As filed with the Securities and Exchange Commission on March 27, 2001
Registration No. 333-_______
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CHARTER FINANCIAL CORP.
(exact name of registrant as specified in its charter)
United States 6035 Application Pending
(state or other jurisdiction of (Primary Standard (IRS Employer Identification No.)
incorporation or organization) Classification Code Number)
c/o CharterBank
600 Third Avenue
West Point, GA 31833
(706) 645-1391
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
____________
Robert L. Johnson
President and Chief Executive Officer
CharterBank
600 Third Avenue
West Point, Georgia 31833
(706) 645-1391
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
____________
Copies to:
V. Gerard Comizio
Thacher Proffitt & Wood
1700 Pennsylvania Ave, N.W., Ste. 800
Washington, D.C. 20006
(202) 347-8400
____________
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box / X /
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CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Title of each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered(1) Offering Price Per Share(2) Aggregate Offering Price (2) Registration Fee
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock, 5,157,750 $10.00 $51,577,500 $12,895
$.01 par value
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(1) Includes the maximum number of shares that may be issued in connection with
this offering.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously Paid.
The Registrant hereby amends this Registration on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to Section 8(a), may determine.
Charter Financial Corp.
Cross Reference Sheet showing location in the Prospectus of information required
by Items of Form S-1:
Registration Statement Item and Caption Location or Headings in Prospectus
--------------------------------------- ----------------------------------
1. Forepart of the Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover Pages
Pages of Prospectus
3. Summary Information and Risk Factors Summary; Risk Factors
4. Use of Proceeds Summary--How We Intend to Use the Proceeds We Raise from the Offering; How We
Intend to Use the Proceeds from the Offering
5. Determination of Offering Price Summary---How We Determined the Offering Range and the $10.00 Price Per Share; The
Reorganization and the Offering--How We Determined the Offering Range and the
$10.00 Price Per Share
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Summary--Persons Who May Order Stock in the Offering; The Reorganization and the
Offering--Subscription Offering and Subscription Rights, Direct Community Offering
and Syndicated Community Offering
9. Description of Securities to be Registered Description of Capital Stock of Charter Financial Corp.
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant Outside Front Cover Page; Summary--The Companies; Summary--Our Directors, Officers
and Employees Will Have Additional Compensation and Benefit Programs After the
Reorganization; Selected Consolidated Financial and Other Data; CharterBank;
Charter Financial Corp.; First Charter, MHC; Our Policy Regarding Dividends;
Market for the Common Stock; Regulatory Capital Compliance; Capitalization; Pro
Forma Data; CharterBank Consolidated Statements of Operations; Management's
Discussion and Analysis of Financial Condition and Results of Operations; Business
of CharterBank; Business of First Charter, MHC; Business of Charter Financial
Corp.; Regulation of CharterBank and Charter Financial Corp; Federal Banking
Regulation; Management; Executive Officers; The Reorganization and the Offering;
Restrictions on Acquisition of Charter Financial Corp. and CharterBank;
Description of Capital Stock of Charter Financial Corp.; Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
PROSPECTUS
[LOGO]
Charter Financial Corp.
Proposed Holding Company for CharterBank
Up to 5,157,750 Shares of Common Stock
Charter Financial Corp. is a federally-chartered corporation that is offering
shares of its common stock in connection with the reorganization of CharterBank
into a mutual holding company. The shares we are offering represent
approximately 20% of the outstanding common stock of Charter Financial.
CharterBank formed Charter Financial to own CharterBank as part of the
reorganization of its structure. First Charter, MHC, a federally-chartered
mutual holding company, will own approximately 80% of the outstanding common
stock of Charter Financial. We have applied to have the common stock of Charter
Financial quoted on the Nasdaq National Market under the symbol "[]."
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TERMS OF THE OFFERING
Price: $10.00 per share
Minimum Maximum
------------ ------------
Number of shares................................ 3,315,000 4,485,000
Underwriting commissions and other expenses..... $ 1,430,000 $ 1,559,000
Net proceeds to Charter Financial............... $31,720,000 $43,291,000
Net proceeds per share to Charter Financial..... $ 9.57 $ 9.65
We may sell up to 5,157,750 shares because of regulatory
considerations or changes in market or economic conditions without
the resolicitation of subscribers.
