy of the allowance, we consider the growth, composition and industry
diversification of the portfolio, historical loan loss experience, current delinquency levels,
adverse situations that may affect a borrowers ability to repay, estimated value of any underlying
collateral, prevailing economic conditions and other relevant factors deriving from our limited
history of operations. Because we have a limited history of our own, we also consider the loss
experience and allowance levels of other similar banks and the historical experience encountered by
our management and senior lending officers prior to joining us. In addition, regulatory agencies,
as an integral part of their examination process, periodically review our allowance for loan
Page 40
losses
and may require us to make adjustments to the allowance based upon judgments different from those
of our management.
We use our risk grading program, as described under Asset Quality, to facilitate our evaluation
of probable inherent loan losses and the adequacy of the allowance for loan losses. In this
program, risk grades are initially
assigned by loan officers and reviewed by Credit Administration, and tested as part of the periodic
loan audit by independent, outside professionals experienced in loan review work. The testing
program includes an evaluation of a sample of new loans, large loans, loans that are identified as
having potential credit weaknesses, loans past due 90 days or more, and nonaccrual loans. We strive
to maintain our loan portfolio in accordance with conservative loan underwriting policies that
result in loans specifically tailored to the needs of our market area. Every effort is made to
identify and minimize the credit risks associated with such lending strategies. We have no foreign
loans and we do not engage in significant lease financing or highly leveraged transactions.
We follow a loan review program designed to evaluate the credit risk in our loan portfolio. Through
this loan review process, we maintain an internally classified watch list that helps management
assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses.
In establishing the appropriate classification for specific assets, management considers, among
other factors, the estimated value of the underlying collateral, the borrowers ability to repay,
the borrowers payment history and the current delinquent status. As a result of this process,
certain loans are categorized as substandard, doubtful or loss. Reserves are allocated based on
managements judgment and historical experience.
Loans classified as substandard are those loans with clear and defined weaknesses such as
unfavorable financial ratios, uncertain repayment sources or poor financial condition that may
jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we
will sustain some losses if the deficiencies are not corrected. Loans classified as doubtful are
those loans that have characteristics similar to substandard loans but with an increased risk that
collection or liquidation in full is highly questionable and improbable. Loans classified as loss
are considered uncollectible and of such little value that their continuance as bankable assets is
not warranted. This classification does not mean that the loan has absolutely no recovery or
salvage value but rather it is not practical or desirable to defer writing off this asset even
though partial recovery may be achieved in the future. As a practical matter, when loans are
identified as loss, the estimated loss is calculated and charged off against the allowance for loan
losses. In addition to the above classification categories, we also categorize loans based upon
risk grade and loan type, estimating an allowance allocation based upon each homogenous loan pool.
Growth in loans outstanding has, throughout our history, been the primary reason for increases in
our allowance for loan losses and the resultant provisions for loan losses necessary to provide for
those increases. This growth has been spread among our major loan categories. Since December 31,
2005 our loan portfolio has more than doubled, growing $855.7 million. Therefore, over half of our
loan portfolio is unseasoned and less than two years old. We have maintained excellent asset
quality through-out our history. For all fiscal years through 2007, our net loan charge-offs in
each year were no more than 0.15% of average loans outstanding, and were 0.09% for the year ended
December 31, 2007. However, because a substantial portion of our portfolio is unseasoned, even with
the sustained trend of low loss experience, based upon all the qualitative factors as discussed
above and our assessment of probable loss, we have set our allowance for loan losses at December
31, 2007 at $15.3 million, representing 1.01% of total loans outstanding, which is consistent with
.95% at December 31, 2006.
The allowance for loan losses represents managements estimate of an amount adequate to provide for
known and inherent losses in the loan portfolio in the normal course of business. We make specific
allowances that are allocated to certain individual loans and pools of loans based on risk
characteristics, as discussed below. A portion of allowance assigned to each pool of loans contains
estimated components based on historical data, economic trends, peer group analysis, past due
analysis, interest rate trends, unemployment trends, inflation rates and the unseasoned segment of
the loan portfolio. A portion of the allowance is intended to reserve for the inherent risk in the
portfolio and the intrinsic inaccuracies associated with the estimation of the allowance for loan
losses and its allocation to specific loan categories. While management believes that it uses the
best information available to establish the allowance for loan losses, future adjustments to the
allowance may be necessary and results of operations could be adversely affected if circumstances
differ substantially from the assumptions used in making the determinations. Furthermore, while we
believe we have established the allowance for loan losses in conformity with generally accepted
accounting principles (SFAS 5 and SFAS 114) in conjunction with guidance issued by the Securities
Exchange Commission (i.e. SAB 102), there can be no assurance that regulators, in reviewing our
portfolio, will not require an increase or decrease in our allowance for loan losses. In addition,
because future events affecting borrowers and collateral cannot be predicted with certainty, there
can be no assurance that the existing allowance for loan losses is adequate or that increases will
not be necessary should the quality of any loans deteriorate as a result
Page 41
of the factors discussed
herein. Any material increase in the allowance for loan losses may adversely affect our financial
condition and results of operations.
The following table shows the allocation of the allowance for loan losses at the dates indicated.
The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses
and other factors that may affect future loan losses in the categories of loans shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Amount
|
|
|
Loans
(1)
|
|
|
Amount
|
|
|
Loans
(1)
|
|
|
|
(Dollars in thousands)
|
|
Balance applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
3,105
|
|
|
|
17.28
|
%
|
|
$
|
1,852
|
|
|
|
11.37
|
%
|
Real estate construction
|
|
|
5,886
|
|
|
|
39.66
|
%
|
|
|
3,377
|
|
|
|
38.46
|
%
|
Real estate commercial mortgage
|
|
|
3,102
|
|
|
|
21.12
|
%
|
|
|
2,083
|
|
|
|
23.28
|
%
|
Real estate 1-4 family mortgage
|
|
|
1,550
|
|
|
|
13.06
|
%
|
|
|
1,087
|
|
|
|
14.56
|
%
|
Consumer
|
|
|
301
|
|
|
|
1.45
|
%
|
|
|
192
|
|
|
|
1.95
|
%
|
Home equity lines of credit
|
|
|
1,395
|
|
|
|
7.43
|
%
|
|
|
814
|
|
|
|
10.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,339
|
|
|
|
100.0
|
%
|
|
$
|
9,405
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Amount
|
|
|
Loans
(1)
|
|
|
Amount
|
|
|
Loans
(1)
|
|
|
|
(Dollars in thousands)
|
|
Balance applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
833
|
|
|
|
11.4
|
%
|
|
$
|
667
|
|
|
|
18.0
|
%
|
Real estate construction
|
|
|
2,464
|
|
|
|
38.4
|
%
|
|
|
1,577
|
|
|
|
34.4
|
%
|
Real estate mortgage
|
|
|
2,277
|
|
|
|
37.9
|
%
|
|
|
1,477
|
|
|
|
37.1
|
%
|
Consumer
|
|
|
169
|
|
|
|
1.9
|
%
|
|
|
128
|
|
|
|
2.8
|
%
|
Home equity lines of credit
|
|
|
540
|
|
|
|
10.4
|
%
|
|
|
294
|
|
|
|
7.7
|
%
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,283
|
|
|
|
100.0
|
%
|
|
$
|
4,163
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2003
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
Amount
|
|
|
Loans
(1)
|
|
|
|
(Dollars in thousands)
|
|
Balance applicable to:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
683
|
|
|
|
22.7
|
%
|
Real estate construction
|
|
|
672
|
|
|
|
24.2
|
%
|
Real estate mortgage
|
|
|
1,102
|
|
|
|
43.2
|
%
|
Consumer
|
|
|
125
|
|
|
|
4.5
|
%
|
Home equity lines of credit
|
|
|
139
|
|
|
|
5.4
|
%
|
Unallocated
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,759
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents total of all outstanding loans in each category as a percent of total
loans outstanding.
|
Page 42
The following table sets forth for the periods indicated information regarding changes in the
Companys allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
9,405
|
|
|
$
|
6,283
|
|
|
$
|
4,163
|
|
|
$
|
2,759
|
|
|
$
|
1,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(435
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
(195
|
)
|
Real estate
|
|
|
(404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
(316
|
)
|
|
|
(263
|
)
|
|
|
(87
|
)
|
|
|
(174
|
)
|
|
|
(20
|
)
|
Home equity lines of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(1,155
|
)
|
|
|
(305
|
)
|
|
|
(87
|
)
|
|
|
(174
|
)
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
36
|
|
|
|
3
|
|
|
|
|
|
|
|
125
|
|
|
|
1
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
31
|
|
|
|
24
|
|
|
|
7
|
|
|
|
28
|
|
|
|
|
|
Home equity lines of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
67
|
|
|
|
27
|
|
|
|
7
|
|
|
|
153
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(1,088
|
)
|
|
|
(278
|
)
|
|
|
(80
|
)
|
|
|
(21
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance acquired from The Bank
Of Richmond acquisition
|
|
|
2,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses on
Loans purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses charged
to operations
|
|
|
4,900
|
|
|
|
3,400
|
|
|
|
2,200
|
|
|
|
1,425
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
15,339
|
|
|
$
|
9,405
|
|
|
$
|
6,283
|
|
|
$
|
4,163
|
|
|
$
|
2,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net loan charge-offs to
average loans outstanding
|
|
|
0.09
|
%
|
|
|
0.04
|
%
|
|
|
0.02
|
%
|
|
|
0.01
|
%
|
|
|
0.11
|
%
|
Page 43
INVESTMENT ACTIVITIES
The Companys portfolio of investment securities consist of trading securities, which are all US
government and agency securities, and available for sale securities which consist primarily of U.S.
Treasury and government agency securities, mortgage-backed securities, preferred stock in U.S.
government agencies, corporate and municipal bonds, and common stock in several community banks.
Trading securities of $23 million at December 31, 2007 are carried at fair value, with unrealized
gains and losses reported as a component of non-interest income. Trading securities are held
principally for resale in the near term and provide short-term liquidity as part of the Companys
asset/liability management strategy.
Securities to be held for indefinite periods of time and not intended to be held to maturity are
classified as available for sale and carried at fair value with any unrealized gains or losses
reflected as an adjustment to stockholders equity. Securities held for indefinite periods of time
include securities that management intends also to use as part of its asset/liability management
strategy and that may be sold in response to changes in interest rates and/or significant
prepayment risks. The following table summarizes the amortized costs, gross unrealized gains and
losses and the resulting market value of securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
4,395
|
|
|
$
|
68
|
|
|
$
|
|
|
|
$
|
4,463
|
|
Corporate debt/equity securities
|
|
|
38,568
|
|
|
|
40
|
|
|
|
2,302
|
|
|
|
36,306
|
|
Mortgage-backed securities
|
|
|
72,889
|
|
|
|
650
|
|
|
|
3
|
|
|
|
73,536
|
|
Municipal securities
|
|
|
12,564
|
|
|
|
31
|
|
|
|
150
|
|
|
|
12,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,416
|
|
|
$
|
789
|
|
|
$
|
2,455
|
|
|
$
|
126,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
36,900
|
|
|
$
|
|
|
|
$
|
922
|
|
|
$
|
35,978
|
|
Corporate debt/equity securities
|
|
|
8,415
|
|
|
|
403
|
|
|
|
10
|
|
|
|
8,808
|
|
Mortgage-backed securities
|
|
|
42,748
|
|
|
|
9
|
|
|
|
616
|
|
|
|
42,141
|
|
Municipal securities
|
|
|
6,612
|
|
|
|
14
|
|
|
|
78
|
|
|
|
6,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,675
|
|
|
$
|
426
|
|
|
$
|
1,626
|
|
|
$
|
93,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
42,555
|
|
|
$
|
|
|
|
$
|
1,327
|
|
|
$
|
41,228
|
|
Corporate debt/equity securities
|
|
|
6,619
|
|
|
|
1,373
|
|
|
|
117
|
|
|
|
7,875
|
|
Mortgage-backed securities
|
|
|
67,935
|
|
|
|
13
|
|
|
|
581
|
|
|
|
67,367
|
|
Municipal securities
|
|
|
7,372
|
|
|
|
18
|
|
|
|
87
|
|
|
|
7,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
124,481
|
|
|
$
|
1,404
|
|
|
$
|
2,112
|
|
|
$
|
123,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 44
The following table summarizes the amortized costs, fair values and weighted average yields, based
on amortized cost, of securities available-for-sale at December 31, 2007, by contractual maturity
groups:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Average
|
|
|
|
Cost
|
|
|
Value
|
|
|
Yield
|
|
Corporate debt/equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
7,864
|
|
|
$
|
5,620
|
|
|
|
6.53
|
%
|
Due after one but within five years
|
|
|
2,560
|
|
|
|
2,541
|
|
|
|
6.42
|
%
|
Due after five but within ten years
|
|
|
3,016
|
|
|
|
3,017
|
|
|
|
5.45
|
%
|
Due after ten years
|
|
|
25,128
|
|
|
|
25,128
|
|
|
|
8.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,568
|
|
|
|
36,306
|
|
|
|
7.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency and mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one but within five years
|
|
|
997
|
|
|
|
1,006
|
|
|
|
5.26
|
%
|
Due after five but within ten years
|
|
|
4,197
|
|
|
|
4,267
|
|
|
|
5.19
|
%
|
Due after ten years
|
|
|
72,090
|
|
|
|
72,726
|
|
|
|
5.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,284
|
|
|
|
77,999
|
|
|
|
5.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
595
|
|
|
|
593
|
|
|
|
2.54
|
%
|
Due after one but within five years
|
|
|
1,204
|
|
|
|
1,196
|
|
|
|
3.90
|
%
|
Due after five but within ten years
|
|
|
1,875
|
|
|
|
1,880
|
|
|
|
4.43
|
%
|
Due after ten years
|
|
|
8,890
|
|
|
|
8,776
|
|
|
|
4.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,564
|
|
|
|
12,445
|
|
|
|
4.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
8,459
|
|
|
|
6,213
|
|
|
|
6.24
|
%
|
Due after one but within five years
|
|
|
4,761
|
|
|
|
4,743
|
|
|
|
5.56
|
%
|
Due after five but within ten years
|
|
|
9,088
|
|
|
|
9,164
|
|
|
|
5.00
|
%
|
Due after ten years
|
|
|
106,108
|
|
|
|
106,630
|
|
|
|
6.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,416
|
|
|
$
|
126,750
|
|
|
|
5.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 there were no securities of any issuer (other than governmental agencies) that
exceeded 10% of the Companys stockholders equity.
SOURCES OF FUNDS
Deposit Activities
The Company provides a range of deposit services, including non-interest-bearing checking accounts,
interest-bearing checking and savings accounts, money market accounts and certificates of deposit.
These accounts generally earn interest at rates established by management based on competitive
market factors and managements desire to increase or decrease certain types or maturities of
deposits. The Company has used brokered deposits as a funding source. However, it strives to
establish customer relations to attract core deposits in non-interest-bearing transactional
accounts and thus to reduce its costs of funds.
The following table sets forth for the periods indicated the average balances outstanding and
average interest rates for each major category of deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Interest-bearing NOW, money
market and savings accounts
|
|
$
|
330,980
|
|
|
|
3.47
|
%
|
|
$
|
245,038
|
|
|
|
3.23
|
%
|
|
$
|
178,577
|
|
|
|
2.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
751,226
|
|
|
|
5.07
|
%
|
|
|
450,786
|
|
|
|
4.56
|
%
|
|
|
267,494
|
|
|
|
3.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
1,082,206
|
|
|
|
4.58
|
%
|
|
|
695,824
|
|
|
|
4.09
|
%
|
|
|
446,071
|
|
|
|
2.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand and other non-interest-bearing
deposits
|
|
|
116,190
|
|
|
|
|
|
|
|
93,346
|
|
|
|
|
|
|
|
79,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average deposits
|
|
$
|
1,198,396
|
|
|
|
4.14
|
%
|
|
$
|
789,170
|
|
|
|
3.61
|
%
|
|
$
|
525,972
|
|
|
|
2.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 45
The following table sets forth at the dates indicated the amounts and maturities of certificates of
deposit with balances of $100,000 or more at December 31, 2007:
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Remaining maturity:
|
|
|
|
|
Less than three months
|
|
$
|
80,263
|
|
Over three months through six months
|
|
|
122,529
|
|
Over six months through one year
|
|
|
49,443
|
|
Over one year through three years
|
|
|
15,024
|
|
Over three years through five years
|
|
|
4,015
|
|
|
|
|
|
Total
|
|
$
|
271,274
|
|
|
|
|
|
Borrowings
As additional sources of funding, the Company uses advances from the Federal Home Loan Bank of
Atlanta under a line of credit with a maximum borrowing availability not to exceed $432.1 million
at December 31, 2007. Outstanding advances at December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(Dollars in thousands)
|
|
Maturity
|
|
Rate
|
|
|
2007
|
|
|
2006
|
|
May 4, 2012
|
|
|
4.25
|
%
|
|
$
|
15,000
|
|
|
$
|
|
|
March 17, 2010
|
|
|
5.71
|
%
|
|
|
1,500
|
|
|
|
1,500
|
|
November 10, 2010
|
|
|
5.43
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
July 31, 2017
|
|
|
2.96
|
%
|
|
|
7,500
|
|
|
|
|
|
August 7, 2017
|
|
|
2.88
|
%
|
|
|
10,000
|
|
|
|
|
|
April 21, 2008
|
|
|
4.22
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
April 25, 2012
|
|
|
4.85
|
%
|
|
|
|
|
|
|
10,000
|
|
May 8, 2012
|
|
|
4.23
|
%
|
|
|
10,000
|
|
|
|
|
|
September 17, 2012
|
|
|
3.78
|
%
|
|
|
10,000
|
|
|
|
|
|
July 23, 2012
|
|
|
4.85
|
%
|
|
|
|
|
|
|
10,000
|
|
September 19, 2012
|
|
|
3.80
|
%
|
|
|
25,000
|
|
|
|
|
|
October 4, 2011
|
|
|
4.35
|
%
|
|
|
|
|
|
|
20,000
|
|
October 24, 2011
|
|
|
4.35
|
%
|
|
|
|
|
|
|
5,000
|
|
August 8, 2011
|
|
|
4.56
|
%
|
|
|
|
|
|
|
35,000
|
|
November 23, 2007
|
|
|
5.50
|
%
|
|
|
|
|
|
|
14,500
|
|
September 1, 2011
|
|
|
4.49
|
%
|
|
|
|
|
|
|
10,000
|
|
September 27, 2012
|
|
|
3.72
|
%
|
|
|
20,000
|
|
|
|
|
|
October 22, 2012
|
|
|
3.65
|
%
|
|
|
25,000
|
|
|
|
|
|
July 25, 2012
|
|
|
4.53
|
%
|
|
|
15,000
|
|
|
|
|
|
July 31, 2012
|
|
|
4.17
|
%
|
|
|
7,500
|
|
|
|
|
|
August 28, 2012
|
|
|
3.99
|
%
|
|
|
10,000
|
|
|
|
|
|
December 12, 2012
|
|
|
2.95
|
%
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
174,000
|
|
|
$
|
116,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to collateral agreements with the Federal Home Loan Bank, at December 31, 2007 advances
are secured by investment securities available for sale with a fair value of $44.6 million and by
loans with a carrying amount of $274.4 million, which approximates market value. The Company has a
maximum borrowing availability from FHLB equal to $432.1 million at December 31, 2007.
