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Business Description Gateway Community Financial Corp. is a federally-chartered corporation that serves as a holding company for Gloucester County Federal Savings Bank , a federally-chartered savings bank with roots in the community going back to 1903. Gloucester County Federal Savings Bank currently operates five offices located in Gloucester and Camden Counties, New Jersey. Gateway Community Financial Corp.'s principal executive offices are located at the administrative offices of Gloucester County Federal Savings Bank at 381 Egg Harbor Road, Sewell, New Jersey 08080. The phone number at that address is (856) 589-6600. Gloucester County Federal Savings Bank maintains a website at www.gcfbank.com. Financial Condition. The following table summarizes our balance sheet composition as of each of the last five fiscal year ends. At December 31, (In thousands) Assets..................................... $351,864 $308,011 $315,927 $293,414 $312,402 Loans receivable, net...................... 210,492 180,916 167,320 163,343 182,660 Investment securities...................... 52,797 41,315 48,451 50,361 58,222 Mortgage-backed securities................. 59,185 54,032 61,201 40,658 23,235 Cash and cash equivalents.................. 10,618 14,031 19,760 19,448 28,729 Deposits................................... 315,962 277,544 286,611 266,895 283,732 Short-term borrowings...................... 4,400 - - - - Total equity............................... 28,903 28,546 26,934 25,332 27,062 As of March 31, 2007, our assets totaled $372.1 million and our deposits totaled $320.0 million, a 19.1% increase and a 12.8% increase, respectively, over assets and deposits as of December 31, 2002. Loans receivable, net of the allowance for loan losses, totaled $211.0 million at March 31, 2007, representing a 15.5% increase over December 31, 2002. Our loan portfolio consists primarily of one-to- four family mortgage loans, which amounted to approximately 48% of our total loans at March 31, 2007. The remainder of our loan portfolio consists of home equity loans and lines of credit (approximately 27%), auto loans (approximately 9%), commercial real estate mortgages (approximately 7%),manufactured housing loans (approximately 4%), commercial loans and lines of credit (approximately 2%), savings account and other consumer loans (approximately 2%), aircraft loans (approximately 1%) and construction loans (approximately 1%). Results of Operations. The following table summarizes our results of operations for the last five fiscal years. For the Year Ended December 31, (In thousands) Interest and dividend income ................ $ 16,273 $ 14,221 $ 13,913 $ 14,477 $ 17,306 Interest expense ............................ 9,377 5,871 5,204 5,899 9,007 Net interest income ......................... 6,896 8,350 8,709 8,578 8,299 Provisions for (recoveries of provisions for) loan losses .............................. (348) (917) (13) 4,342 7,550 Net interest income after provisions for (recoveries of provisions for) loan losses . 7,244 9,267 8,722 4,236 749 Noninterest income .......................... 856 883 876 793 712 Noninterest expense ......................... 7,631 7,634 7,689 7,384 6,022 Income (loss) before income tax expense (benefit) ........................ 469 2,516 1,909 (2,355) (4,561) Income tax expense (benefit) ................ 90 893 259 (673) (1,924) Net income (loss) ........................... $ 379 $ 1,623 $ 1,650 $ (1,682) $ (2,637) ======== ======== ======== ======== ======== In 2002 and 2003, we had net losses of $2.6 million and $1.7 million, respectively, as a result of large provisions to the allowance for loan losses during those years in connection with the significant asset quality problems that we experienced with regard to our commercial real estate and commercial loan portfolios. Provisions to the allowance were $7.6 million in 2002 and $4.3 million in 2003. As we worked through the problems and our asset quality improved, we recognized recoveries from the allowance for loan losses in each of the last three years. In 2004, we recognized a relatively small recovery of $13,000. In 2005 and 2006, the recoveries from the allowance were larger and had a greater effect on net income for those years: for 2005, our net income of $1.6 million included a $917,000 (pre-tax) recovery of loan losses; for 2006, our net income of $379,000 included a $348,000 (pre-tax) recovery of loan losses. At this time, we do not anticipate further recoveries of loan loss provisions out of the allowance for loan losses. For the year ended December 31, 2006, our net interest income fell by 17.4% compared to 2005. Our net interest rate spread and margin have been reduced as a result of the flat or inverted interest rate yield curve environment, which has hurt our net interest rate spread and net interest margin because the interest rates we pay on our deposits have repriced upwards faster than the interest rates that we earn on our loans and investments. As of December 31, 2006, we had $113.5 million in certificates of deposit that will mature within one year. If the yield curve remains flat, these deposits are expected to reprice upwards faster than loans and investments, which will reduce our net interest income. For the quarter ended March 31, 2007, we reported a net loss of $200,000 as our net interest income continued to decline as a result of continued margin compression, and failed to cover our operating expenses for the quarter. Net interest income for the quarter ended March 31, 2007 was $1.7 million, while noninterest expenses amounted to $2.2 million. We expect to report a loss for the second quarter of 2007 as well. If the current interest rate environment persists, we may not be able to achieve profitability from our core operations in the near term and we may report a loss for the year ending December 31, 2007.