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This investment involves a degree of risk, including the possible loss of
principal.
Please read the Risk Factors beginning on page [].
These securities are not deposits or savings accounts and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
None of the Securities and Exchange Commission, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, nor any state securities
regulator has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
We are offering the common stock on a best efforts basis, subject to
certain conditions. The minimum number of shares that you may purchase is 25
shares. Funds received prior to the completion of the offering will be held in
an account at CharterBank which will bear interest at our savings passbook rate.
This offering is expected to terminate on [], 2001.
Sandler O'Neill & Partners, L.P.
_______, 2001
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[MAP OF CHARTERBANK BRANCH OFFICES]
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TABLE OF CONTENTS
Page
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SUMMARY................................................................ 1
RISK FACTORS........................................................... 11
FORWARD LOOKING STATEMENTS............................................. 18
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA......................... 19
CHARTERBANK............................................................ 21
CHARTER FINANCIAL...................................................... 22
FIRST CHARTER, MHC..................................................... 22
CHARTER INSURANCE COMPANY.............................................. 22
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING.................... 23
OUR POLICY REGARDING DIVIDENDS......................................... 24
MARKET FOR THE COMMON STOCK............................................ 25
REGULATORY CAPITAL COMPLIANCE.......................................... 26
CAPITALIZATION......................................................... 27
PRO FORMA DATA......................................................... 28
CHARTERBANK CONSOLIDATED STATEMENTS OF OPERATIONS...................... 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 36
BUSINESS OF CHARTERBANK................................................ 66
BUSINESS OF CHARTER FINANCIAL.......................................... 100
REGULATION OF CHARTERBANK AND CHARTER FINANCIAL........................ 101
TAXATION............................................................... 110
MANAGEMENT............................................................. 111
THE REORGANIZATION AND THE OFFERING.................................... 123
RESTRICTIONS ON ACQUISITION OF CHARTER FINANCIAL
AND CHARTERBANK.................................................... 141
DESCRIPTION OF CAPITAL STOCK OF CHARTER FINANCIAL...................... 144
LEGAL AND TAX OPINIONS................................................. 146
EXPERTS................................................................ 146
REGISTRATION REQUIREMENTS.............................................. 146
WHERE YOU CAN FIND ADDITIONAL INFORMATION.............................. 146
INDEX TO FINANCIAL STATEMENTS.......................................... F-1
iii
[THIS PAGE INTENTIONALLY LEFT BLANK]
iv
SUMMARY
You should read this entire document carefully, including the financial
statements and the notes to the financial statements.
Our Reorganization and Stock Offering
CharterBank is currently a federally-chartered mutual savings and loan
association headquartered in West Point, Georgia. CharterBank is reorganizing
into the mutual holding company structure. As part of the reorganization,
Charter Financial is offering up to 5,157,750 shares to the public, representing
approximately 20% of its outstanding common stock. After the reorganization,
Charter Financial will own 100% of CharterBank.
This chart shows our new structure after the reorganization:
[GRAPHIC OMITTED]
First Charter, MHC will own a majority of Charter Financial's common
stock after the reorganization. The same directors and officers who manage
CharterBank will manage Charter Financial and First Charter, MHC.
1
The Companies
CharterBank
We are a federally-chartered mutual savings and loan association,
headquartered in West Point, Georgia. We were formed in 1954 and operate four
full-service branch offices and three loan production offices in west-central
Georgia and east-central Alabama. We are a community-oriented financial
institution serving consumer households and small businesses. At December 31,
2000, we had total assets of $1.0 billion, including 5,055,000 shares of Freddie
Mac stock with a market value of $348.2 million, equity of $257.5 million and
total deposits of $211.3 million, respectively. We are the only locally-owned
and operated financial institution in the Valley area, which is comprised of
West Point, Georgia and Lanett and Valley, Alabama. Our address is 600 Third
Avenue, West Point, Georgia 31833, and our telephone number is (706) 645-1391.
Our assets have grown over the past three years from $729.3 million at September
1998 to $1.0 billion at December 31, 2000, an increase of over 38%.