The Company may purchase federal funds through six unsecured federal funds lines of credit
aggregating $106.5 million. These lines are intended for short-term borrowings and are subject to
restrictions limiting the frequency and term of advances. These lines of credit are payable on
demand and bear interest based upon the daily federal funds rate (4.25% at December 31, 2007). The
Company had $28.0 million and $0 outstanding on these lines of credit as of December 31, 2007 and
2006, respectively. The maximum amounts outstanding under these lines of credit at any month-end
during 2007 and 2006 were $28.0 million and $35.0 million, respectively. The average amounts
outstanding under these lines of credit were $12.8 million for 2007 and $11.0 million for 2006.
The Company entered into two reverse repurchase agreements in 2006 pursuant to a master repurchase
agreement.
Page 46
Each repurchase agreement is for $10.0 million, and is collateralized with mortgage
backed securities with a similar fair market value. The first repurchase agreement, dated August
1, 2006 has a five year term. The interest rate on this agreement was 4.49% from August 1, 2006
through November 1, 2006. The interest rate was fixed at 4.99% on November 1, 2006 until it is
repurchased by the counterparty on August 1, 2011. The agreement is callable by the
counterparty on a quarterly basis. The second repurchase agreement, dated August 1, 2006 has a
seven year term with a repurchase date of August 1, 2013. The interest rate of this agreement was
4.55% from August 1, 2006 through February 1, 2007, at which time it adjusted to a variable rate
of 9.85% minus three month LIBOR (4.91% at December 31, 2007), not to exceed 5.85%, for the
duration of the contract. The applicable interest rate in affect at December 31, 2007 was 4.94%.
The agreement is callable by the counterparty on a quarterly basis.
In August of 2003, $8.0 million of trust preferred securities were placed through Gateway Capital
Statutory Trust I (the Trust). The Trust issuer has invested the total proceeds from the sale of
the Trust Preferred in Junior Subordinated Deferrable Interest Debentures (the Junior Subordinated
Debentures) issued by the Company. The trust preferred securities pay cumulative cash
distributions quarterly at an annual rate, reset quarterly, equal to LIBOR plus 3.10%. The
dividends paid to holders of the trust preferred securities, which are recorded as interest
expense, are deductible for income tax purposes. The trust preferred securities are redeemable on
or after
September 17, 2008, in whole or in part. Redemption is mandatory at September 17, 2033. The
Company has fully and unconditionally guaranteed the trust preferred securities through the
combined operation of the debentures and other related documents. The Companys obligation under
the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.
In June of 2004, $7.0 million of trust preferred securities were placed through Gateway Capital
Statutory Trust II (the Trust). The Trust issuer has invested the total proceeds from the sale of
the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the Junior
Subordinated Debentures) issued by the Company. The trust preferred securities pay cumulative cash
distributions quarterly at an annual rate, reset quarterly, equal to the 3 month LIBOR plus 2.65%.
The dividends paid to holders of the trust preferred securities, which are recorded as interest
expense, are deductible for income tax purposes. The trust preferred securities are redeemable on
or after June 17, 2009, in whole or in part. Redemption is mandatory at June 17, 2034. The
Company has fully and unconditionally guaranteed the trust preferred securities through the
combined operation of the debentures and other related documents. The Companys obligation under
the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.
In May of 2006, $15.0 million of trust preferred securities were placed through Gateway Capital
Statutory Trust III (the Trust). The Trust issuer has invested the total proceeds from the sale
of the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the
Junior Subordinated Debentures) issued by the Company. The trust preferred securities pay
cumulative cash distributions quarterly at an annual rate, reset quarterly, equal to the 3 month
LIBOR plus 1.50%. The dividends paid to holders of the trust preferred securities, which are
recorded as interest expense, are deductible for income tax purposes. The trust preferred
securities are redeemable on or after May 30, 2011, in whole or in part. Redemption is mandatory
at May 30, 2036. The Company has fully and unconditionally guaranteed the trust preferred
securities through the combined operation of the debentures and other related documents. The
Companys obligation under the guarantee is unsecured and subordinate to senior and subordinated
indebtedness of the Company.
In May of 2007, $25.0 million of trust preferred securities were placed through Gateway Capital
Statutory Trust IV (the Trust). The Trust issuer has invested the total proceeds from the sale of
the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the Junior
Subordinated Debentures) issued by the Company. The trust preferred securities pay cumulative cash
distributions quarterly at an annual rate, reset quarterly, equal to the 3 month LIBOR plus 1.55%.
The dividends paid to holders of the trust preferred securities, which are recorded as interest
expense, are deductible for income tax purposes. The trust preferred securities are redeemable on
or after May 31, 2012, in whole or in part. Redemption is mandatory at May 31, 2037. The Company
has fully and unconditionally guaranteed the trust preferred securities through the combined
operation of the debentures and other related documents. The Companys obligation under the
guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.
The trust preferred securities presently qualify as Tier 1 regulatory capital and are reported in
Federal Reserve regulatory reports as a minority interest in a consolidated subsidiary. The junior
subordinated debentures do not qualify as Tier 1 regulatory capital. On March 1, 2005, the Board
of Governors of the Federal Reserve issued a final rule stating that trust preferred securities
will continue to be included in Tier 1 capital, subject to stricter quantitative and qualitative
standards. For Bank Holding Companies, after a transition period, under the new rule which is
effective as of March 31, 2009, trust preferred securities will continue to be included in Tier 1
capital up to 25% of core capital elements (including trust preferred securities) net of goodwill
less any associated deferred tax liability.
Page 47
As of December 31, 2007 the Company has $408,000 of the
trust preferred securities that did not qualify for Tier 1 capital and was included in Tier 2
capital.
In March 2007, the Company entered into a three year, $20,000,000 revolving line of credit
agreement with a bank. Interest on the outstanding principal is based on 90 day LIBOR plus 1.25%,
giving an interest rate of 6.57% at
December 31, 2007. At December 31, 2007 the Company had $4,000,000 outstanding on the line of
credit. The agreement requires that the Company must maintain certain financial ratios and remain
well capitalized per regulatory guidelines. The Company was in compliance with all financial
covenants as of December 31, 2007.
Interim Financial Information (Unaudited)
Consolidated quarterly results of operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
21,580
|
|
|
$
|
26,047
|
|
|
$
|
30,759
|
|
|
$
|
31,173
|
|
Interest expense
|
|
|
11,541
|
|
|
|
14,338
|
|
|
|
17,200
|
|
|
|
17,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
10,039
|
|
|
|
11,709
|
|
|
|
13,559
|
|
|
|
13,778
|
|
Provision for loan losses
|
|
|
1,200
|
|
|
|
1,350
|
|
|
|
750
|
|
|
|
1,600
|
|
Noninterest income
|
|
|
4,649
|
|
|
|
3,117
|
|
|
|
6,118
|
|
|
|
3,881
|
|
Noninterest expense
|
|
|
9,526
|
|
|
|
10,417
|
|
|
|
12,353
|
|
|
|
12,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
3,962
|
|
|
|
3,059
|
|
|
|
6,574
|
|
|
|
3,414
|
|
Income tax expense
|
|
|
1,448
|
|
|
|
1,040
|
|
|
|
2,358
|
|
|
|
1,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,514
|
|
|
$
|
2,019
|
|
|
$
|
4,216
|
|
|
$
|
2,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.23
|
|
|
$
|
0.17
|
|
|
$
|
0.33
|
|
|
$
|
0.17
|
|
Diluted earnings per share
|
|
|
0.22
|
|
|
|
0.17
|
|
|
|
0.32
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
15,204
|
|
|
$
|
18,031
|
|
|
$
|
19,220
|
|
|
$
|
20,642
|
|
Interest expense
|
|
|
6,982
|
|
|
|
8,719
|
|
|
|
9,727
|
|
|
|
10,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
8,222
|
|
|
|
9,312
|
|
|
|
9,493
|
|
|
|
9,971
|
|
Provision for loan losses
|
|
|
1,200
|
|
|
|
800
|
|
|
|
600
|
|
|
|
800
|
|
Noninterest income
|
|
|
1,013
|
|
|
|
1,296
|
|
|
|
4,416
|
|
|
|
2,545
|
|
Noninterest expense
|
|
|
7,840
|
|
|
|
8,559
|
|
|
|
9,018
|
|
|
|
9,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
195
|
|
|
|
1,249
|
|
|
|
4,291
|
|
|
|
2,159
|
|
Income tax expense (benefit)
|
|
|
(29
|
)
|
|
|
385
|
|
|
|
1,513
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
224
|
|
|
$
|
864
|
|
|
$
|
2,778
|
|
|
$
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.02
|
|
|
$
|
0.08
|
|
|
$
|
0.26
|
|
|
$
|
0.13
|
|
Diluted earnings per share
|
|
|
0.02
|
|
|
|
0.08
|
|
|
|
0.25
|
|
|
|
0.13
|
|
Page 48
ITEM 8 FINANCIAL STATEMENTS
GATEWAY FINANCIAL HOLDINGS, INC. & SUBSIDIARY
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page No.
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
57
|
|
Page 49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
Gateway Financial Holdings, Inc.
Virginia Beach, Virginia
We have audited the accompanying consolidated balance sheets of Gateway Financial Holdings, Inc.
and subsidiary (the Company) as of December 31, 2007 and 2006, and the related consolidated
statements of operations, comprehensive income, changes in stockholders equity and cash flows for
each of the years in the three-year period ended December 31, 2007. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated 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 Financial Holdings, Inc. and subsidiary at
December 31, 2007 and 2006 and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note B and Note L to the consolidated financial statements, effective January 1,
2007 the Company adopted the provisions of Statement of Financial Accounting Standards No. 157,
Fair Value Measurement, Statement of Financial Accounting Standards No. 159, Fair Value Option
for Financial Assets and Financial Liabilities, and FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, and effective January 1, 2006 adopted the provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Gateway Financial Holdings, Inc. and subsidiarys internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 10, 2008, expressed an unqualified opinion.
Greenville, North Carolina
March 10, 2008
Page 50
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
19,569
|
|
|
$
|
22,077
|
|
Interest-earning deposits in other banks
|
|
|
1,092
|
|
|
|
4,717
|
|
Trading securities (Note C)
|
|
|
23,011
|
|
|
|
|
|
Investment securities available for sale, at fair value (Note C)
|
|
|
126,750
|
|
|
|
93,475
|
|
|
|
|
|
|
|
|
|
|
Loans (Note D)
|
|
|
1,522,401
|
|
|
|
994,592
|
|
Allowance for loan losses (Note D)
|
|
|
(15,339
|
)
|
|
|
(9,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOANS
|
|
|
1,507,062
|
|
|
|
985,187
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
12,330
|
|
|
|
8,742
|
|
Stock in Federal Reserve Bank, at cost
|
|
|
5,348
|
|
|
|
3,609
|
|
Stock in Federal Home Loan Bank of Atlanta, at cost
|
|
|
10,312
|
|
|
|
6,970
|
|
Premises and equipment, net (Note E)
|
|
|
73,614
|
|
|
|
38,456
|
|
Intangible assets, net (Note R)
|
|
|
5,069
|
|
|
|
4,163
|
|
Goodwill (Notes O and R)
|
|
|
46,006
|
|
|
|
8,452
|
|
Bank-owned life insurance
|
|
|
26,105
|
|
|
|
25,051
|
|
Other assets
|
|
|
11,917
|
|
|
|
6,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,868,185
|
|
|
$
|
1,207,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
123,885
|
|
|
$
|
108,007
|
|
Savings
|
|
|
16,685
|
|
|
|
7,249
|
|
Money market and NOW
|
|
|
385,838
|
|
|
|
261,409
|
|
Time (Note F)
|
|
|
882,511
|
|
|
|
547,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL DEPOSITS
|
|
|
1,408,919
|
|
|
|
923,725
|
|
|
|
|
|
|
|
|
|
|
Short term borrowings (Note G)
|
|
|
33,000
|
|
|
|
14,500
|
|
Long term borrowings (Note G) $14,865 at fair value at December 31, 2007
|
|
|
249,102
|
|
|
|
152,429
|
|
Accrued expenses and other liabilities
|
|
|
12,757
|
|
|
|
7,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
1,703,778
|
|
|
|
1,097,837
|
|
|
|
|
|
|
|
|
Commitments (Notes D and K)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity (Notes J and N)
|
|
|
|
|
|
|
|
|
Non-cumulative, perpetual preferred stock, $1,000 liquidation value per share,
1,000,000 shares authorized, 23,266 issued and outstanding
at December 31, 2007 and none issued at December 31, 2006
|
|
|
23,182
|
|
|
|
|
|
Common stock, no par value, 30,000,000 shares authorized,
12,558,625 and 10,978,014 shares issued and outstanding at December 31, 2007 and 2006, respectively
|
|
|
127,258
|
|
|
|
101,669
|
|
Retained earnings
|
|
|
14,991
|
|
|
|
8,708
|
|
Accumulated other comprehensive loss
|
|
|
(1,024
|
)
|
|
|
(737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
|
164,407
|
|
|
|
109,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
$
|
1,868,185
|
|
|
$
|
1,207,477
|
|
|
|
|
|
|
|
|
See accompanying notes.