Charter Financial Corp.
Charter Financial will be the stock holding company for CharterBank
after the reorganization. Charter Financial has not engaged in any business to
date. After the reorganization, Charter Financial will hold 1.7 million shares
of Freddie Mac stock, currently held in CharterBank's investment portfolio and
will own Charter Insurance Company which will own an additional 400,000 shares
of Freddie Mac stock. See "Business of Charter Financial."
First Charter, MHC
First Charter, MHC will own at least a majority of the outstanding
common stock of Charter Financial after the reorganization. We do not expect
that First Charter, MHC will engage in any business activity other than owning a
majority of the common stock of Charter Financial and holding 400,000 shares of
Freddie Mac stock, currently held in CharterBank's investment portfolio. First
Charter, MHC has not engaged in any business to date.
Charter Insurance Company
Charter Insurance Company is a Hawaiian corporation which commenced
operations in December 2000. Charter Insurance Company is a wholly-owned
subsidiary of Charter Holdings, Inc., a wholly-owned subsidiary of CharterBank.
Charter Insurance Company generates fee income by reinsuring a portion of
CharterBank's loan originations which carry private mortgage insurance.
CharterBank has capitalized Charter Insurance Company with $450,000. As part of
the reorganization, 400,000 shares of Freddie Mac stock will be contributed to
Charter Insurance Company and Charter Insurance Company will become a subsidiary
of Charter Financial. Charter Insurance Company's revenues are expected to be
less than 1% of Charter Financial's total revenues.
2
The following are highlights of CharterBank's operations:
. Ownership of Freddie Mac Stock
Our balance sheet is unique in comparison to our peers in that we own
5,055,000 shares of Freddie Mac stock with a market value of approximately
$348.2 million at December 31, 2000, which represents approximately 34.5% of our
total assets. The $209.5 million in after-tax unrealized gain on our Freddie Mac
stock represents 81.4% of our equity at December 31, 2000. The Freddie Mac stock
is held in our investment portfolio as available-for-sale. Our investment in
Freddie Mac stock in the 1980s has significantly increased our capital and
earnings. Because we believe that our ownership of Freddie Mac stock continues
to present attractive earnings growth potential and because the sale of Freddie
Mac stock would result in substantial tax liability for us, we have no current
plans to liquidate our investment. However, we are reallocating the stock so as
to more effectively manage our Freddie Mac stock investment and CharterBank's
retail operations. In this regard, as part of the reorganization, 2.5 million
shares of the Freddie Mac stock will be transferred out of CharterBank's
portfolio to Charter Financial, First Charter, MHC and Charter Insurance
Company, leaving 50.5% of our Freddie Mac stock in CharterBank's portfolio.
Following the reorganization, we will continue to monitor our Freddie Mac stock
investment.
. Community Banking and Customer Service
We are a service-oriented bank providing retail and small business
customers with products and services designed to create long term, profitable
relationships. We strive to offer high quality services to customers, not only
through personal service, but also by offering a competitive array of financial
products which address customer needs. In this regard, we offer numerous loan
products, including residential mortgage loans, commercial real estate loans,
commercial loans, home equity loans, second mortgages and other loan products.
We also offer deposit products including consumer and commercial checking
accounts, savings accounts, money market accounts and certificates of deposit,
as well as other services to our customers. In addition, we have funded The
Charter Foundation, a non-profit charitable foundation, which makes charitable
contributions to our community.
. Residential Lending
We are the leading residential mortgage lender in the Valley area. As
of December 31, 2000, our residential mortgage loans totaled $157.1 million,
equal to 60.5% of our total loans. Our strategy is to offer customers a broad
range of mortgage products including adjustable and fixed rate loans and "jumbo"
loan products, which are loans with balances that exceed Fannie Mae guidelines.
For the three months ended December 31, 2000, we originated $16.7 million in
residential loans. For the years ended September 30, 2000 and 1999, we
originated $92.5 million and $139.5 million, respectively, in residential loans.
3
. Branch Expansion
We plan to expand our targeted market area to include higher income
areas within the I-85 corridor in west-central Georgia and east-central
Alabama. In this regard, we plan to establish additional branch offices and
upgrade existing facilities over the next three to four years. As part of this
strategy, we acquired Citizens National Bank, Valley, Alabama in August 1999 and
are currently constructing a new branch in Auburn, Alabama, which is scheduled
to open in the fourth quarter of this year.
. Expanded Delivery Channels
To serve our existing customers better and to complement our planned
branch expansion, we will increase the channels through which we deliver
products and services. In this regard, we will expand our use of ATMs by placing
additional ATMs at strategic locations within our primary market area. We also
plan to introduce Internet banking products which will give our customers
on-line access to their accounts and the ability to conduct account transactions
such as online bill payment and electronic funds transfers.
. Capital Strength
Our policy has been to maintain the financial strength of CharterBank
through conservative risk management, sound financial condition, stable earnings
and an efficient operation. Our strong capital position is bolstered by our
Freddie Mac Stock investment. At December 31, 2000, we had $209.5 million in
after-tax unrealized gain from the investment in the Freddie Mac stock.
. Interest Rate Strategy
We seek to maintain an acceptable balance between maximizing potential
yield and limiting exposure to changing interest rates. To reduce the risk that
our earnings will be impacted if interest rates change, we:
. sell most of our conforming fixed rate one- to
four-family mortgage loans that we currently
originate rather than retain them in our loan
portfolio;
. emphasize investments with adjustable rates and/or
short and intermediate-term average lives of less
than ten years; and
. structure most of our commercial real estate loans
with adjustable rates or as balloon loans, which
require a large, lump sum payment at maturity.
4
Reasons for the Reorganization
The reorganization of CharterBank to a mutual holding company will
permit Charter Financial to issue common stock, which is a source of capital not
available to mutual savings banks. The proceeds from the sale of common stock of
Charter Financial will provide CharterBank with new capital, which will support
our planned branch expansion, future deposit growth and expanded operations.
CharterBank's mutual form of ownership will be preserved in First
Charter, MHC. First Charter, MHC, as a mutual holding company, will own at least
a majority of the common stock of Charter Financial as long as First Charter,
MHC remains in existence. The reorganization will allow CharterBank to achieve
certain benefits of a stock company, while allowing us to raise capital
incrementally.
The reorganization is also intended to provide an additional source of
capital to Charter Financial in order to allow it to:
. finance its planned branch expansion through acquisitions of
other financial institutions as well as through de novo
branching;
. finance acquisitions of other businesses related to banking;
. pay dividends to stockholders; and
. repurchase shares of our common stock.
As part of the reorganization, CharterBank will transfer 2.5 million
shares of its Freddie Mac stock holdings with an approximate market value of
$172.2 million as of December 31, 2000 to Charter Financial, Charter Insurance
Company and First Charter, MHC. We believe that the transfer of Freddie Mac
stock to Charter Financial, Charter Insurance Company and First Charter, MHC
will allow CharterBank's management to focus on improving returns on our core
banking activities.
Additionally, after the reorganization, Charter Financial will have the
ability to issue additional shares of common stock to raise capital or to
support mergers or acquisitions without assuming the risks of raising capital
through the sale of Freddie Mac stock, although no additional capital issuance
and no mergers or acquisitions are planned or contemplated at the present time.
In addition, the reorganization will allow Charter Financial to establish stock
benefit plans for management and employees, including incentive stock option
plans, stock award plans and an employee stock ownership plan, in order to allow
us to attract and retain qualified personnel. We also believe that the
reorganization will provide local customers and other residents with an
opportunity to become equity owners of Charter Financial, and thereby
participate in possible stock price appreciation and cash dividends. This is
consistent with our objective of being a locally-owned financial institution.
5
After considering the advantages and risks of the reorganization, as
well as applicable fiduciary duties, the Board of Directors of CharterBank
unanimously approved the reorganization as being in the best interests of
CharterBank, our depositors and the communities that we serve.