Page 51
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except
|
|
|
|
per share data)
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
102,041
|
|
|
$
|
67,517
|
|
|
$
|
36,358
|
|
Trading account securities
|
|
|
1,902
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
4,007
|
|
|
|
4,632
|
|
|
|
2,731
|
|
Tax-exempt
|
|
|
423
|
|
|
|
238
|
|
|
|
204
|
|
Interest-earning bank deposits
|
|
|
341
|
|
|
|
140
|
|
|
|
138
|
|
Other interest and dividends
|
|
|
845
|
|
|
|
570
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INTEREST INCOME
|
|
|
109,559
|
|
|
|
73,097
|
|
|
|
39,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market, NOW and savings deposits
|
|
|
11,491
|
|
|
|
7,918
|
|
|
|
3,579
|
|
Time deposits (Note F)
|
|
|
38,103
|
|
|
|
20,571
|
|
|
|
9,115
|
|
Short-term borrowings
|
|
|
1,367
|
|
|
|
2,429
|
|
|
|
1,140
|
|
Long-term borrowings
|
|
|
9,513
|
|
|
|
5,181
|
|
|
|
2,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INTEREST EXPENSE
|
|
|
60,474
|
|
|
|
36,099
|
|
|
|
16,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME
|
|
|
49,085
|
|
|
|
36,998
|
|
|
|
23,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR LOAN LOSSES (Note D)
|
|
|
4,900
|
|
|
|
3,400
|
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
|
|
|
44,185
|
|
|
|
33,598
|
|
|
|
21,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
3,938
|
|
|
|
3,294
|
|
|
|
2,308
|
|
Mortgage operations
|
|
|
3,029
|
|
|
|
1,584
|
|
|
|
836
|
|
Insurance operations
|
|
|
5,245
|
|
|
|
2,883
|
|
|
|
2,388
|
|
Brokerage operations
|
|
|
794
|
|
|
|
744
|
|
|
|
656
|
|
Gain on sale of securities
|
|
|
163
|
|
|
|
842
|
|
|
|
282
|
|
Gain (Loss) on disposition of premises & equipment
|
|
|
|
|
|
|
(292
|
)
|
|
|
6
|
|
Gain (loss) and net cash settlement on
economic hedge (Note S)
|
|
|
584
|
|
|
|
(1,918
|
)
|
|
|
|
|
Gain from trading securities
|
|
|
355
|
|
|
|
|
|
|
|
|
|
Income from bank-owned life insurance
|
|
|
1,054
|
|
|
|
864
|
|
|
|
679
|
|
Other service charges and fees
|
|
|
1,408
|
|
|
|
1,019
|
|
|
|
623
|
|
Other
|
|
|
1,195
|
|
|
|
250
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NON-INTEREST INCOME
|
|
|
17,765
|
|
|
|
9,270
|
|
|
|
8,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
24,978
|
|
|
|
17,287
|
|
|
|
11,583
|
|
Occupancy and equipment
|
|
|
8,254
|
|
|
|
6,865
|
|
|
|
4,592
|
|
Data processing fees
|
|
|
1,990
|
|
|
|
1,652
|
|
|
|
941
|
|
Other (Note I)
|
|
|
9,719
|
|
|
|
9,170
|
|
|
|
6,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NON-INTEREST EXPENSE
|
|
|
44,941
|
|
|
|
34,974
|
|
|
|
23,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
17,009
|
|
|
|
7,894
|
|
|
|
5,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES (Note H)
|
|
|
5,990
|
|
|
|
2,625
|
|
|
|
1,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
11,019
|
|
|
$
|
5,269
|
|
|
$
|
3,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
|
$
|
0.49
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.89
|
|
|
$
|
0.47
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Page 52
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
Net income
|
|
$
|
11,019
|
|
|
$
|
5,269
|
|
|
$
|
3,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on available-for-sale
securities
|
|
|
(1,863
|
)
|
|
|
351
|
|
|
|
(67
|
)
|
Tax effect
|
|
|
761
|
|
|
|
(127
|
)
|
|
|
26
|
|
Reclassification of gains recognized in net income
|
|
|
(163
|
)
|
|
|
(842
|
)
|
|
|
(282
|
)
|
Tax effect
|
|
|
61
|
|
|
|
316
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
(1,204
|
)
|
|
|
(302
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
9,815
|
|
|
$
|
4,967
|
|
|
$
|
3,725
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Page 53
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
Other
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Retained
|
|
|
- Restricted
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(Amounts in thousands, except share data)
|
|
Balance at December 31, 2004
|
|
|
|
|
|
$
|
|
|
|
|
6,659,073
|
|
|
$
|
62,726
|
|
|
$
|
1,813
|
|
|
$
|
|
|
|
$
|
(221
|
)
|
|
$
|
64,318
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,939
|
|
|
|
|
|
|
|
|
|
|
|
3,939
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214
|
)
|
|
|
(214
|
)
|
Restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
10,230
|
|
|
|
133
|
|
|
|
|
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
Unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
|
|
90
|
|
Issuance of shares pursuant to dividend reinvestment plan
|
|
|
|
|
|
|
|
|
|
|
9,025
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Shares issued from options exercise
|
|
|
|
|
|
|
|
|
|
|
142,159
|
|
|
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,225
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
29,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,855
|
|
Shares issued in 11-for-10 stock split effected as a 10% stock dividend
|
|
|
|
|
|
|
|
|
|
|
671,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits from the exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Sale of common stock
|
|
|
|
|
|
|
|
|
|
|
1,213
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Cash dividends ($0.09 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(631
|
)
|
|
|
|
|
|
|
|
|
|
|
(631
|
)
|
Cash paid for fractional shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
9,493,440
|
|
|
|
94,109
|
|
|
|
5,113
|
|
|
|
(43
|
)
|
|
|
(435
|
)
|
|
|
98,744
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,269
|
|
|
|
|
|
|
|
|
|
|
|
5,269
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(302
|
)
|
|
|
(302
|
)
|
Issuance of restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation related to restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
Stock based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
Adjustment to deferred compensation for the adoption of SFAS No. 123(R)
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
Issuance of shares pursuant to dividend reinvestment plan
|
|
|
|
|
|
|
|
|
|
|
32,573
|
|
|
|
515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
515
|
|
Shares issued for subsidiary acquisitions
|
|
|
|
|
|
|
|
|
|
|
143,966
|
|
|
|
2,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,088
|
|
Shares issued from options exercise
|
|
|
|
|
|
|
|
|
|
|
13,763
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
Shares issued upon exercise of overallotment option
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
4,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,383
|
|
Shares issued in 11 for 10 stock split effected as a 10% stock dividend
|
|
|
|
|
|
|
|
|
|
|
981,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits from the exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293
|
|
Cash dividends ($0.16 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,674
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
10,978,014
|
|
|
|
101,669
|
|
|
|
8,708
|
|
|
|
|
|
|
|
(737
|
)
|
|
|
109,640
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,019
|
|
|
|
|
|
|
|
|
|
|
|
11,019
|
|
Cumulative effect adjustment resulting from the adoption of
SFAS No. 159, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,197
|
)
|
|
|
|
|
|
|
917
|
|
|
|
(280
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,204
|
)
|
|
|
(1,204
|
)
|
Issuance of restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
61,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of non-cumulative, perpetual preferred stock
|
|
|
23,266
|
|
|
|
23,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,182
|
|
Stock based compensation related to restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
Stock based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
Issuance of shares pursuant to dividend reinvestment plan
|
|
|
|
|
|
|
|
|
|
|
30,122
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
433
|
|
Acquisition of The Bank of Richmond:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
|
|
|
|
|
|
|
|
1,845,631
|
|
|
|
26,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,168
|
|
Fair value of stock options assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,624
|
|
Shares issued for subsidiary acquisitions
|
|
|
|
|
|
|
|
|
|
|
29,502
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
Shares issued from options exercise
|
|
|
|
|
|
|
|
|
|
|
14,493
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
Tax benefits from the exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Shares repurchased
|
|
|
|
|
|
|
|
|
|
|
(400,637
|
)
|
|
|
(5,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,600
|
)
|
Cash dividends on common stock ($0.29 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,461
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,461
|
)
|
Cash dividends on non-cumulative, perpetual preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
23,266
|
|
|
$
|
23,182
|
|
|
|
12,558,625
|
|
|
$
|
127,258
|
|
|
$
|
14,991
|
|
|
$
|
|
|
|
$
|
(1,024
|
)
|
|
$
|
164,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Page 54
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,019
|
|
|
$
|
5,269
|
|
|
$
|
3,939
|
|
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
558
|
|
|
|
361
|
|
|
|
379
|
|
Depreciation and amortization
|
|
|
2,834
|
|
|
|
2,444
|
|
|
|
1,761
|
|
(Gain) loss on market value of economic hedge
|
|
|
(1,225
|
)
|
|
|
1,225
|
|
|
|
|
|
Deferred income taxes
|
|
|
(270
|
)
|
|
|
(1,319
|
)
|
|
|
(185
|
)
|
Realized gain on available-for-sale securities
|
|
|
(163
|
)
|
|
|
(842
|
)
|
|
|
(282
|
)
|
Unrealized and realized gain on trading securities
|
|
|
(355
|
)
|
|
|
|
|
|
|
|
|
Income from bank-owned life insurance
|
|
|
(1,054
|
)
|
|
|
(864
|
)
|
|
|
(680
|
)
|
Realized gain on sale of loans
|
|
|
(48
|
)
|
|
|
(56
|
)
|
|
|
(127
|
)
|
Proceeds from sale of loans
|
|
|
586
|
|
|
|
799
|
|
|
|
2,536
|
|
Unrealized gain on fair value on junior subordinated debt
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of mortgage loans held for sale
|
|
|
183,473
|
|
|
|
58,593
|
|
|
|
|
|
Mortgage loan originations held for sale
|
|
|
(173,521
|
)
|
|
|
(74,169
|
)
|
|
|
|
|
Realized (gain) loss on sale of premises and equipment
|
|
|
|
|
|
|
292
|
|
|
|
(6
|
)
|
Provision for loan losses
|
|
|
4,900
|
|
|
|
3,400
|
|
|
|
2,200
|
|
Stock based compensation
|
|
|
380
|
|
|
|
222
|
|
|
|
|
|
Deferred compensation restricted stock
|
|
|
|
|
|
|
|
|
|
|
90
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accrued interest receivable
|
|
|
(2,714
|
)
|
|
|
(2,859
|
)
|
|
|
(3,186
|
)
|
Increase in other assets
|
|
|
(4,230
|
)
|
|
|
(171
|
)
|
|
|
(1,360
|
)
|
Increase in accrued expenses and other liabilities
|
|
|
5,233
|
|
|
|
2,594
|
|
|
|
1,526
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
|
|
|
24,443
|
|
|
|
(5,081
|
)
|
|
|
6,605
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received (paid) from investment securities available for sale transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities
|
|
|
(115,102
|
)
|
|
|
(7,621
|
)
|
|
|
(58,113
|
)
|
Maturities and calls of available-for-sale securities
|
|
|
10,714
|
|
|
|
15,055
|
|
|
|
5,106
|
|
Proceeds from sale of available-for-sale securities
|
|
|
21,518
|
|
|
|
23,133
|
|
|
|
21,540
|
|
Cash received (paid) from trading securities transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of trading securities
|
|
|
(69,962
|
)
|
|
|
|
|
|
|
|
|
Maturities and calls of trading securities
|
|
|
56,000
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of trading securities
|
|
|
42,315
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents acquired with The Bank of Richmond acquisition
|
|
|
17,974
|
|
|
|
|
|
|
|
|
|
Cash paid for The Bank of Richmond acquisition
|
|
|
(26,710
|
)
|
|
|
|
|
|
|
|
|
Cash paid for subsidiary acquisition
|
|
|
(445
|
)
|
|
|
|
|
|
|
|
|
Net increase in loans from originations and repayments
|
|
|
(370,907
|
)
|
|
|
(313,385
|
)
|
|
|
(287,185
|
)
|
Proceeds from sale of bank premises and equipment
|
|
|
|
|
|
|
6
|
|
|
|
234
|
|
Purchase of premises and equipment
|
|
|
(29,195
|
)
|
|
|
(11,528
|
)
|
|
|
(12,408
|
)
|
Purchase of Federal Reserve Bank stock
|
|
|
(1,739
|
)
|
|
|
(1,512
|
)
|
|
|
(1,375
|
)
|
Purchase of Federal Home Loan Bank stock
|
|
|
(3,018
|
)
|
|
|
(762
|
)
|
|
|
(3,887
|
)
|
Purchase of bank owned life insurance
|
|
|
|
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED BY INVESTING ACTIVITIES
|
|
|
(468,557
|
)
|
|
|
(303,614
|
)
|
|
|
(336,088
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in deposits
|
|
|
307,622
|
|
|
|
277,463
|
|
|
|
240,003
|
|
Net increase (decrease) in short-term borrowings
|
|
|
18,450
|
|
|
|
(47,500
|
)
|
|
|
21,339
|
|
Net increase in long term borrowings
|
|
|
71,500
|
|
|
|
64,300
|
|
|
|
49,400
|
|
Proceeds from issuance of junior subordinated debentures
|
|
|
25,774
|
|
|
|
15,464
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
116
|
|
|
|
102
|
|
|
|
1,237
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
4,383
|
|
|
|
29,866
|
|
Proceeds from issuance of preferred stock
|
|
|
23,182
|
|
|
|
|
|
|
|
|
|
Proceeds from dividend reinvestment
|
|
|
433
|
|
|
|
515
|
|
|
|
147
|
|
Repurchase of common stock
|
|
|
(5,600
|
)
|
|
|
|
|
|
|
|
|
Cash paid for dividends
|
|
|
(3,539
|
)
|
|
|
(1,674
|
)
|
|
|
(631
|
)
|
Tax benefit from the exercise of stock options
|
|
|
43
|
|
|
|
293
|
|
|
|
|
|
Cash paid for fractional shares
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
437,981
|
|
|
|
313,346
|
|
|
|
341,353
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(6,133
|
)
|
|
|
4,651
|
|
|
|
11,870
|
|
CASH AND CASH EQUIVALENTS, BEGINNING
|
|
|
26,794
|
|
|
|
22,143
|
|
|
|
10,273
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, ENDING
|
|
$
|
20,661
|
|
|
$
|
26,794
|
|
|
$
|
22,143
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Page 55
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
56,243
|
|
|
$
|
34,656
|
|
|
$
|
15,689
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
7,931
|
|
|
$
|
3,723
|
|
|
$
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer from loans to real estate owned
|
|
$
|
482
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments securities transferred from available for sale to trading
|
|
$
|
51,012
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on available-for-sale securities, net
|
|
$
|
(1,204
|
)
|
|
$
|
(302
|
)
|
|
$
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
Business combinations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
236,560
|
|
|
$
|
2,740
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of liabilities assumed
|
|
$
|
179,188
|
|
|
$
|
652
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued and stock options assumed
|
|
$
|
30,217
|
|
|
$
|
2,088
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Page 56
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE A ORGANIZATION AND OPERATIONS
Gateway Bank & Trust Co. (the Bank) was incorporated November 24, 1998 and began banking
operations on December 1, 1998. Effective October 1, 2001, the Bank became a wholly-owned
subsidiary of Gateway Financial Holdings, Inc. (the Company), a financial holding company whose
principal business activity consists of the ownership of the Bank, Gateway Capital Statutory Trust
I, Gateway Capital Statutory Trust II, Gateway Capital Statutory Trust III, and Gateway Capital
Statutory Trust IV.
The Bank is engaged in general commercial and retail banking in Eastern and Central North Carolina
and in the Richmond and Tidewater area of Southeastern Virginia, operating under state banking laws
and the rules and regulations of the Federal Reserve System and the North Carolina Commissioner of
Banks. The Bank undergoes periodic examinations by those regulatory authorities.
The Bank has four wholly-owned subsidiaries: Gateway Investment Services, Inc., whose principal
activity is to engage in brokerage services as an agent for non-bank investment products and
services; Gateway Insurance Services, Inc., an independent insurance agency with offices in
Edenton, Hertford, Elizabeth City, Moyock, Plymouth and Kitty Hawk, North Carolina and Chesapeake
and Newport News, Virginia; Gateway Bank Mortgage, Inc. with offices in Raleigh, Elizabeth City and
Kitty Hawk, North Carolina and Norfolk and Virginia Beach, Virginia which began operations during
the second quarter of 2006 whose principal activity is to engage in originating, processing and
sale of mortgage loans; and Gateway Title Agency, Inc., acquired in February 2007, with offices in
Newport News, Hampton and Virginia Beach, Virginia, whose principal activity is to engage in title
services for real estate transactions.
The Company formed Gateway Capital Statutory Trust I in 2003, Gateway Capital Statutory Trust II in
2004, Gateway Capital Statutory Trust III in 2006, and Gateway Capital Statutory Trust IV in May
2007, all of which are wholly owned by the Company, to facilitate the issuance of trust preferred
securities totaling $8.0 million, $7.0 million $15.0 million, and $25.0 million respectively.
Adoption of FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities
resulted
in the deconsolidation of Gateway Capital Trust I and II. Upon deconsolidation, the junior
subordinated debentures issued by the Company to the trusts were included in long-term borrowings
and the Companys equity interest in the trusts was included in other assets. The deconsolidation
of the trusts did not materially impact net income.
Generally, trust preferred securities qualify as Tier 1 regulatory capital and are reported in
Federal Reserve regulatory reports as a minority interest in a consolidated subsidiary. The junior
subordinated debentures do not qualify as Tier 1 regulatory capital. On March 1, 2005, the Board of
Governors of the Federal Reserve issued the final rule that retains the inclusion of trust
preferred securities in Tier 1 capital of bank holding companies, but with stricter quantitative
limits and clearer qualitative standards. After a transition period, under the new rule which is
effective as of March 31, 2009, the aggregate amount of trust preferred securities and certain
other capital elements will be limited to 25 percent of Tier 1 capital elements, net of goodwill
less any associated deferred tax liability. The amount of trust preferred securities and certain
other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions.
Currently the Company has $408,000 of the trust preferred securities that do not qualify for Tier
1 capital and is included in Tier 2 capital.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Gateway Financial Holdings, Inc. and
Gateway Bank & Trust Co., and its four wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Page 57
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change relate to the determination of
the allowance for loan losses.
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statement of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet captions Cash and due from
banks and Interest-earning deposits in other banks.
Investment Securities Held to Maturity
Investment securities that management has the positive intent and ability to hold to maturity are
reported at cost, adjusted for premiums and discounts that are recognized in interest income using
the interest method over the period to maturity.
Trading Securities
Investment securities classified as trading securities are held principally for resale in the near
term and are reported at fair value in the consolidated balance sheet at December 31, 2007.
Realized and unrealized gains and looses are determined using the specific identification method
and are recognized as a component of non-interest income. Interest and dividends are included in
net interest income.
Investment Securities Available for Sale
Investment securities available for sale are reported at fair value and consist of debt instruments
that are not classified as either trading securities or as held to maturity securities. Unrealized
holding gains and losses, net of deferred income tax, on available for sale securities are reported
as a net amount in other comprehensive income. Gains and losses on the sale of investment
securities available for sale are determined using the specific-identification method. Declines in
the fair value of individual held to maturity and investment securities available for sale below
their cost that are other than temporary would result in write-downs of the individual securities
to their fair value. Such write-downs would be included in earnings as realized losses. Premiums
and discounts are recognized in interest income using the interest method over the period to
maturity.
Mortgage Loans Held for Sale
The Company originates single family, residential first mortgage loans that have been approved by
secondary investors. Loans held for sale are carried at the lower of cost or fair value in the
aggregate as determined by outstanding commitments from investors. The Company issues a rate lock
commitment to a customer and concurrently locks in with a secondary market investor under a best
efforts delivery system. Within several weeks of closing, these loans, together with their
servicing rights, are sold to other financial institutions under prearranged terms. The Company
recognizes certain origination and service release fees upon the sale, which are included in
mortgage operations which is part of non-interest income in the consolidated statement of
operations.
Page 58
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until
maturity are reported at their outstanding principal adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or
discounts on purchased loans. Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related loan. The accrual of
interest on impaired loans is discontinued when, in managements opinion, the borrower may be
unable to meet payments as they become due. When loans become classified as non-accrual loans
interest accrual is discontinued. Interest income is subsequently recognized only to the extent
cash payments are received. Loans may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time and there is a sustained period of repayment performance
(generally a minimum of six months) by the borrower in accordance with the contractual terms of
interest and principal.
Allowance for Loan Losses
The provision for loan losses is based upon managements estimate of the amount needed to maintain
the allowance for loan losses at an adequate level. In making the evaluation of the adequacy of the
allowance for loan losses, management gives consideration to current economic conditions, statutory
examinations of the loan portfolio by regulatory agencies, delinquency information and managements
internal review of the loan portfolio. Loans are considered impaired when it is probable amounts
will not be collected in accordance to the contractual terms of the loan agreement. The measurement
of impaired loans is generally based on the present value of expected future cash flows discounted
at the historical effective interest rate, or upon the fair value of the collateral if collateral
dependent. If the recorded investment in the loan (including accrued and unpaid interest) exceeds
the measure of fair value, a valuation allowance is established as a component of the allowance for
loan losses. While management uses the best information available to make evaluations, future
adjustments to the allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations. In addition, regulatory examiners may require the Bank
to recognize adjustments to the allowance for loan losses based on their judgments about
information available to them at the time of their examination.
Foreclosed Real Estate
Real estate acquired through, or in lieu of, loan foreclosure is initially recorded at fair value
less estimated cost to sell at the date of foreclosure establishing a new cost basis. After
foreclosure, valuations of the property are periodically performed by management and the real
estate is carried at the lower of cost or fair value minus estimated cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in other non-interest
expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated
on the straight-line method over the estimated useful asset lives of 3 - 10 years for furniture and
equipment, 3 5 years for vehicles, and 40 years for bank premises. Leasehold improvements are
amortized over the terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Repairs and maintenance costs are charged to operations as
incurred and additions and improvements to premises and equipment are capitalized. Upon sale or
retirement, the cost and related accumulated depreciation are removed from the accounts and any
gains or losses are reflected in current operations.
Page 59
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Home Loan Bank and Federal Reserve Bank Stock
As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of
Atlanta (FHLB) and the Federal Reserve Bank (FRB). These investments are carried at cost. Due
to the redemption provisions of these entities, the Company estimated that fair value equals cost
and that these investments were not impaired at December 31, 2007.
Intangible Assets and Goodwill
Intangible assets include goodwill and other identifiable assets, such as core deposit premiums,
resulting from acquisitions. Core deposit premiums are amortized primarily on a straight-line basis
over a ten-year life based upon historical studies of core deposits. Intangible assets related to
insurance agency acquisitions are amortized over the expected life of the book of business
acquired. Goodwill is not amortized but is tested annually for impairment or at any time an event
occurs or circumstances change that may trigger a decline in the value of the reporting unit.
Examples of such events or circumstances include adverse changes in legal factors, business
climate, unanticipated competition, change in regulatory environment or loss of key personnel.
The Company tests for impairment in accordance with SFAS No. 142. Potential impairment of goodwill
exists when the carrying amount of a reporting unit exceeds its fair value. The fair value of a
reporting unit is computed using one or a combination of the following three methods: income,
market value or cost method. The income method uses a discounted cash flow analysis to determine
fair value by considering a reporting units capital structure and applying a risk-adjusted
discount rate to forecast earnings based on a capital asset pricing model. The market value method
uses recent transaction analysis or publicly traded comparable analysis for similar assets and
liabilities to determine fair value. The cost method assumes the net assets of a recent business
combination accounted for under the purchase method of accounting will be recorded at fair value if
no event or circumstance has occurred triggering a decline in the value. To the extent a reporting
units carrying amount exceeds its fair value, an indication exists that the reporting units
goodwill may be impaired, and a second step of impairment test will be performed. In the second
step, the implied fair value of the reporting units goodwill, determined by allocating the
reporting units fair value to all of its assets (recognized and unrecognized) and liabilities as
if the reporting unit had been acquired in a business combination at the date of the impairment
test. If the implied fair value of reporting unit goodwill is lower than its carrying amount,
goodwill is impaired and is written down to its implied fair value. The loss recognized is limited
to the carrying amount of goodwill. Once an impairment loss is recognized, future increases in fair
value will not result in the reversal of previously recognized losses.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes. Deferred tax assets are also recognized for operating
loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which the temporary differences are expected to be recovered or settled.
Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax
benefits will not be realized.
The Company adopted the Financial Accounting Standards Boards Interpretation No. 48 Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), effective
January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the
financial statements and requires the impact of a tax position to be recognized in the financial
statements if that position is more likely than not of being sustained by the taxing authority.
The adoption of FIN 48 did not have a material effect on our consolidated financial position or
results of operations and unrecognized tax benefits as of December 31, 2007, and 2006. The balance
of unrecognized tax benefits were immaterial at December 31, 2007 and 2006. The Company classifies
interest and penalties related to income tax assessments, if any, in income tax expense in the
consolidated statement of operations and interest and penalties recognized in 2007, 2006, and 2005
were immaterial. Fiscal years ending on or after December 31, 2003 are subject to examination by
federal and state tax authorities.
Page 60
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
The Company reports as comprehensive income all changes in stockholders equity during the year
from sources other than stockholders. Other comprehensive income refers to all components
(revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income.
The Companys only component of other comprehensive income is unrealized gains and losses on
investment securities available for sale.
Mortgage Operations
The Bank originates single family, residential first mortgage loans that have been approved by
secondary investors. For a portion of 2006 and prior years, such loans were closed by a third party
and therefore are not shown in the Companys consolidated financial statements. The Bank
recognizes certain origination and service release fees upon the sale, which are included in
non-interest income on the statements of operations under the caption Mortgage operations. Also
included under this caption is income derived from investments in certain mortgage companies for a
portion of 2006 and prior years. During 2006 the Bank ceased using a third party to close such
loans after it opened its wholly owned mortgage subsidiary, Gateway Bank Mortgage, Inc., at which
time mortgage loan originations were closed by the mortgage company with the related fees and
expenses recorded in the consolidated financial statements.
Stock Compensation Plans
The Company has four share-based compensation plans in effect at December 31, 2007. Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS
No. 123R) which was issued by the FASB in December 2004. SFAS No. 123R revises SFAS No. 123
Accounting for Stock Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued
to Employees, (APB No. 25) and its related interpretations. SFAS No. 123R requires recognition of
the cost of employee services received in exchange for an award of equity instruments in the
financial statements over the period the employee is required to perform the services in exchange
for the award (usually the vesting period). SFAS No. 123R also requires measurement of the cost of
employee services received in exchange for an award based on the grant-date fair value of the
award. SFAS No. 123R also amends SFAS No. 95 Statement of Cash Flows, to require that excess tax
benefits be reported as financing cash inflows flows, rather than as a reduction of taxes paid,
which is included within operating cash flows.
The Company adopted SFAS No. 123R using the modified prospective application as permitted under
SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application,
the Company is required to record compensation expense for all awards granted after the date of
adoption and for the unvested portion of previously granted awards that remain outstanding at the
date of adoption.
Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed
by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices
equal to the fair market value of the Companys common stock on the date of the grant.
Per Share Results
Basic earnings per share represents income available to common stockholders divided by the
weighted-average number of common shares outstanding during the period. Diluted earnings per share
reflect additional common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate to outstanding stock
options and are determined using the treasury stock method.
Page 61
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Per Share Results (Continued)
The basic and diluted weighted average shares outstanding are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Weighted average outstanding shares used for
basic EPS
|
|
|
11,960,932
|
|
|
|
10,811,980
|
|
|
|
8,214,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus incremental shares from assumed exercise of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
362,712
|
|
|
|
293,166
|
|
|
|
339,275
|
|
Restricted stock
|
|
|
23,226
|
|
|
|
16,557
|
|
|
|
2,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares
used for diluted EPS
|
|
|
12,346,870
|
|
|
|
11,121,703
|
|
|
|
8,556,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 16, 2005, the Companys Board of Directors declared a 11-for-10 stock split, effected in the
form of a 10% stock dividend, which was distributed June 20, 2005 to stockholders of record on May
30, 2005. In 2006 the Board of Directors declared an 11-for-10 stock split, effected in the form of
a 10% stock dividend, which was distributed May 15, 2006 to stockholders of record on April 28,
2006. All references to per share results and weighted average common and common equivalent shares
outstanding have been adjusted to reflect the effects of these stock splits.
In December 2007 the Board declared a cash preferred stock dividend of $78,085 to shareholders of
record, payable on January 15, 2008. The preferred stock dividend was deducted from 2007 net income
in the computation of diluted earnings per share. There were no adjustments required to be made to
net income in the computation of diluted earnings per share during 2006 and 2005. For the years
ended December 31, 2007, 2006 and 2005, there were 324,013, 162,250 and 126,000 options,
respectively, that were antidilutive since the exercise price for these options exceeded the
average market price of the Companys common stock for the year.
Derivative financial instruments
For asset/liability management purposes, the Company has used interest rate swap agreements to
hedge various exposures or to modify interest rate characteristics of various balance sheet
accounts. Such derivatives are used as part of the asset/liability management process and are
linked to specific assets or liabilities, and have a high correlation between the contract and the
underlying item being hedged, both at inception and throughout the hedge period.
Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities requires that
changes in the fair market value of derivative financial instruments that do not qualify for hedge
accounting treatment be reported as an economic gain or loss in non-interest income.
Fair value measurements
Effective January 1, 2007, the Company elected early adoption of Statements of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements and SFAS No. 159 The Fair Value Option for
Financial Assets and Liabilities. SFAS No. 157, which was issued in September 2006, establishes a
framework for using fair value. It defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. SFAS No. 159, which was issued in February 2007, generally permits the
measurement of selected eligible financial instruments at fair value at specified election dates.
Upon adoption of SFAS No. 159, the Company selected the fair value measurement option for various
pre-existing financial assets and liabilities, including certain short-term investment securities
used primarily for liquidity and asset liability management purposes in the available for sale
portfolio totaling approximately $51 million; and junior subordinated debentures issued to
unconsolidated capital trusts of $15.5 million. The initial fair value measurement of these items
resulted in, approximately, a $1.2 million cumulative-effect adjustment, net of tax, recorded as a
reduction in retained earnings as of January 1, 2007.
Page 62
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Under SFAS No. 159, this one-time charge was not recognized in current earnings.
Recent Accounting Pronouncements
In 2006 the Emerging Issues Task Force issued EITF Issue 06-4 Accounting for Deferred
Compensation and Postretirement Benefits Aspects of Endorsement Split-Dollar Life Insurance
Arrangements requires the recognition of a liability related to the postretirement benefits
covered by an endorsement split-dollar life insurance arrangement. The employer (who is also the
policyholder) has a liability for the benefit it is providing to its employee. As such, if the
policyholder has agreed to maintain the insurance policy in force for the employees benefit during
his or her retirement, then the liability recognized during the employees active service period
should be based on the future cost of insurance to be incurred during the employees retirement.
Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then
the liability for the future death benefit should be recognized by following the guidance in
Statement 106 or Opinion 12, as appropriate. This issue is applicable for interim or annual
reporting periods beginning after December 15, 2007. The Company has determined that it will have
to establish an initial liability of approximately $400,000 as of January 1, 2008, and will reduce
net income by approximately $100,000 in 2008 to comply with this EITF.
In December 2007, the FASB issued SFAS 141(R), Business Combinations. SFAS 141(R) will
significantly change how entities apply the acquisition method to business combinations. The most
significant changes affecting how the Company will account for business combinations under this
Statement include: the acquisition date will be the date the acquirer obtains control; all (and only)
identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree
will be stated at fair value on the acquisition date; assets or liabilities arising from
noncontractual contingencies will be measured at their acquisition date fair value only if it is
more likely than not that they meet the definition of an asset or liability on the acquisition
date; adjustments subsequently made to the provisional amounts recorded on the acquisition date
will be made retroactively during a measurement period not to exceed one year; acquisition-related
restructuring costs that do not meet the criteria in SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities, will be expensed as incurred; transaction costs will be expensed
as incurred; reversals of deferred income tax valuation allowances and income tax contingencies
will be recognized in earnings subsequent to the measurement period; and the allowance for loan
losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally,
SFAS 141(R) will require new and modified disclosures surrounding subsequent changes to
acquisition-related contingencies, contingent consideration, noncontrolling interests,
acquisition-related transaction costs, fair values and cash flows not expected to be collected for
acquired loans, and an enhanced goodwill rollforward. The Company will be required to
prospectively apply SFAS 141(R) to all business combinations completed on or after January 1, 2009.
Early adoption is not permitted. For business combinations in which the acquisition date was before
the effective date, the provisions of SFAS 141(R) will apply to the subsequent accounting for
deferred income tax valuation allowances and income tax contingencies and will require any changes
in those amounts to be recorded in earnings. Management is currently evaluating the effects that
SFAS 141(R) will have on the financial condition, results of operations, liquidity, and the
disclosures that will be presented in the consolidated financial statements.
Page 63
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In December 2007, the FASB issued SFAS 160, Noncontrolling interests in Consolidated Financial
Statements, an Amendment of ARB 51. SFAS 160 establishes new accounting and reporting standards
for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
will require entities to classify noncontrolling interests as a component of stockholders equity
and will require subsequent changes in ownership interests in a subsidiary to be accounted for as
an equity transaction. Additionally, SFAS 160 will require entities to recognize a gain or loss
upon the loss of control of a subsidiary and to remeasure any ownership interest retained at fair
value on that date. This statement also requires expanded disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the noncontrolling owners.
SFAS 160 is effective on a prospective basis for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008, except for the presentation and disclosure
requirements, which are required to be applied retrospectively. Early adoption is not permitted.
Management is currently evaluating the effects, if any, that SFAS 160 will have upon adoption as
this standard will affect the presentation and disclosure of noncontrolling interests in the
consolidated financial statements.
In June 2007, the FASB ratified the consensus reached in EITF 06-11, Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 applies to entities that have
share-based payment arrangements that entitle employees to receive dividends or dividend
equivalents on equity-classified nonvested shares when those dividends or dividend equivalents are
charged to retained earnings and result in an income tax deduction. Entities that have share-based
payment arrangements that fall within the scope of EITF 06-11 will be required to increase capital
surplus for any realized income tax benefit associated with dividends or dividend equivalents paid
to employees for equity classified nonvested equity awards. Any increase recorded to capital
surplus is required to be included in an entitys pool of excess tax benefits that are available to
absorb potential future tax deficiencies on share-based payment awards. The Company adopted EITF
06-11 on January 1, 2008 for dividends declared on share-based payment awards subsequent to this
date. The impact of adoption is not expected to have a material impact on financial condition,
results of operations, or liquidity.
In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No.
109, which addresses the valuation of written loan commitments accounted for at fair value through
earnings. The guidance in SAB 109 expresses the staffs view that the measurement of fair value for
a written loan commitment accounted for at fair value through earnings should incorporate the
expected net future cash flows related to the associated servicing of the loan. Previously under
SAB 105, Application of Accounting Principles to Loan Commitments, this component of value was not
incorporated into the fair value of the loan commitment. The impact of SAB 109 will be to
accelerate the recognition of the estimated fair value of the servicing inherent in the loan to the
commitment date. Management is currently evaluating the effects that SAB 109 will have on the
financial condition, results of operations, liquidity, and the disclosures that will be presented
in the consolidated financial statements.
From time to time, the FASB issues exposure drafts for proposed statements of financial accounting
standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB
and to final issuance by the FASB as statements of financial accounting standards. Management
considers the effect of the proposed statements on the consolidated financial statements of the
Company and monitors the status of changes to and proposed effective dates of exposure drafts.
Reclassifications
Certain amounts in the 2006 and 2005 consolidated financial statements have been reclassified to
conform to the 2007 presentation. The reclassifications had no effect on net income or
stockholders equity as previously reported.
Page 64
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE C INVESTMENT SECURITIES
Trading assets consisted of U.S government and agency securities with a fair value of approximately
$23 million at December 31, 2007.
The following is a summary of the available for sale securities portfolio by major
classification:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government securities
and obligations of U.S.
government agencies
|
|
$
|
4,395
|
|
|
$
|
68
|
|
|
$
|
|
|
|
$
|
4,463
|
|
Corporate debt/equity securities
|
|
|
38,568
|
|
|
|
40
|
|
|
|
2,302
|
|
|
|
36,306
|
|
Mortgage-backed securities
|
|
|
72,889
|
|
|
|
650
|
|
|
|
3
|
|
|
|
73,536
|
|
Municipal securities
|
|
|
12,564
|
|
|
|
31
|
|
|
|
150
|
|
|
|
12,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,416
|
|
|
$
|
789
|
|
|
$
|
2,455
|
|
|
$
|
126,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government securities
and obligations of U.S.
government agencies
|
|
$
|
36,900
|
|
|
$
|
|
|
|
$
|
922
|
|
|
$
|
35,978
|
|
Corporate debt/equity securities
|
|
|
8,415
|
|
|
|
403
|
|
|
|
10
|
|
|
|
8,808
|
|
Mortgage-backed securities
|
|
|
42,748
|
|
|
|
9
|
|
|
|
616
|
|
|
|
42,141
|
|
Municipal securities
|
|
|
6,612
|
|
|
|
14
|
|
|
|
78
|
|
|
|
6,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,675
|
|
|
$
|
426
|
|
|
$
|
1,626
|
|
|
$
|
93,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show our investments gross unrealized losses and fair value, aggregated by
investment category and length of time that the individual securities have been in a continuous
unrealized loss position, at December 31, 2007 and 2006. For available for sale securities, the
unrealized losses relate to seven corporate debt and equity securities, twenty-five municipal
securities and two mortgage-backed securities. All investment securities with unrealized losses are
considered by management to be temporarily impaired given the credit ratings on these investment
securities and managements intent and ability to hold these securities until recovery. Management
has concluded that the unrealized losses related to the corporate equity securities will recover in
a reasonable amount of time. These investments are primarily in community banks, whose valuations
have been reduced by the overall market sentiment towards the financial industry in general, and
not reflective of poor financial performance on any of these institutions. Should the Company
decide in the future to sell securities in an unrealized loss position, or determine that
impairment of any securities is other than temporary, irrespective of a decision to sell, an
impairment loss would be recognized in the period such determination is made.
Page 65
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE C INVESTMENT SECURITIES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
|
(Dollars in thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt/equity securities
|
|
$
|
7,137
|
|
|
$
|
2,244
|
|
|
$
|
961
|
|
|
$
|
58
|
|
|
$
|
8,098
|
|
|
$
|
2,302
|
|
Mortgage-backed securities
|
|
|
249
|
|
|
|
1
|
|
|
|
1,017
|
|
|
|
2
|
|
|
|
1,266
|
|
|
|
3
|
|
Municipal securities
|
|
|
7,590
|
|
|
|
130
|
|
|
|
2,491
|
|
|
|
20
|
|
|
|
10,081
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities
|
|
$
|
14,976
|
|
|
$
|
2,375
|
|
|
$
|
4,469
|
|
|
$
|
80
|
|
|
$
|
19,445
|
|
|
$
|
2,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
|
(Dollars in thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
and obligations of U.S.
government agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35,978
|
|
|
$
|
922
|
|
|
$
|
35,978
|
|
|
$
|
922
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
1,542
|
|
|
|
10
|
|
|
|
1,542
|
|
|
|
10
|
|
Mortgage-backed securities
|
|
|
21,749
|
|
|
|
302
|
|
|
|
7,989
|
|
|
|
314
|
|
|
|
29,738
|
|
|
|
616
|
|
Municipal securities
|
|
|
1,313
|
|
|
|
12
|
|
|
|
2,924
|
|
|
|
66
|
|
|
|
4,237
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities
|
|
$
|
23,062
|
|
|
$
|
314
|
|
|
$
|
48,433
|
|
|
$
|
1,312
|
|
|
$
|
71,495
|
|
|
$
|
1,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities, sales and calls of investment securities available-for-sale during the
years ended December 31, 2007, 2006 and 2005 were $32.2 million, $38.2 million and $26.6 million,
respectively. From those transactions, the Company realized gross gains of $163,000, $842,000 and
$333,000 and gross losses of $0, $0 and $52,000 in 2007, 2006 and 2005, respectively.
The amortized cost and fair values of securities available-for-sale at December 31, 2007 by
contractual maturity are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
Due within one year
|
|
$
|
8,459
|
|
|
$
|
6,213
|
|
Due after one year through five years
|
|
|
4,761
|
|
|
|
4,743
|
|
Due after five years through ten years
|
|
|
9,088
|
|
|
|
9,164
|
|
Due after ten years
|
|
|
106,108
|
|
|
|
106,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,416
|
|
|
$
|
126,750
|
|
|
|
|
|
|
|
|
Page 66
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE C INVESTMENT SECURITIES (Continued)
For purposes of the maturity table, mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings based on the weighted-average
contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier
than their weighted-average contractual maturities because of principal prepayments. Equity
securities are shown as due within one year.
Securities with an amortized cost of $83.3 million and a fair value of $83.8 million were pledged
to secure FHLB advances, reverse repurchase agreements, and public monies on deposit as required by
law at December 31, 2007.
NOTE D LOANS
A summary of the balances of loans follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Commercial and industrial
|
|
$
|
263,283
|
|
|
$
|
137,658
|
|
Real estate construction, acquisition and development
|
|
|
604,335
|
|
|
|
381,788
|
|
Real estate commercial mortgage
|
|
|
321,806
|
|
|
|
229,752
|
|
Mortgage loans held for sale
|
|
|
5,624
|
|
|
|
15,576
|
|
|
|
|
|
|
|
|
|
|
Real estate 1- 4 family mortgage
|
|
|
193,549
|
|
|
|
128,920
|
|
Consumer
|
|
|
22,133
|
|
|
|
15,347
|
|
Home equity lines of credit
|
|
|
113,191
|
|
|
|
85,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,523,921
|
|
|
|
994,923
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(15,339
|
)
|
|
|
(9,405
|
)
|
Unamortized net deferred fees
|
|
|
(1,520
|
)
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
1,507,062
|
|
|
$
|
985,187
|
|
|
|
|
|
|
|
|
Loans are primarily made in Eastern and Central North Carolina and in the Richmond and Tidewater
area of Southeastern Virginia. Real estate loans can be affected by the condition of the local
real estate market. Commercial and industrial loans and loans to individuals can be affected by the
local economic conditions. Non-accrual loans, all of which are considered to be impaired, at
December 31, 2007 and 2006 consisted of loans of approximately $3.4 million and $3.3 million,
respectively, that were more than 90 days delinquent and on which the accrual of interest had
ceased. The average recorded investment in non-accrual loans was approximately $2.1 million, $1.3
million and $252,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Interest
income that would have been recorded on non-accrual loans totaled $193,000, $70,000 and $141,000
for the years ended December 31, 2007, 2006 and 2005. The total amount of impaired loans as of
December 31, 2007 and 2006 was $15.2 million and $4.1 million, respectively. The allowance for
loan losses allocated to these impaired loans was $1.6 million and $902,000 at December 31, 2007
and 2006, respectively. There was no allowance for loan losses established for $4.9 million and
$132,000 of the impaired loans at December 31, 2007 and 2006, respectively. Real estate owned
aggregated $482,000 at December 31, 2007.
The Company grants loans to directors and executive officers of the Bank and their related
interests. Such loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with other borrowers and,
in managements opinion, do not involve more than the normal risk of collectability. All loans to
directors and executive officers or their related interests are submitted to the Board of Directors
for approval.
Page 67
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE D LOANS (Continued)
A summary of related party loan transactions is as follows (in thousands):
|
|
|
|
|
|
|
2007
|
|
Balance at beginning of year
|
|
$
|
50,374
|
|
Additions
|
|
|
54,028
|
|
Loan repayments
|
|
|
(38,061
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
66,341
|
|
|
|
|
|
At December 31, 2007, commitments to extend credit to directors, executive officers and their
related interests consisted of unused lines of credit totaling $13.5 million.
An analysis of the allowance for loan losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of year
|
|
$
|
9,405
|
|
|
$
|
6,283
|
|
|
$
|
4,163
|
|
Provision charged to operations
|
|
|
4,900
|
|
|
|
3,400
|
|
|
|
2,200
|
|
Allowance acquired from The Bank
of Richmond acquisition
|
|
|
2,122
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(1,155
|
)
|
|
|
(305
|
)
|
|
|
(87
|
)
|
Recoveries
|
|
|
67
|
|
|
|
27
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(1,088
|
)
|
|
|
(278
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
15,339
|
|
|
$
|
9,405
|
|
|
$
|
6,283
|
|
|
|
|
|
|
|
|
|
|
|
NOTE E PREMISES AND EQUIPMENT
Following is a summary of premises and equipment at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Land
|
|
$
|
8,374
|
|
|
$
|
4,799
|
|
Furniture and equipment
|
|
|
12,308
|
|
|
|
9,692
|
|
Vehicles
|
|
|
1,039
|
|
|
|
763
|
|
Buildings and improvements
|
|
|
49,610
|
|
|
|
25,942
|
|
Construction in progress
|
|
|
10,800
|
|
|
|
3,135
|
|
Accumulated depreciation
|
|
|
(8,517
|
)
|
|
|
(5,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
73,614
|
|
|
$
|
38,456
|
|
|
|
|
|
|
|
|
Depreciation and amortization amounting to $2.8 million, $2.4 million and $1.5 million for the
years ended
December 31, 2007, 2006 and 2005, respectively, is included in occupancy and equipment expense.
The Company leases, under separate agreements, land on which its operations facility and financial
center facilities in Norfolk, Chesapeake and Virginia Beach, Virginia and Elizabeth City, Raleigh,
Kitty Hawk and Nags Head, North Carolina are located. These leases expire at various dates through
January 31, 2034. Future rentals under these leases are as follows (in thousands):
Page 68
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE E PREMISES AND EQUIPMENT (Continued)
|
|
|
|
|
2008
|
|
$
|
1,574
|
|
2009
|
|
|
1,430
|
|
2010
|
|
|
1,307
|
|
2011
|
|
|
1,227
|
|
2012
|
|
|
1,122
|
|
Thereafter
|
|
|
12,350
|
|
|
|
|
|
|
|
$
|
19,010
|
|
|
|
|
|
Rental expense amounted to $2.0 million, $1.5 million and $819,000 during the years ended December
31, 2007, 2006 and 2005, respectively.
Certain leases contain options to extend for up to three consecutive five-year terms. The Company
has an option to purchase the land on which its permanent headquarters are affixed at the end of
the twenty-year lease term for a cost of $300,000.
Gateway Bank & Trust Co. leases its Nags Head and one of its Kitty Hawk branch offices from a
director and his wife for monthly payments of approximately $6,000 and $16,272, respectively. The
term of the Nags Head lease is for five years, with one five-year renewal. Kitty Hawk is a land
lease that commenced in April 2006 for a term of twenty years, with three five-year renewals.
NOTE F DEPOSITS
The weighted average cost of time deposits was 4.98%, 4.56% and 3.85% at December 31, 2007, 2006
and 2005, respectively.
Time deposits in denominations of $100,000 or more were $271.3 million and $205.5 million at
December 31, 2007 and 2006, respectively. Interest expense on such deposits aggregated $20.9
million in 2007 and $10.2 million in 2006. At December 31, 2007, the scheduled maturities of time
deposits are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$100,000
|
|
|
Under
|
|
|
|
|
|
|
and Over
|
|
|
$100,000
|
|
|
Total
|
|
2008
|
|
$
|
252,235
|
|
|
$
|
571,061
|
|
|
$
|
823,296
|
|
2009
|
|
|
4,035
|
|
|
|
16,593
|
|
|
|
20,628
|
|
2010
|
|
|
9,100
|
|
|
|
13,098
|
|
|
|
22,198
|
|
2011
|
|
|
1,889
|
|
|
|
3,659
|
|
|
|
5,548
|
|
2012
|
|
|
4,015
|
|
|
|
6,805
|
|
|
|
10,820
|
|
2013
|
|
|
|
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
271,274
|
|
|
$
|
611,237
|
|
|
$
|
882,511
|
|
|
|
|
|
|
|
|
|
|
|
Page 69
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE G BORROWINGS
A summary of the balances of borrowings follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Federal funds purchased
|
|
$
|
28,000
|
|
|
$
|
|
|
Federal Home Loan Bank
|
|
|
5,000
|
|
|
|
14,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
$
|
33,000
|
|
|
$
|
14,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
|
|
$
|
169,000
|
|
|
$
|
101,500
|
|
Line of credit with a bank
|
|
|
4,000
|
|
|
|
|
|
Reverse repurchase agreements
|
|
|
20,000
|
|
|
|
20,000
|
|
Junior Subordinated Debentures
|
|
|
56,102
|
|
|
|
30,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term borrowings
|
|
$
|
249,102
|
|
|
$
|
152,429
|
|
|
|
|
|
|
|
|
Advances from the Federal Home Loan Bank of Atlanta consisted of the following at December 31, 2007
and 2006, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
Maturity
|
|
Rate
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
May 4, 2012
|
|
|
4.25
|
%
|
|
$
|
15,000
|
|
|
$
|
|
|
March 17, 2010
|
|
|
5.71
|
%
|
|
|
1,500
|
|
|
|
1,500
|
|
November 10, 2010
|
|
|
5.43
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
July 31, 2017
|
|
|
2.96
|
%
|
|
|
7,500
|
|
|
|
|
|
August 7, 2017
|
|
|
2.88
|
%
|
|
|
10,000
|
|
|
|
|
|
April 21, 2008
|
|
|
4.22
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
April 25, 2012
|
|
|
4.85
|
%
|
|
|
|
|
|
|
10,000
|
|
May 8, 2012
|
|
|
4.23
|
%
|
|
|
10,000
|
|
|
|
|
|
September 17, 2012
|
|
|
3.78
|
%
|
|
|
10,000
|
|
|
|
|
|
July 23, 2012
|
|
|
4.85
|
%
|
|
|
|
|
|
|
10,000
|
|
September 19, 2012
|
|
|
3.80
|
%
|
|
|
25,000
|
|
|
|
|
|
October 4, 2011
|
|
|
4.35
|
%
|
|
|
|
|
|
|
20,000
|
|
October 24, 2011
|
|
|
4.35
|
%
|
|
|
|
|
|
|
5,000
|
|
August 8, 2011
|
|
|
4.56
|
%
|
|
|
|
|
|
|
35,000
|
|
November 23, 2007
|
|
|
5.50
|
%
|
|
|
|
|
|
|
14,500
|
|
September 1, 2011
|
|
|
4.49
|
%
|
|
|
|
|
|
|
10,000
|
|
September 27, 2012
|
|
|
3.72
|
%
|
|
|
20,000
|
|
|
|
|
|
October 22, 2012
|
|
|
3.65
|
%
|
|
|
25,000
|
|
|
|
|
|
July 25, 2012
|
|
|
4.53
|
%
|
|
|
15,000
|
|
|
|
|
|
July 31, 2012
|
|
|
4.17
|
%
|
|
|
7,500
|
|
|
|
|
|
August 28, 2012
|
|
|
3.99
|
%
|
|
|
10,000
|
|
|
|
|
|
December 12, 2012
|
|
|
2.95
|
%
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
174,000
|
|
|
$
|
116,000
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the above advances from the Federal Home Loan Bank are callable with the exception of the
$5.0 million that is maturing on April 21, 2008. All of the advances are at fixed rates with the
exception of the advances that mature on October 22, 2012, July 31, 2017 and August 7, 2017.
Pursuant to collateral agreements with the Federal
Page 70
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE G BORROWINGS (Continued)
Home Loan Bank, at December 31, 2007 advances are secured by investment securities available for
sale with a fair value of $44.6 million and by loans with a carrying amount of $274.4 million,
which approximates market value. The Company has a maximum borrowing amount of $432.1 million as
of December 31, 2007.
The Company may purchase federal funds through six unsecured federal funds lines of credit
aggregating $106.5 million. These lines are intended for short-term borrowings and are subject to
restrictions limiting the frequency and term of advances. These lines of credit are payable on
demand and bear interest based upon the daily federal funds rate (4.25% at December 31, 2007). The
Company had $28.0 million and $0 outstanding on these lines of credit as of December 31, 2007 and
2006, respectively. The maximum amounts outstanding under these lines of credit at any month-end
during 2007 and 2006 were $28.0 million and $35.0 million, respectively. The average amounts
outstanding under these lines of credit were $12.8 million for 2007 and $11.0 million for 2006.
The Company entered into two reverse repurchase agreements in 2006 pursuant to a master repurchase
agreement. Each repurchase agreement is for $10.0 million, and is collateralized with mortgage
backed securities with a similar fair market value. The first repurchase agreement, dated August
1, 2006 has a five year term. The interest rate on this agreement was 4.49% from August 1, 2006
through November 1, 2006. The interest rate was fixed at 4.99% on November 1, 2006 until it is
repurchased by the counterparty on August 1, 2011. The agreement is callable by the counterparty
on a quarterly basis. The second repurchase agreement, dated August 1, 2006 has a seven year term
with a repurchase date of August 1, 2013. The interest rate of this agreement was 4.55% from
August 1, 2006 through February 1, 2007, at which time it adjusted to a variable rate of 9.85%
minus three month LIBOR (4.91% at December 31, 2007), not to exceed 5.85%, for the duration of the
contract. The applicable interest rate in effect at December 31, 2007 was 4.94%. The agreement is
callable by the counterparty on a quarterly basis.
In August of 2003, $8.0 million of trust preferred securities were placed through Gateway Capital
Statutory Trust I (the Trust). The Trust issuer has invested the total proceeds from the sale of
the Trust Preferred in Junior Subordinated Deferrable Interest Debentures (the Junior Subordinated
Debentures) issued by the Company. The trust preferred securities pay cumulative cash
distributions quarterly at an annual rate, reset quarterly, equal to LIBOR plus 3.10%. The
dividends paid to holders of the trust preferred securities, which are recorded as interest
expense, are deductible for income tax purposes. The trust preferred securities are redeemable on
or after
September 17, 2008, in whole or in part. Redemption is mandatory at September 17, 2033. The
Company has fully and unconditionally guaranteed the trust preferred securities through the
combined operation of the debentures and other related documents. The Companys obligation under
the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.
In June of 2004, $7.0 million of trust preferred securities were placed through Gateway Capital
Statutory Trust II (the Trust). The Trust issuer has invested the total proceeds from the sale of
the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the Junior
Subordinated Debentures) issued by the Company. The trust preferred securities pay cumulative cash
distributions quarterly at an annual rate, reset quarterly, equal to the 3 month LIBOR plus 2.65%.
The dividends paid to holders of the trust preferred securities, which are recorded as interest
expense, are deductible for income tax purposes. The trust preferred securities are redeemable on
or after June 17, 2009, in whole or in part. Redemption is mandatory at June 17, 2034. The
Company has fully and unconditionally guaranteed the trust preferred securities through the
combined operation of the debentures and other related documents. The Companys obligation under
the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.
In May of 2006, $15.0 million of trust preferred securities were placed through Gateway Capital
Statutory Trust III (the Trust). The Trust issuer has invested the total proceeds from the sale
of the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the
Junior Subordinated Debentures) issued by the Company. The trust preferred securities pay
cumulative cash distributions quarterly at an annual rate, reset quarterly, equal to the 3 month
LIBOR plus 1.50%. The dividends paid to holders of the trust preferred securities, which are
recorded as interest expense, are deductible for income tax purposes. The trust preferred
securities are redeemable on or after May 30, 2011, in whole or in part. Redemption is mandatory
at May 30, 2036. The Company has fully and
Page 71
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE G BORROWINGS (Continued)
unconditionally guaranteed the trust preferred securities through the combined operation of the
debentures and other related documents. The Companys obligation under the guarantee is unsecured
and subordinate to senior and subordinated indebtedness of the Company.
In May of 2007, $25.0 million of trust preferred securities were placed through Gateway Capital
Statutory Trust IV (the Trust). The Trust issuer has invested the total proceeds from the sale of
the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the Junior
Subordinated Debentures) issued by the Company. The trust preferred securities pay cumulative cash
distributions quarterly at an annual rate, reset quarterly, equal to the 3 month LIBOR plus 1.55%.
The dividends paid to holders of the trust preferred securities, which are recorded as interest
expense, are deductible for income tax purposes. The trust preferred securities are redeemable on
or after July 30, 2012, in whole or in part. Redemption is mandatory at July 30, 2037. The
Company has fully and unconditionally guaranteed the trust preferred securities through the
combined operation of the debentures and other related documents. The Companys obligation under
the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.
The trust preferred securities presently qualify as Tier 1 regulatory capital and are reported in
Federal Reserve regulatory reports as a minority interest in a consolidated subsidiary. The junior
subordinated debentures do not qualify as Tier 1 regulatory capital. On March 1, 2005, the Board
of Governors of the Federal Reserve issued a final rule stating that trust preferred securities
will continue to be included in Tier 1 capital, subject to stricter quantitative and qualitative
standards. For Bank Holding Companies, after a transition period, under the new rule which is
effective as of March 31, 2009, trust preferred securities will continue to be included in Tier 1
capital up to 25% of core capital elements (including trust preferred securities) net of goodwill
less any associated deferred tax liability. As of December 31, 2007 the Company has $408,000 of the
trust preferred securities that did not qualify for Tier 1 capital and was included in Tier 2
capital.
In March 2007, the Company entered into a three year, $20,000,000 revolving line of credit
agreement with a bank. Interest on the outstanding principal is based on 90 day LIBOR plus 1.25%,
giving an interest rate of 6.57% at December 31, 2007. At December 31, 2007 the Company had
$4,000,000 outstanding on the line of credit. The agreement requires that the Company must maintain
certain financial ratios and remain well capitalized per regulatory guidelines. The Company was in
compliance with all financial covenants as of December 31, 2007.
NOTE H INCOME TAXES
The significant components of the provision for income taxes for the years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,302
|
|
|
$
|
3,373
|
|
|
$
|
1,841
|
|
State
|
|
|
958
|
|
|
|
571
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,260
|
|
|
|
3,944
|
|
|
|
2,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(233
|
)
|
|
|
(1,130
|
)
|
|
|
(181
|
)
|
State
|
|
|
(37
|
)
|
|
|
(189
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(270
|
)
|
|
|
(1,319
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net provision for income taxes
|
|
$
|
5,990
|
|
|
$
|
2,625
|
|
|
$
|
1,965
|
|
|
|
|
|
|
|
|
|
|
|
Page 72
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE H INCOME TAXES (Continued)
The difference between the provision for income taxes and the amounts computed by applying the
statutory federal income tax rate of 35% to income before income taxes is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
Tax computed at the statutory federal rate
|
|
$
|
5,953
|
|
|
$
|
2,684
|
|
|
$
|
2,007
|
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
599
|
|
|
|
253
|
|
|
|
184
|
|
Non-taxable interest income
|
|
|
(123
|
)
|
|
|
(65
|
)
|
|
|
(59
|
)
|
Non-taxable income from bank owned life insurance
|
|
|
(369
|
)
|
|
|
(294
|
)
|
|
|
(231
|
)
|
Other permanent differences
|
|
|
(70
|
)
|
|
|
47
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
5,990
|
|
|
$
|
2,625
|
|
|
$
|
1,965
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of deferred taxes at December 31, 2007 and 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Deferred tax assets relating to:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
5,816
|
|
|
$
|
3,464
|
|
Equity investment basis difference
|
|
|
|
|
|
|
6
|
|
Unrealized loss on economic hedge
|
|
|
|
|
|
|
460
|
|
Unrealized loss on securities available for sale
|
|
|
649
|
|
|
|
462
|
|
Deferred and stock based compensation
|
|
|
529
|
|
|
|
|
|
Fair value adjustment to net assets acquired in business combination
|
|
|
275
|
|
|
|
|
|
Other
|
|
|
256
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
7,525
|
|
|
|
4,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities relating to:
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
(743
|
)
|
|
|
(545
|
)
|
Deferred loan costs
|
|
|
(1,017
|
)
|
|
|
(709
|
)
|
Intangible assets
|
|
|
(1,697
|
)
|
|
|
(1,026
|
)
|
Unrealized fair value gains on trust preferred securities
|
|
|
(230
|
)
|
|
|
|
|
Prepaid expenses
|
|
|
(262
|
)
|
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(3,949
|
)
|
|
|
(2,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recorded deferred tax assets
|
|
$
|
3,576
|
|
|
$
|
2,051
|
|
|
|
|
|
|
|
|
It is managements opinion that realization of the net deferred tax asset is more likely than not
based on the Companys history of taxable income and estimates of future taxable income.
The adoption of FIN 48 did not have a material effect on our consolidated financial position or
results of operations and unrecognized tax benefits as of December 31, 2007, and 2006. The balance
of unrecognized tax benefits were immaterial at December 31, 2007 and 2006. The Company classifies
interest and penalties related to income tax assessments, if any, in income tax expense in the
consolidated statement of operations and interest and penalties recognized in 2007, 2006, and 2005
were immaterial. Fiscal years ending on or after December 31, 2003 are subject to examination by
federal and state tax authorities.
Page 73
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE I OTHER NON-INTEREST EXPENSE
The major components of other non-interest expense for the years ended December 31, 2007, 2006 and
2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Professional services
|
|
$
|
1,374
|
|
|
$
|
1,535
|
|
|
$
|
1,399
|
|
Postage, printing and office supplies
|
|
|
1,848
|
|
|
|
1,504
|
|
|
|
1,355
|
|
Advertising and promotion
|
|
|
770
|
|
|
|
1,814
|
|
|
|
541
|
|
Amortization of intangibles
|
|
|
558
|
|
|
|
323
|
|
|
|
380
|
|
FDIC Assessment
|
|
|
780
|
|
|
|
92
|
|
|
|
57
|
|
Franchise Taxes
|
|
|
895
|
|
|
|
690
|
|
|
|
183
|
|
Other
|
|
|
3,494
|
|
|
|
3,212
|
|
|
|
2,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,719
|
|
|
$
|
9,170
|
|
|
$
|
6,150
|
|
|
|
|
|
|
|
|
|
|
|
NOTE J REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered by federal and state
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Companys consolidated financial statements. Quantitative measures
established by regulation to ensure capital adequacy require the Company to maintain minimum
amounts and ratios, as set forth in the table below. Management believes, as of December 31, 2007,
that the Company meets all capital adequacy requirements to which it is subject. At December 31,
2007, the Companys total risk-based capital, Tier I risk-based capital, and leverage ratios were
11.40%, 10.43% and 9.76%, respectively.
As of December 31, 2007, the most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum amounts and ratios, as set forth in the table below.
There are no conditions or events since that notification that management believes have changed the
Banks category. The Banks actual capital amounts and ratios are also presented in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum to be Well
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized under
|
|
|
|
|
|
|
|
|
|
|
Minimum for Capital
|
|
Prompt Corrective
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Provisions
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
$
|
180,479
|
|
|
|
11.19
|
%
|
|
$
|
129,033
|
|
|
|
8.00
|
%
|
|
$
|
161,291
|
|
|
|
10.00
|
%
|
Tier I Capital (to Risk-Weighted Assets)
|
|
|
165,139
|
|
|
|
10.24
|
%
|
|
|
64,517
|
|
|
|
4.00
|
%
|
|
|
96,775
|
|
|
|
6.00
|
%
|
Tier I Capital (to Average Assets)
|
|
|
165,139
|
|
|
|
9.46
|
%
|
|
|
69,844
|
|
|
|
4.00
|
%
|
|
|
87,305
|
|
|
|
5.00
|
%
|
As of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
$
|
130,191
|
|
|
|
12.28
|
%
|
|
$
|
84,814
|
|
|
|
8.00
|
%
|
|
$
|
106,018
|
|
|
|
10.00
|
%
|
Tier I Capital (to Risk-Weighted Assets)
|
|
|
120,786
|
|
|
|
11.39
|
%
|
|
|
42,407
|
|
|
|
4.00
|
%
|
|
|
63,611
|
|
|
|
6.00
|
%
|
Tier I Capital (to Average Assets)
|
|
|
120,786
|
|
|
|
10.62
|
%
|
|
|
45,929
|
|
|
|
4.00
|
%
|
|
|
57,411
|
|
|
|
5.00
|
%
|
Page 74
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE J REGULATORY MATTERS (CONTINUED)
The Bank may not declare or pay a cash dividend, or repurchase any of its capital stock, if the
effect would cause the regulatory net worth of the Bank to fall to an amount which is less than the
minimum required by the FDIC and the North Carolina Office of the Commissioner of Banks.
NOTE K OFF-BALANCE SHEET RISK
The Company 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
commitments to extend credit and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it does for on-balance
sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of conditions established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customers creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon
extension of credit is based on managements credit evaluation of the borrower. Collateral obtained
varies but may include real estate, stocks, bonds, and certificates of deposit.
A summary of the contract amount of the Companys exposure to off-balance sheet risk as of
December 31, 2007 is as follows (in thousands):
|
|
|
|
|
Financial instruments whose contract
amounts represent credit risk:
|
|
|
|
|
Commitments to extend credit
|
|
$
|
17,500
|
|
Undisbursed lines of credit
|
|
|
444,404
|
|
Standby letters of credit
|
|
|
19,411
|
|
Commitments to originate mortgage loans,
Fixed and variable rate
|
|
|
12,181
|
|
NOTE L FAIR VALUE MEASUREMENT AND DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Effective January 1, 2007, the Company elected early adoption of Statements of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements and SFAS No. 159 The Fair Value Option for
Financial Assets and Liabilities. SFAS No. 157, which was issued in September 2006, establishes a
framework for using fair value. It defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. SFAS No. 159, which was issued in February 2007, generally permits the
measurement of selected eligible financial instruments at fair value at specified election dates.
Upon adoption of SFAS No. 159, the Company selected the fair value measurement option for various
pre-existing financial assets and liabilities, including certain short-term investment securities
used primarily for liquidity and asset liability management purposes in the available for sale
portfolio totaling approximately $51.0 million; and junior subordinated debentures issued to
unconsolidated capital trusts of $15.5 million. The initial fair value measurement of these items
resulted in, approximately, a $1.2 million cumulative-effect adjustment, net of tax, recorded as a
reduction in retained earnings as of January 1, 2007. Under SFAS No. 159, this one-time charge was
not recognized in current earnings.
Page 75
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE L FAIR VALUE MEASUREMENT AND DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
(Continued)
The investment securities selected for fair value measurement are classified as trading securities
because they are held principally for resale in the near term and are reported at fair value in the
consolidated balance sheet at December 31, 2007. Interest and dividends are included in net
interest income. Unrealized gains and losses are reported as a component in non-interest income.
The Company recorded trading gains of approximately $355,000 for the year ended December 31, 2007.
Additionally, the Company recorded income of $960,000 related to the change in fair value of the
junior subordinated debentures during the year ended December 31, 2007, which was also recorded as
a component of non-interest income. The Company chose to elect fair value measurement for these
specific assets and liabilities because they will have a positive impact on the Companys ability
to manage the market and interest rate risks and liquidity associated with certain financial
instruments (primarily investments with short durations and low market volatility); improve its
financial reporting; mitigate volatility in reported earnings without having to apply complex hedge
accounting rules; and remain competitive in the marketplace. The Company chose not to elect fair
value measurement for municipal securities, corporate equity securities and bonds, longer term
duration mortgage-backed securities, and held to maturity investments.
Below is a table that presents the cumulative effect adjustment to retained earnings for the
initial adoption of the fair value option (FVO) for the elected financial assets and liabilities as
of January 1, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
1/1/07 prior
|
|
|
Net Gain/ (Loss)
|
|
|
1/1/07 after
|
|
Description
|
|
to adoption
|
|
|
upon adoption
|
|
|
adoption of FVO
|
|
|
|
(Dollars in Thousands)
|
|
Trading securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
51,012
|
|
Accumulated other comprehensive loss
|
|
|
917
|
|
|
|
(917
|
)
|
|
|
|
|
Junior subordinated debenture
|
|
|
(15,465
|
)
|
|
|
(447
|
)
|
|
|
(15,912
|
)
|
Pretax cumulative effect of
adoption of the fair value option
|
|
|
|
|
|
|
(1,364
|
)
|
|
|
|
|
Decrease in deferred tax asset
|
|
|
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption
of the fair value option
(charge to retained earnings)
|
|
|
|
|
|
$
|
(1,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS No. 157, we group our financial assets and financial liabilities measured
at fair value in three levels, based on the markets in which the assets and liabilities are traded
and the reliability of the assumptions used to determine fair value. The most significant
instruments that the Company fair values include securities, derivative instruments, and certain
junior subordinated debentures. The majority of instruments fall into the Level 1 or 2 fair value
hierarchy. Valuation methodologies for the fair value hierarchy are as follows:
Level 1 Valuations for assets and liabilities traded in active exchange markets, such as the New
York Stock Exchange. Level 1 securities include common stock of publicly traded companies, and were
valued based on the price of the security at the close of business on December 31, 2007.
Level 2 Valuations are obtained from readily available pricing sources via independent providers
for market transactions involving similar assets or liabilities. The companys principal market for
these securities is the secondary institutional markets and valuations are based on observable
market data in those markets. Level 2 securities include U. S. Treasury, other U.S. government and
agency mortgage-backed securities, corporate and municipal bonds, and preferred stock in U.S.
government sponsored agencies.
Page 76
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE L FAIR VALUE MEASUREMENT AND DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
(Continued)
Level 3 Valuations for assets and liabilities that are derived from other valuation
methodologies, including option pricing models, discounted cash flow models and similar techniques,
and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations
incorporate certain assumptions and projections in determining the fair value assigned to such
assets or liabilities. Level 3 financial instruments include economic hedges and junior
subordinated debentures. The Company obtains pricing for these instruments from third parties who
have experience in valuing these type of securities.
The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair
value is used on a recurring basis for those assets and liabilities that were elected under SFAS
No. 159 as well as for certain assets and liabilities in which fair value is the primary basis of
accounting.
Below is a table that presents information about certain assets and liabilities measured at fair
value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Fair Values for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Month Period Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
for Items Measured at air Value Pursuant to
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007, Using
|
|
|
Election of the Fair Value Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Total Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
|
Amount in The
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Consolidated
|
|
|
Assets/Liabilities
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
Trading
|
|
|
Other
|
|
|
|
|
|
|
Consolidated
|
|
|
Included in
|
|
|
|
Balance
|
|
|
Measured at
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Gains
|
|
|
Gains
|
|
|
Interest
|
|
|
Expense
|
|
|
Current
|
|
|
|
Sheet
|
|
|
Fair Value
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
and
|
|
|
and
|
|
|
Income
|
|
|
on Long-
|
|
|
Period
|
|
Description
|
|
12/31//07
|
|
|
12/31/2007
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Losses
|
|
|
Losses
|
|
|
on Loans
|
|
|
term Debt
|
|
|
Earnings
|
|
Trading securities
|
|
$
|
23,011
|
|
|
$
|
23,011
|
|
|
$
|
|
|
|
$
|
23,011
|
|
|
$
|
|
|
|
$
|
355
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
355
|
|
Available-
for-sale securities
|
|
|
126,750
|
|
|
|
126,750
|
|
|
|
5,127
|
|
|
|
121,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
subordinated
debentures
|
|
|
56,102
|
|
|
|
14,865
|
|
|
|
|
|
|
|
|
|
|
|
14,865
|
|
|
|
|
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
960
|
|
Economic
hedge liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
1,225
|
|
The Company evaluates other assets and liabilities for which fair value accounting is used on a
non-recurring basis. These assets and liabilities include goodwill, loans held for sale, and real
estate owned of $46.0 million, $5.6 million, and $482,000, respectively, at December 31, 2007.
There were no fair value adjustments related to these assets and liabilities for the year ended
December 31, 2007.
Junior subordinated debentures are included in long-term borrowings in the consolidated balance
sheet as of December 31, 2007. Approximately $41.2 million of other junior subordinated
debentures, $169.0 million of FHLB advances, $20.0 million of reverse repurchase agreements, and
$4.0 million borrowed on a line of credit are included in long-term borrowings that were not
elected for the fair value option.
The $12.8 million of various accrued expenses and liabilities presented on the companying
consolidated balance sheet are not eligible for the fair value option.
Additionally, the Bank has other financial instruments that include cash and due from banks,
interest-earning deposits with banks, loans, stock in the Federal Reserve Bank and the Federal Home
Loan Bank of Atlanta, deposit accounts and borrowings. Fair value estimates for these financial
instruments are made at a specific moment in time, based on relevant market information and
information about the financial instrument using the same level hierarchy assumptions discussed
above. These estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
Page 77
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE L FAIR VALUE MEASUREMENT AND DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
(Continued)
Cash and Due from Banks and Interest-Earning Deposits in Other Banks
The carrying amounts for cash and due from banks and interest-earning deposits in other banks
approximate fair value because of the short maturities of those instruments.
Investment Securities
Fair value for investment securities equals quoted market price if such information is available.
If a quoted market price is not available, fair value is estimated using quoted market prices for
similar securities.
Loans
For certain homogenous categories of loans, such as residential mortgages, fair value is estimated
using the quoted market prices for securities backed by similar loans, adjusted for differences in
loan characteristics. The fair value of other types of loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. The carrying amount of loans held for sale
is a reasonable estimate of fair value since they will be sold in a short period.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Stock in Federal Reserve Bank and Federal Home Loan Bank of Atlanta
The fair value for FRB and FHLB stock approximates carrying value, based on the redemption
provisions of the Federal Reserve Bank and Federal Home Loan Bank.
Bank Owned Life Insurance
The carrying value of life insurance approximates fair value because this investment is carried at
cash surrender value, as determined by the insurer.
Deposits
The fair value of demand, savings, money market and NOW account deposits is the amount payable on
demand at the reporting date. The fair value of time deposits is estimated based on discounting
expected cash flows using the rates currently offered for instruments of similar remaining
maturities.
Borrowings
The fair values are based on discounting expected cash flows at the interest rate for debt with the
same or similar remaining maturities and collateral requirements.
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk discussed in Note K, it is not
practicable to estimate the fair value of future financing commitments.
Page 78
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE L FAIR VALUE MEASUREMENT AND DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
(Continued)
The carrying amounts and estimated fair values of the Companys financial instruments are as
follows at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
19,569
|
|
|
$
|
19,569
|
|
|
$
|
22,077
|
|
|
$
|
22,077
|
|
Interest-earning deposits in other banks
|
|
|
1,092
|
|
|
|
1,092
|
|
|
|
4,717
|
|
|
|
4,717
|
|
Trading securities
|
|
|
23,011
|
|
|
|
23,011
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
126,750
|
|
|
|
126,750
|
|
|
|
93,475
|
|
|
|
93,475
|
|
Accrued interest receivable
|
|
|
12,330
|
|
|
|
12,330
|
|
|
|
8,742
|
|
|
|
8,742
|
|
Federal Reserve Bank stock
|
|
|
5,348
|
|
|
|
5,348
|
|
|
|
3,609
|
|
|
|
3,609
|
|
Federal Home Loan Bank stock
|
|
|
10,312
|
|
|
|
10,312
|
|
|
|
6,970
|
|
|
|
6,970
|
|
Loans
|
|
|
1,522,401
|
|
|
|
1,533,000
|
|
|
|
994,592
|
|
|
|
989,650
|
|
Bank owned life insurance
|
|
|
26,105
|
|
|
|
26,105
|
|
|
|
25,051
|
|
|
|
25,051
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,408,919
|
|
|
|
1,410,000
|
|
|
|
923,725
|
|
|
|
931,413
|
|
Borrowings
|
|
|
282,102
|
|
|
|
280,500
|
|
|
|
166,929
|
|
|
|
167,846
|
|
Accrued interest payable
|
|
|
7,537
|
|
|
|
7,537
|
|
|
|
2,569
|
|
|
|
2,569
|
|
NOTE M EMPLOYEE AND DIRECTOR BENEFIT PLANS
401(k) Retirement Plan
The Company has a 401(k) retirement plan that contains provisions for specified matching
contributions by the Bank. The Company funds contributions as they accrue. Total 401(k) expense was
$737,000, $520,000 and $388,000 during the years ended December 31, 2007, 2006 and 2005,
respectively.
Stock Based Compensation
During 1999 the Company adopted, with shareholder approval, an Incentive Stock Option Plan (the
Employee Plan) and a Nonstatutory Stock Option Plan (the 1999 Director Plan). During 2001 the
Company increased, with shareholder approval, the number of shares available under its option
plans. In 2002, the Company increased, with shareholder approval, the number of shares available
under the Employee Plan. The Company also adopted a 2001 Nonstatutory Stock Option Plan. On
November 24, 2004, the Company adopted a 2005 Omnibus Stock Ownership And Long Term Incentive Plan
(the Omnibus Plan) providing for the issuance of up to 726,000 shares of common stock under the
terms of the Omnibus Plan, approved by the shareholders at the annual shareholder meeting. All
options granted prior to November 2004 to non-employee directors vested immediately at the time of
grant, while other options from this pool vest over a four-year period with 20% vesting on the
grant date and 20% vesting annually thereafter. Options granted from the pool of shares made
available on November 24, 2004 to non-employee directors vested immediately at the time of the
grant, while options from this pool granted to employees vested 50% at the time of the grant and
50% the following year. During the year ended December 31, 2006 the Company granted 166,500
nonstatutory options which will vest at 20% per year beginning the month following the quarter in
which the Company achieves a ROA of 1%. For purposes of the ROA calculation, the gain or loss from
the fair market value of the economic hedge are excluded. During the year ended December 31, 2007
the Company granted 10,500 nonstatutory options with the same vesting criteria as in 2006.
Page 79
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE M EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Stock Based Compensation (Continued)
The Company assumed as a result of the acquisition of The Bank of Richmond, the 1999 BOR Stock
Option Plan, which was adopted by the Board of Directors of The Bank of Richmond as of June 2,
1999. The plan provides for the issuance of up to 601,237 shares of common stock of which 369,048
were outstanding and fully vested as of December 31, 2007.
All unexercised options expire ten years after the date of grant. All references to options have
been adjusted to reflect the effects of stock splits. The exercise price of all options granted to
date under these plans range from $3.95 to $16.53. At December 31, 2007 the number of shares
available for grant under Omnibus plan was 644,678.
The fair market value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model. The Company has assumed a volatility rate of 14.2% to 17.1%, an
expected life of 7 years, interest rate of 4.37% and a dividend yield of 1.50% in the Black Scholes
computation related to the options granted in 2007. The Company granted 10,500 nonqualifying stock
options during the year ended December 31, 2007; and the Company granted 166,500 nonqualifying
stock options during the year ended December 31, 2006. During the twelve months ended December 31,
2005, the Company granted 162,250 options.
A summary of the Companys option plans as of and for the years ended December 31, 2007, 2006 and
2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Available
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
for Future
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
|
in Plans
|
|
|
Grants
|
|
|
Outstanding
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
At December 31, 2004
|
|
|
1,380,973
|
|
|
|
8,195
|
|
|
|
1,372,778
|
|
|
$
|
9.31
|
|
|
|
1,187,621
|
|
|
$
|
9.04
|
|
|
|
|
|
|
Options authorized
|
|
|
|
|
|
|
|
|
|
|
726,000
|
|
|
|
726,000
|
|
|
|
|
|
|
|
|
|
Options granted/vested
|
|
|
|
|
|
|
(162,250
|
)
|
|
|
162,250
|
|
|
|
16.05
|
|
|
|
335,199
|
|
|
|
16.02
|
|
Options exercised
|
|
|
(163,156
|
)
|
|
|
|
|
|
|
(163,156
|
)
|
|
|
7.50
|
|
|
|
(163,156
|
)
|
|
|
7.50
|
|
Options forfeited
|
|
|
|
|
|
|
10,890
|
|
|
|
(10,890
|
)
|
|
|
11.72
|
|
|
|
(10,890
|
)
|
|
|
11.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005
|
|
|
1,943,817
|
|
|
|
582,835
|
|
|
|
1,360,982
|
|
|
|
10.31
|
|
|
|
1,348,774
|
|
|
|
10.33
|
|
|
|
|
|
|
Options authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted/vested
|
|
|
|
|
|
|
(166,500
|
)
|
|
|
166,500
|
|
|
|
14.62
|
|
|
|
9,031
|
|
|
|
8.47
|
|
Options exercised
|
|
|
(13,897
|
)
|
|
|
|
|
|
|
(13,897
|
)
|
|
|
7.36
|
|
|
|
(13,897
|
)
|
|
|
7.36
|
|
Options forfeited
|
|
|
|
|
|
|
3,888
|
|
|
|
(3,888
|
)
|
|
|
9.39
|
|
|
|
(3,888
|
)
|
|
|
9.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
1,929,920
|
|
|
|
420,223
|
|
|
|
1,509,697
|
|
|
|
10.82
|
|
|
|
1,340,020
|
|
|
|
10.35
|
|
|
|
|
|
|
Options authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted/vested
|
|
|
|
|
|
|
(10,500
|
)
|
|
|
10,500
|
|
|
|
14.06
|
|
|
|
3,005
|
|
|
|
14.06
|
|
Options exercised
|
|
|
(14,493
|
)
|
|
|
|
|
|
|
(14,493
|
)
|
|
|
7.72
|
|
|
|
(14,493
|
)
|
|
|
7.72
|
|
Options forfeited
|
|
|
|
|
|
|
8,505
|
|
|
|
(8,505
|
)
|
|
|
14.62
|
|
|
|
(5
|
)
|
|
|
6.35
|
|
Assumed in The Bank
Of Richmond acquisition
|
|
|
601,237
|
|
|
|
226,450
|
|
|
|
374,787
|
|
|
|
4.56
|
|
|
|
374,787
|
|
|
|
4.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
2,516,664
|
|
|
|
644,678
|
|
|
|
1,871,986
|
|
|
$
|
9.59
|
|
|
|
1,703,314
|
|
|
$
|
9.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 80
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE M EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Stock Based Compensation (Continued)
Outstanding options include 1,871,986 options with exercise prices ranging from $3.95 to $16.53 per
share, of which 1,703,314 are exercisable at December 31, 2007. The weighted average remaining
life of total options outstanding and options exercisable as of December 31, 2007 is 4.80 years and
4.41 years, respectively. The weighted average fair value of options granted in 2007, 2006 and
2005 was $3.71, $3.68 and $4.90, respectively, and was determined as of the date of grant using the
Black-Scholes option pricing model, assuming a dividend growth rate ranging from 0% to 5% for each
period; expected volatility of 14.33%, 16.42% and 24.26%; risk-free interest rates ranging from
3.9% to 4.78%; and expected lives of 7 years for new grants during the years ended December 31,
2007, 2006 and 2005, respectively.
For the year ended December 31, 2007, the intrinsic value of options exercised and fair value of
options vested amounted to $104,079 and $10,146, respectively. The aggregate intrinsic value of
options outstanding at December 31, 2007 amounted to $6.2 million. The aggregate intrinsic value
of options exercisable at December 31, 2007 amounted to $6.2 million. For the year ended December
31, 2006, the intrinsic value of options exercised and fair value of options vested amounted to
$103,254 and $133,568, respectively. The aggregate intrinsic value of options outstanding and
exercisable at December 31, 2006 amounted to $5.9 million and $5.2 million, respectively.
Cash received from option exercises under all share-based payment arrangements for the year ended
December 31, 2007 was $116,000. The actual tax benefit realized for tax deductions from option
exercise of the share-based payment arrangements totaled $43,000 for the year ended December 31,
2007.
A summary of restricted stock outstanding (split adjusted) during the year is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested outstanding at December 31, 2006
|
|
|
13,750
|
|
|
$
|
15.26
|
|
Granted
|
|
|
62,500
|
|
|
|
14.59
|
|
Vested
|
|
|
(13,750
|
)
|
|
|
15.26
|
|
Forfeited
|
|
|
(1,000
|
)
|
|
|
14.62
|
|
|
|
|
|
|
|
|
Non-vested outstanding at December 31, 2007
|
|
|
61,500
|
|
|
$
|
14.60
|
|
|
|
|
|
|
|
|
The total fair value of restricted stock grants issued during the year ended December 31, 2007 was
$912,200. The fair value of restricted stock grants vested during the period was $209,800.
As of
December 31, 2007, there was approximately $1.1 million of unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the plans. That cost is expected to be
recognized over a weighted average period of 2.64 years.
The adoption of SFAS 123R and its fair market value cost recognition provisions are different from
the provisions used SFAS 123 and the intrinsic value method for compensation cost allowed under
APB 25. The effect (increase (decrease)) of the adoption of 123R is presented below:
Page 81
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE M EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Stock Based Compensation (Continued)
|
|
|
|
|
|
|
2005
|
|
|
|
(Amounts in thousands,
|
|
|
|
except per share data)
|
|
Net income:
|
|
|
|
|
As reported
|
|
$
|
3,939
|
|
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects
|
|
|
1,748
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
2,191
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
|
|
|
|
As reported
|
|
$
|
0.48
|
|
Pro forma
|
|
|
0.27
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
As reported
|
|
$
|
0.46
|
|
Pro forma
|
|
|
0.26
|
|
For purposes of this pro-forma disclosure, the value of the options is estimated using the
Black-Scholes option pricing model and amortized to expense over the options vesting periods.
Employment Contracts
The Company has entered into employment agreements with its chief executive officer and seventeen
other officers to ensure a stable and competent management base. The agreements provide for a
three-year term, but the agreements may be extended for an additional year at the end of the first
year and annually thereafter. The agreements provide for benefits as spelled out in the contracts
and cannot be terminated by the Board of Directors, except for cause, without prejudicing the
officers rights to receive certain vested rights, including compensation. In the event of a change
in control of the Bank and in certain other events, as defined in the agreements, the Bank or any
successor to the Company will be bound to the terms of the contracts.
Salary Continuation Agreements
The Company in October 2006 entered into Salary Continuation Agreements with its chief executive
officer and one other executive officer. These Salary Continuation Agreements provide for benefits
to be paid for 15 years to each executive with the payment amounts varying upon different
retirement scenarios, such as normal retirement, early termination, disability, or change in
control. The Company has purchased life insurance policies on the participating officers in order
to offset the future funding of benefit payments. Provisions of $406,672 and $85,628 were provided
for the years ended December 31, 2007 and 2006, respectively, for future benefits to be provided
under these plans. The corresponding liability related to this plan was $492,300 and $85,268 as of
December 31, 2007 and 2006, respectively.
The Company also has a deferred compensation plan for its directors. Expense provided under the
plan totaled $267,000, $175,000 and $106,400 for the years ended December 31, 2007, 2006 and 2005,
respectively. Since 2003, directors have had the option to invest amounts deferred in Company
common stock that is held in a rabbi trust established for that purpose. At December 31, 2007 and
2006, the trust held 51,513 and 31,984 shares of Company common stock, respectively.
Page 82
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE N ACQUISITIONS
The Bank of Richmond Transaction
On June 1, 2007, the Company completed the acquisition of The Bank of Richmond, a Richmond,
Virginia based bank with approximately $197.0 million in assets, operating 6 financial centers in
the Richmond area and a loan production office in Charlottesville, Virginia. The Bank of Richmond
acquisition further enhances the Companys geographic footprint and provides a meaningful presence
in the demographically attractive Richmond market.
Pursuant to the terms of the acquisition, the Company purchased 100% of the outstanding stock of
The Bank of Richmond with a combination of cash and stock of the Company. The aggregate purchase
price was $56.6 million including approximately $1.1 million of transaction costs. The Company
issued approximately 1.85 million shares of the Companys common stock, assumed outstanding Bank of
Richmond stock options valued at approximately $3.6 million, and paid approximately $25.6 million
in cash to The Bank of Richmond shareholders for the approximate 1.72 million shares of The Bank of
Richmond shares outstanding. The overall exchange for stock was limited to 50% of The Bank of
Richmond common stock, using an exchange ratio of 2.11174 of the Company stock for every share of
The Bank of Richmond stock. The value of the common stock exchanged was determined based on the
average market price of the Companys common stock over the 10-day period ended May 21, 2007.
The acquisition transaction has been accounted for using the purchase method of accounting for
business combinations, and accordingly, the assets and liabilities of The Bank of Richmond were
recorded based on estimated fair values as of June 1, 2007, with the estimate of goodwill being
subject to possible adjustments during the one-year period from that date. Goodwill will not be
amortized but will be tested for impairment in accordance with SFAS No. 142. None of the goodwill
is expected to be deductible for income tax purposes. The consolidated financial statements include
the results of operations of The Bank of Richmond since June 1, 2007.
The estimated fair values of the The Bank of Richmond assets acquired and liabilities assumed at
the date of acquisition based on the information currently available is as follows (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,974
|
|
Investment securities, available for sale
|
|
|
2,998
|
|
Loans, net
|
|
|
165,879
|
|
Premises and equipment, net
|
|
|
8,749
|
|
Goodwill
|
|
|
36,699
|
|
Core deposit intangible
|
|
|
1,464
|
|
Other assets
|
|
|
1,927
|
|
Deposits
|
|
|
(177,572
|
)
|
Borrowings
|
|
|
(50
|
)
|
Other liabilities
|
|
|
(1,566
|
)
|
Stockholders Equity
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
56,600
|
|
|
|
|
|
Goodwill is lower while other assets and other liabilities are higher than originally reported at
June 30, 2007 by $487,000, $246,000, and $405,000, respectively, primarily as a result of
adjustments made for deferred income taxes and transactions cost. These adjustments result in a
net assets acquired increase of $164,000 from what was originally reported at June 30, 2007. The
core deposit intangible will be amortized on the straight-line basis over a ten-year life. The
amortization method and valuation of the core deposit intangible are based upon a historical study
of the deposits acquired. Discounts totaling $960,000 and $68,000 that resulted from recording The
Bank of Richmond assets and liabilities at their respective fair values are being accreted using
methods that approximate an effective yield over the life of the assets and liabilities. The net
accretion increased net income before taxes by $56,000 for the year ended December 31, 2007.
Page 83
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE N ACQUISITIONS (Continued)
The following unaudited pro forma financial information presents the combined results of operations
of the Company and The Bank of Richmond as if the acquisition had occurred as of the beginning of
the period for each period presented, after giving effect to certain adjustments, including
amortization of the core deposit intangible, fair value premium and discounts, and additional
financing necessary to complete the transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Net interest income
|
|
$
|
51,739
|
|
|
$
|
42,951
|
|
|
$
|
27,781
|
|
Non-interest income
|
|
|
18,223
|
|
|
|
9,872
|
|
|
|
8,746
|
|
Total revenue
|
|
|
69,962
|
|
|
|
52,823
|
|
|
|
36,527
|
|
Provision for loan losses
|
|
|
5,416
|
|
|
|
3,591
|
|
|
|
2,502
|
|
Acquisition related charges
|
|
|
2,286
|
|
|
|
|
|
|
|
|
|
Other non-interest expense
|
|
|
47,356
|
|
|
|
39,728
|
|
|
|
27,468
|
|
Income before taxes
|
|
|
14,904
|
|
|
|
9,504
|
|
|
|
6,557
|
|
Net income
|
|
|
9,439
|
|
|
|
6,368
|
|
|
|
4,441
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.74
|
|
|
$
|
0.50
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
0.72
|
|
|
$
|
0.49
|
|
|
$
|
0.42
|
|
Acquisition related charges in the above table represent one-time costs associated with the
acquisition and integration of the operations of the Company and The Bank of Richmond, and do not
represent ongoing costs of the fully integrated combined organization. These costs included
change-of-control, severance, and other employee-related costs of $1.43 million, system integration
costs of $175,000, professional, consulting, and investment banker costs of $647,000 and other
costs of $38,000.
Other Acquisitions
During January 2007, the Bank completed the acquisition of Breen Title & Settlement, Inc., an
independent title agency with offices located in Newport News, Hampton and Virginia Beach,
Virginia. A summary, of the purchase price and the assets acquired is as follows:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
Thousands)
|
|
Purchase price:
|
|
|
|
|
Portion paid in cash
|
|
$
|
445
|
|
Issuance of common stock
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
870
|
|
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Property and equipment
|
|
$
|
15
|
|
Goodwill
|
|
|
855
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
870
|
|
|
|
|
|
It is anticipated that the goodwill related to the acquisition of Breen Title & Settlement, Inc. is
tax deductible. The pro forma impact of the acquisition presented as though it had been made at the
beginning of the period presented is not considered material to the Companys consolidated
financial statements.
Page 84
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE N ACQUISITIONS (Continued)
During October 2006, Gateway Insurance Services, Inc., completed the acquisition of Insurance
Center, Inc., an independent insurance agency located in Chesapeake, Virginia. This transaction was
accounted for as a purchase. A summary of the purchase price and the assets acquired is as follows.
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
Purchase price:
|
|
|
|
|
Issuance of common stock
|
|
$
|
588
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
588
|
|
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Other intangibles
|
|
$
|
588
|
|
Goodwill
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
814
|
|
|
|
|
|
|
|
|
|
|
Liabilities Assumed:
|
|
|
|
|
Deferred taxes
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
226
|
|
|
|
|
|
During December 2006, Gateway Insurance Services, Inc., completed the acquisition of C D West, III,
Inc an independent insurance agency located in Newport News, Virginia. This transaction was
accounted for as a purchase. A summary, in thousands, of the purchase price and the assets acquired
is as follows.
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
Purchase price:
|
|
|
|
|
Issuance of common stock
|
|
$
|
1,500
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
1,500
|
|
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Property and equipment
|
|
$
|
36
|
|
Accounts receivable
|
|
|
75
|
|
Goodwill
|
|
|
770
|
|
Other intangibles
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
1,926
|
|
|
|
|
|
|
|
|
|
|
Liabilities Assumed:
|
|
|
|
|
Accounts payable
|
|
$
|
34
|
|
Deferred taxes
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
426
|
|
|
|
|
|
The goodwill related to the acquisition of C D West, III, Inc. and Insurance Center, Inc. is not
tax deductible.
The pro-forma impact of the acquisitions of CD West III, Inc. and Insurance Center, Inc. as though
they had been made at the beginning of the periods presented is not considered material to the
Companys consolidated financial statements.
Page 85
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE O STOCKHOLDERS EQUITY
Preferred Stock
On December 19, 2007 Gateway Financial Holdings, Inc. sold 23,266 shares of Class A Non-Cumulative
Perpetual Preferred Stock with a liquidation value of $1,000 per share. Proceeds from the private
placement, net of expenses, were $23.2 million. The shares of preferred stock were sold solely to
accredited investors in a transaction that was exempt from registration pursuant to Section 4(2)
and Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended.
The Company intends to pay quarterly non-cumulative cash dividends on the preferred stock at an
annual rate of 8.75%. The Company may redeem all or a portion of the preferred stock at any time,
and for any reason, after January 1, 2009.
The preferred stock is not convertible and has no general voting rights. All preferred stock
outstanding has preference over the common stock with respect to the payment of dividends and
distribution of assets in the event of liquidation or dissolution.
Common Stock
The Companys stock repurchase program, as approved by the Board of Directors on April 30, 2007,
provides for the purchase of up to 500,000 shares. There have been 400,637 shares purchased under
the 2007 plan during the year ended December 31, 2007.
The following table presents share repurchase activity for the year ended December 31, 2007,
including total common shares repurchased under the announced program, weighted average per share
price and the remaining buyback authority under announced programs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Shares That
|
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
|
May Yet Be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced
|
|
|
Purchased Under
|
|
Period
|
|
Shares Purchased
|
|
|
Paid Per Share
|
|
|
Program
|
|
|
the Program (1)
|
|
April 1, 2007 to June 30, 2007
|
|
|
92,564
|
|
|
$
|
14.71
|
|
|
|
92,564
|
|
|
|
407,436
|
|
July 1, 2007 to September 30, 2007
|
|
|
207,436
|
|
|
|
14.47
|
|
|
|
300,000
|
|
|
|
200,000
|
|
October 1, 2007 to December 31, 2007
|
|
|
100,637
|
|
|
|
12.33
|
|
|
|
400,637
|
|
|
|
99,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
400,637
|
|
|
$
|
13.98
|
|
|
|
400,637
|
|
|
|
99,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 86
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE P PARENT COMPANY FINANCIAL DATA
Gateway Financial Holdings, Inc. became the holding company for Gateway Bank & Trust Co. effective
October 1, 2001. Following are condensed financial statements of Gateway Financial Holdings, Inc.
as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005,
presented in thousands.
Condensed Balance Sheets
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Asset:
|
|
|
|
|
|
|
|
|
Cash on deposit in subsidiary
|
|
$
|
4,357
|
|
|
$
|
1,679
|
|
Investment in securities available for sale
|
|
|
4,916
|
|
|
|
7,266
|
|
Investment in subsidiaries
|
|
|
215,652
|
|
|
|
131,653
|
|
Other assets
|
|
|
991
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
225,916
|
|
|
$
|
140,790
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long term borrowings
|
|
$
|
60,102
|
|
|
$
|
30,929
|
|
Other liabilities
|
|
|
1,407
|
|
|
|
221
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
61,509
|
|
|
|
31,150
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
23,182
|
|
|
|
|
|
Common stock
|
|
|
127,258
|
|
|
|
101,669
|
|
Retained earnings
|
|
|
14,991
|
|
|
|
8,708
|
|
Accumulated other comprehensive loss
|
|
|
(1,024
|
)
|
|
|
(737
|
)
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
164,407
|
|
|
|
109,640
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
225,916
|
|
|
$
|
140,790
|
|
|
|
|
|
|
|
|
Condensed Statements of Operations
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Equity in income of subsidiary
|
|
$
|
13,453
|
|
|
$
|
6,499
|
|
|
$
|
4,716
|
|
Interest and dividend income
|
|
|
82
|
|
|
|
34
|
|
|
|
18
|
|
Other Income
|
|
|
960
|
|
|
|
|
|
|
|
|
|
Gain on sale of securities
|
|
|
|
|
|
|
653
|
|
|
|
199
|
|
Interest expense
|
|
|
(3,474
|
)
|
|
|
(1,831
|
)
|
|
|
(939
|
)
|
Other expense
|
|
|
(2
|
)
|
|
|
(86
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,019
|
|
|
$
|
5,269
|
|
|
$
|
3,939
|
|
|
|
|
|
|
|
|
|
|
|
Page 87
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE P PARENT COMPANY FINANCIAL DATA (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,019
|
|
|
$
|
5,269
|
|
|
$
|
3,939
|
|
Equity in income of subsidiary
|
|
|
(13,453
|
)
|
|
|
(6,499
|
)
|
|
|
(4,716
|
)
|
Amortization of debt issuance costs
|
|
|
|
|
|
|
55
|
|
|
|
55
|
|
Realized gain on sale of available-for-sale securities
|
|
|
|
|
|
|
(653
|
)
|
|
|
(199
|
)
|
Realized gain on fair value on junior subordinated debt
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
|
Deferred and stock based compensation
|
|
|
380
|
|
|
|
222
|
|
|
|
90
|
|
(Increase) decrease in other assets
|
|
|
(54
|
)
|
|
|
392
|
|
|
|
(482
|
)
|
Increase in other liabilities
|
|
|
1,341
|
|
|
|
25
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,727
|
)
|
|
|
(1,189
|
)
|
|
|
(1,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities
|
|
|
(244
|
)
|
|
|
(6,619
|
)
|
|
|
(5,102
|
)
|
Investment in subsidiaries
|
|
|
(46,260
|
)
|
|
|
(23,464
|
)
|
|
|
(30,000
|
)
|
Proceeds from the sale of securities
|
|
|
|
|
|
|
5,459
|
|
|
|
766
|
|
Upstream dividend received from the Bank
|
|
|
6,500
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,004
|
)
|
|
|
(20,124
|
)
|
|
|
(34,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of junior subordinated
debentures
|
|
|
25,774
|
|
|
|
15,464
|
|
|
|
|
|
Proceeds from long term borrowings
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock
|
|
|
23,182
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
4,383
|
|
|
|
29,855
|
|
Proceeds from options exercise
|
|
|
116
|
|
|
|
102
|
|
|
|
1,237
|
|
Proceeds from dividend reinvestment
|
|
|
433
|
|
|
|
515
|
|
|
|
147
|
|
Common shares repurchased
|
|
|
(5,600
|
)
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(3,539
|
)
|
|
|
(1,674
|
)
|
|
|
(631
|
)
|
Tax benefit from exercise of stock options
|
|
|
43
|
|
|
|
293
|
|
|
|
|
|
Cash paid for fractional shares
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,409
|
|
|
|
19,083
|
|
|
|
30,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
2,678
|
|
|
|
(2,230
|
)
|
|
|
(5,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of year
|
|
|
1,679
|
|
|
|
3,909
|
|
|
|
8,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
4,357
|
|
|
$
|
1,679
|
|
|
$
|
3,909
|
|
|
|
|
|
|
|
|
|
|
|
Page 88
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE Q BUSINESS SEGMENT REPORTING
In addition to its banking operations, the Bank has three other reportable segments, Gateway
Investment Services, Inc., whose principal activity is to engage in brokerage services as an agent
for non-bank investment products and services, Gateway Bank Mortgage, a mortgage company which
began operations during the second quarter of 2006 and Gateway Insurance Services, Inc., an
independent insurance agency. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. Set forth below is certain financial
information for each segment and in total (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Year Ended December 31, 2007
|
|
|
|
Consolidated
|
|
|
Adjustments
|
|
|
Banking
|
|
|
Brokerage
|
|
|
Insurance
|
|
|
Mortgage
|
|
Total interest income
|
|
$
|
109,559
|
|
|
$
|
|
|
|
$
|
109,041
|
|
|
$
|
|
|
|
$
|
18
|
|
|
$
|
500
|
|
Total interest expense
|
|
|
60,474
|
|
|
|
(447
|
)
|
|
|
60,474
|
|
|
|
|
|
|
|
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
49,085
|
|
|
|
447
|
|
|
|
48,567
|
|
|
|
|
|
|
|
18
|
|
|
|
53
|
|
Provision for loan losses
|
|
|
4,900
|
|
|
|
|
|
|
|
4,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
44,185
|
|
|
|
447
|
|
|
|
43,667
|
|
|
|
|
|
|
|
18
|
|
|
|
53
|
|
Non-interest income
|
|
|
17,765
|
|
|
|
(1,780
|
)
|
|
|
10,477
|
|
|
|
794
|
|
|
|
5,245
|
|
|
|
3,029
|
|
Non-interest expense
|
|
|
44,941
|
|
|
|
|
|
|
|
37,166
|
|
|
|
558
|
|
|
|
4,456
|
|
|
|
2,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
17,009
|
|
|
|
(1,333
|
)
|
|
|
16,978
|
|
|
|
236
|
|
|
|
807
|
|
|
|
321
|
|
Provision for income taxes
|
|
|
5,990
|
|
|
|
|
|
|
|
5,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,019
|
|
|
$
|
(1,333
|
)
|
|
$
|
10,988
|
|
|
$
|
236
|
|
|
$
|
807
|
|
|
$
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end total assets
|
|
$
|
1,868,185
|
|
|
$
|
(15,665
|
)
|
|
$
|
1,868,185
|
|
|
$
|
865
|
|
|
$
|
9,022
|
|
|
$
|
5,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Year Ended December 31, 2006
|
|
|
|
Consolidated
|
|
|
Adjustments
|
|
|
Banking
|
|
|
Brokerage
|
|
|
Insurance
|
|
|
Mortgage
|
|
Total interest income
|
|
$
|
73,097
|
|
|
$
|
|
|
|
$
|
72,940
|
|
|
$
|
|
|
|
$
|
21
|
|
|
$
|
136
|
|
Total interest expense
|
|
|
36,099
|
|
|
|
(149
|
)
|
|
|
36,099
|
|
|
|
|
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
36,998
|
|
|
|
149
|
|
|
|
36,841
|
|
|
|
|
|
|
|
21
|
|
|
|
(13
|
)
|
Provision for loan losses
|
|
|
3,400
|
|
|
|
|
|
|
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
33,598
|
|
|
|
149
|
|
|
|
33,441
|
|
|
|
|
|
|
|
21
|
|
|
|
(13
|
)
|
Non-interest income
|
|
|
9,280
|
|
|
|
(676
|
)
|
|
|
5,135
|
|
|
|
744
|
|
|
|
2,883
|
|
|
|
1,194
|
|
Non-interest expense
|
|
|
34,984
|
|
|
|
|
|
|
|
30,682
|
|
|
|
590
|
|
|
|
2,205
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,894
|
|
|
|
(527
|
)
|
|
|
7,894
|
|
|
|
154
|
|
|
|
699
|
|
|
|
(326
|
)
|
Provision for income taxes
|
|
|
2,625
|
|
|
|
|
|
|
|
2,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,269
|
|
|
$
|
(527
|
)
|
|
$
|
5,269
|
|
|
$
|
154
|
|
|
$
|
699
|
|
|
$
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end total assets
|
|
$
|
1,207,477
|
|
|
$
|
(22,548
|
)
|
|
$
|
1,207,477
|
|
|
$
|
645
|
|
|
$
|
6,132
|
|
|
$
|
15,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Year Ended December 31, 2005
|
|
|
|
Consolidated
|
|
|
Adjustments
|
|
|
Banking
|
|
|
Brokerage
|
|
|
Insurance
|
|
|
Mortgage
|
|
Total interest income
|
|
$
|
39,679
|
|
|
$
|
|
|
|
$
|
39,646
|
|
|
$
|
|
|
|
$
|
33
|
|
|
$
|
|
|
Total interest expense
|
|
|
16,376
|
|
|
|
|
|
|
|
16,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
23,303
|
|
|
|
|
|
|
|
23,270
|
|
|
|
|
|
|
|
33
|
|
Provision for loan losses
|
|
|
2,200
|
|
|
|
|
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
21,103
|
|
|
|
|
|
|
|
21,070
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
Non-interest income
|
|
|
8,067
|
|
|
|
(713
|
)
|
|
|
5,736
|
|
|
|
656
|
|
|
|
2,388
|
|
|
|
|
|
Non-interest expense
|
|
|
23,266
|
|
|
|
|
|
|
|
20,902
|
|
|
|
464
|
|
|
|
1,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
5,904
|
|
|
|
(713
|
)
|
|
|
5,904
|
|
|
|
192
|
|
|
|
521
|
|
|
|
|
|
Provision for income taxes
|
|
|
1,965
|
|
|
|
|
|
|
|
1,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,939
|
|
|
$
|
(713
|
)
|
|
$
|
3,939
|
|
|
$
|
192
|
|
|
$
|
521
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end total assets
|
|
$
|
883,373
|
|
|
$
|
(3,837
|
)
|
|
$
|
884,198
|
|
|
$
|
488
|
|
|
$
|
2,524
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 89
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE R INTANGIBLE ASSETS AND GOODWILL
The following is a summary of intangible assets as of December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
Intangibles assets subject to future amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core intangibles gross
|
|
$
|
4,961
|
|
|
$
|
3,497
|
|
|
$
|
3,497
|
|
Less accumulated amortization
|
|
|
(1,462
|
)
|
|
|
(1,027
|
)
|
|
|
(707
|
)
|
|
|
|
|
|
|
|
|
|
|
Core intangible Net
|
|
|
3,499
|
|
|
|
2,470
|
|
|
|
2,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles book of business
|
|
|
1,821
|
|
|
|
1,821
|
|
|
|
188
|
|
Less accumulated amortization
|
|
|
(251
|
)
|
|
|
(128
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,570
|
|
|
|
1,693
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles net
|
|
$
|
5,069
|
|
|
$
|
4,163
|
|
|
$
|
2,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to future amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill banking segment
|
|
$
|
43,153
|
|
|
$
|
6,454
|
|
|
$
|
6,454
|
|
Goodwill insurance segment
|
|
|
2,853
|
|
|
|
1,998
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,006
|
|
|
$
|
8,452
|
|
|
$
|
7,456
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the estimated amortization expense (in thousands) for intangible
assets for each of the five years ending December 31, 2012 and the estimated amount amortizable
thereafter. These estimates are subject to change in future periods to the extent management
determines it is necessary to make adjustments to the carrying value or estimated useful life of
amortizing intangible assets.
|
|
|
|
|
2008
|
|
$
|
618
|
|
2009
|
|
|
618
|
|
2010
|
|
|
577
|
|
2011
|
|
|
560
|
|
2012
|
|
|
553
|
|
Thereafter
|
|
|
2,143
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,069
|
|
|
|
|
|
NOTE S DERIVATIVES
On September 11, 2007 the Company sold the $150.0 million stand-alone derivative financial
instrument which was entered into on December 30, 2005. The Company received an $115,000
termination fee from the counterparty for terminating its position in the financial instrument. The
financial instrument was in the form of an interest rate swap agreement, which derived its value
from underlying interest rates. These transactions involve both credit and market risk. The
notional amount is the amount on which calculations, payments and the value of the derivative are
based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited
to the net difference between the calculated amounts to be received and paid. SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities requires that changes in the fair
value of derivative financial instruments that do not qualify as hedging instruments be reported as
an economic gain or loss in non-interest income. For the years ended December 31, 2007 and 2006 a
gain of $1.2 million and a loss of $1.2 million, respectively, was included in non-interest income
related to the change in the fair value of the interest rate swap agreement. Fair value changes in
this derivative can be volatile from quarter to quarter, and are primarily driven by changes in
interest rates. Net cash monthly settlements are recorded as non-interest income in the period to
which they relate. For the years ended December 31, 2007 and 2006 the interest rate swap cash
settlements decreased non-
Page 90
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
NOTE S DERIVATIVES (Continued)
interest income by $641,000 and $693,000, respectively. The 2007 cash settlements included the
$115,000 termination fee described above.
The Company was exposed to credit related losses in the event of nonperformance by the counterparty
to this agreement. The Company controls the credit risk of its financial contracts through credit
approvals, limits and monitoring procedures, and does not expect the counterparty to fail their
obligations.
This agreement required the Company to make monthly payments at a variable rate determined by a
specified index (prime rate as stated in Publication H-15) in exchange for receiving payments at a
fixed rate.
The Company had been required to provide collateral in the form of U.S. Treasury Securities of $2.0
million to the counterparty based on the evaluation of the market value of the agreement. The
Company received back its collateral when the financial instrument was terminated.
Page 91
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
The Companys management, with the participation of its Chief Executive Officer and the Chief
Financial Officer has evaluated the effectiveness of the Companys disclosure controls and
procedures as of December 31, 2007. Based on that evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures
were effective as of December 31, 2007. There were no material changes in the Companys internal
controls over financial reporting during the fourth quarter of 2007.
Managements Report On Internal Control Over Financial Reporting
The management of Gateway Financial Holdings, Inc. and Subsidiary (the Company) is responsible
for preparing the Companys annual consolidated financial statements and for establishing and
maintaining adequate internal control over financial reporting. The Companys internal control
system was designed to provide reasonable assurance to management and board of directors regarding
the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management assessed the effectiveness of the Companys internal control over financial reporting as
of
December 31, 2007. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control
Integrated Framework
. Based on that assessment, we believe that, as of December 31, 2007, the
Companys internal control over financial reporting is effective based on those criteria.
The Companys registered public accounting firm that audited the Companys consolidated financial
statements included in this annual report has issued an attestation report on the effectiveness of
the Companys internal control over financial reporting.
March 14, 2008
|
|
|
/s/ D. Ben Berry
|
|
/s/ Theodore L. Salter
|
D. Ben Berry
|
|
Theodore L. Salter
|
Chairman, President and Chief Executive Officer
|
|
Senior Executive Vice President and Chief Financial Officer
|
Page 92
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Gateway Financial Holdings, Inc.
We have audited Gateway Financial Holdings, Inc. and Subsidiarys (the Company) internal control
over financial reporting as of December 31, 2007, based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Managements Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control, based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Gateway Financial Holdings, Inc. and Subsidiary maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2007, based on
criteria established in
Internal ControlIntegrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Page 93
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements of Gateway Financial Holdings, Inc.
and Subsidiary as of and for the year ended December 31, 2007, and our report dated March 10, 2008,
expressed an unqualified opinion on those consolidated financial statements.
Greenville, North Carolina
March 10, 2008
Page 94
ITEM 9B OTHER INFORMATION
None.
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from the Companys definitive proxy statement, to be mailed to
stockholders
and filed with the Securities and Exchange Commission within 120 days of December 31, 2007.
ITEM 11 EXECUTIVE COMPENSATION
Incorporated by reference from the Companys definitive proxy statement, to be mailed to
stockholders
and filed with the Securities and Exchange Commission within 120 days of December 31, 2007.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from the companys definitive proxy statement, to be mailed to
shareholders and filed with the Securities and Exchange Commission within 120 days of December 31,
2007.
The following table sets forth equity compensation plan information at December 31, 2007.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
|
remaining available for
|
|
|
Number of securities
|
|
|
|
|
|
future issuance under
|
|
|
to be issued
|
|
Weighted-average
|
|
equity compensation plans
|
|
|
upon exercise of
|
|
exercise price of
|
|
(excluding securities
|
Plan Category
|
|
outstanding options
|
|
outstanding options
|
|
reflected in column(a))
|
|
|
(a)
|
|
(b)
|
|
(c)
|
Equity compensation
plans approved by
security holders
|
|
|
1,721,954
|
|
|
$
|
9.89
|
|
|
|
644,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved
by security holders
|
|
|
150,032
|
|
|
$
|
6.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,871,986
|
|
|
$
|
9.59
|
|
|
|
644,678
|
|
A description of the Companys equity compensation plans is presented in Note N to the accompanying
consolidated financial statements.
The 2001 Nonstatutory Stock Option Plan (NSSO Plan) was not approved by security holders.
Options granted under the NSSO Plan do not qualify as incentive stock options within the meaning
of Section 422A of the Internal Revenue Code and do not afford favorable tax treatment to
recipients. Options granted under the NSSO Plan do result in tax deductions to the Company. The
NSSO Plan is administered by the Executive Committee. Directors and employees of the Company are
eligible to receive options under the NSSO Plan at no cost to them other than the option exercise
price. The options must be exercised within ten years from the date of grant. In the event that a
participant ceases to serve as a director or employee of the Company due to disability or
retirement, as defined in the NSSO Plan, an exercisable stock option will continue to be
exercisable upon the terms and conditions contained in the grant. In the event of the death of a
participant during service, an exercisable stock option will continue to be exercisable for 12
months from the date of death to the extent it was exercisable by the participant immediately prior
to death. In the event that a participant ceases to serve as a director or employee of the Company
for any other reason, the options will terminate.
Page 95
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Incorporated by reference from the Companys definitive proxy statement, to be mailed to
stockholders
and filed with the Securities and Exchange Commission within 120 days of December 31, 2007.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from the Companys definitive proxy statement, to be mailed to
stockholders
and filed with the Securities and Exchange Commission within 120 days of December 31, 2007.
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below.
|
|
|
Exhibit No.
|
|
Description
|
Exhibit 3.1:
|
|
Amended and Restated Articles of Incorporation
|
Exhibit 3.2:
|
|
Articles of Amendment to the Articles of Incorporation
|
Exhibit 3.3:
|
|
Amended Bylaws
|
Exhibit 4.1:
|
|
Specimen Certificate for Common Stock of Gateway Financial Holdings, Inc.
(incorporated by reference to Exhibit 4.1 of Amendment No. 1 to the Registration
Statement on Form S-3 filed September 20, 2001)
|
Exhibit 10.1:
|
|
1999 Incentive Stock Option Plan of Gateway Financial Holdings, Inc. (incorporated
by reference to Exhibit 10.1 to the Annual Report on Form 10K for the year ended
December 31, 2001 (2001 Annual Report))
|
Exhibit 10.2:
|
|
1999 Non-Statutory Stock Option Plan of Gateway Financial Holdings, Inc.
(incorporated by reference to Exhibit 10.2 to the 2001 Annual Report)
|
Exhibit 10.3:
|
|
2001 Non-Statutory Stock Option Plan of Gateway Financial Holdings, Inc.
(incorporated by reference to Exhibit 10.3 to the 2001 Annual Report)
|
Exhibit 10.4
|
|
Amended Employment Agreement with D. Ben Berry
|
Exhibit 10.5
|
|
Amended Employment Agreement with David R. Twiddy
|
Exhibit 10.6
|
|
2005 Omnibus Stock Ownership And Long Term Incentive Plan (incorporated by
reference to Exhibit 10.6 to the Annual Report on Form 10K for the year ended
December 31, 2005)
|
Exhibit 10.7
|
|
Amended Employment Agreement with Theodore L. Salter
|
Exhibit 10.8
|
|
Salary Continuation Agreement with D. Ben Berry
|
Exhibit 10.9
|
|
Salary Continuation Agreement with David R. Twiddy
|
Exhibit 10.10
|
|
Amended Change in Control Agreement with Matthew D. White
|
Exhibit 21:
|
|
Subsidiaries of the Registrant
|
Exhibit 23:
|
|
Consent of Dixon Hughes PLLC
|
Exhibit 31.1:
|
|
Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
|
Exhibit 31.2:
|
|
Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
|
Exhibit 32:
|
|
Section 1350 Certifications
|
Page 96
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the undersigned, thereunto duly
authorized.
|
|
|
|
|
|
GATEWAY FINANCIAL HOLDINGS, INC.
|
|
Date: March 14, 2008
|
By:
|
/s/ D. Ben Berry
|
|
|
|
D. Ben Berry
|
|
|
|
Chairman, President and Chief Executive Officer
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
NAME
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ D. Ben Berry
D. Ben Berry
|
|
Chairman,
President and CEO
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Theodore L. Salter
Theodore L. Salter
|
|
Chief
Financial Officer
|
|
March 14, 2008
|
|
|
|
|
|
/s/ H. Spencer Barrow
H. Spencer Barrow
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ William Brumsey III
William Brumsey III
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Jimmie Dixon, Jr.
Jimmie Dixon, Jr.
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ James H. Ferebee, Jr.
James H. Ferebee, Jr.
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Charles R. Franklin, Jr.
Charles R. Franklin, Jr.
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Robert Y. Green, Jr.
Robert Y. Green, Jr.
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ W. Taylor Johnson, Jr.
W. Taylor Johnson, Jr.
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Robert Willard Luther, III
Robert Willard Luther, III
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Frances Morrisette Norrell
Frances Morrisette Norrell
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ W. C. Owens, Jr.
W. C. Owens, Jr.
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
William A. Paulette
William A. Paulette
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Billy G. Roughton
Billy G. Roughton
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Ollin B. Sykes
Ollin B. Sykes
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Frank T. Williams
Frank T. Williams
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
Jerry T. Womack
Jerry T. Womack
|
|
Director
|
|
March 14, 2008
|
Page 97
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