Terms of the Offering
We are offering between 3,315,000 and 4,485,000 shares of common stock
of Charter Financial to qualifying depositors, tax-qualified employee plans and
possibly to the public. The maximum number of shares that we sell in the
offering may increase by up to 15% to 5,157,750 shares as a result of regulatory
considerations or changes in financial markets. Unless the number of shares to
be issued is increased to more than 5,157,750 or decreased below 3,315,000, you
will not have the opportunity to change or cancel your stock order. The offering
price is $10.00 per share. Sandler O'Neill & Partners, L.P., our financial and
marketing advisor in connection with the reorganization, will use its best
efforts to assist us in selling our stock.
Persons Who May Order Stock in the Offering
We are offering the shares of common stock of Charter Financial in what
we call a "subscription offering" in the order of priority listed below:
(1) Depositors with accounts at CharterBank with aggregate
balances of at least $50 on September 30, 1999;
(2) The tax-qualified employee plans of CharterBank (including the
ESOP), which will provide retirement benefits to our
employees;
(3) Depositors with accounts at CharterBank with aggregate
balances of at least $50 on March 31, 2001; and
(4) Other depositors and borrowers of CharterBank on the voting
record date who do not already have subscription rights in the
above priorities.
The shares of common stock not purchased in the subscription offering
will be offered, in what we call a "direct community offering," on a priority
basis, with preference to the natural persons residing within our Community
Reinvestment Act assessment area which consists of the entirety of Troup and
Harris Counties, Georgia, as well as the entirety of Chambers and Lee Counties,
Alabama. Shares may also be offered to the general public. The direct community
offering, if any, will commence concurrently with, during or promptly after the
subscription offering. We also may offer shares of common stock not purchased in
the subscription offering or the direct community offering to the public through
a syndicate of broker-dealers managed by Sandler O'Neill & Partners, L.P.
(referred to as a "syndicated community offering.") We have the right to accept
or reject orders received in the direct community offering and the syndicated
community offering at our sole discretion.
6
How We Determined the Offering Range and the $10.00 Price Per Share
The offering range is based on an independent appraisal of the common
stock to be offered. RP Financial, LC., an appraisal firm experienced in
appraisals of savings banks and financial institutions, has estimated as of
March 2, 2001 the market value of the common stock to be between $33,150,000 and
$44,850,000. This results in an offering of between 3,315,000 and 4,485,000
shares of common stock at an offering price of $10.00 per share. RP Financial's
estimate of our market value was based in part upon our financial condition and
results of operations and the effect of the additional capital raised in this
offering. RP Financial's independent appraisal will be updated before we
complete our reorganization.
The $10.00 price per share was selected primarily because $10.00 is
the price per share most commonly used in stock offerings involving
reorganizations of federal savings banks. See "Pro Forma Data."
Limits on Your Purchase of the Common Stock
Your orders for common stock will be limited in the following ways:
(1) the minimum order is 25 shares or $250;
(2) in the subscription offering, the maximum amount that an
individual may purchase is $1,000,000;
(3) in the direct community offering and in the syndicated
community offering, the maximum amount that an individual may
purchase is $1,000,000;
(4) in all categories of the offering combined, the total amount
that an individual may purchase, acting together with others,
is $1,650,000; and
(5) if we receive orders for a greater number of shares than we
are offering, then we will allocate the available shares that
we issue. This may result in your receiving a smaller number
of shares than you ordered. See "The Reorganization and The
Offering."
We may increase the purchase limitations at any time. The ESOP is authorized to
purchase up to 8% of the 49.9% of the outstanding shares of Charter Financial
without regard to these purchase limitations. For additional information on
these purchase limitations see "The Reorganization and The Offering --
Limitations on Common Stock Purchases."
7
How You May Pay for Your Shares
In the subscription offering and the direct community offering you may
pay for your shares only by:
(1) personal check, bank check or money order; or
(2) authorizing us to withdraw money from your deposit accounts
maintained with CharterBank.
We may also, but are not required, to permit wire transfers as payment
for shares ordered for purchase. CharterBank cannot lend funds to anyone for the
purpose of purchasing shares.
You May Not Sell or Transfer Your Subscription Rights
If you order stock in the subscription offering, you will be required
to state that you are purchasing the stock for yourself and that you have no
agreement or understanding to sell or transfer your subscription rights. We
intend to take legal action, including reporting persons to federal or state
regulatory agencies, against anyone who we believe sells or gives away their
subscription rights. We will not accept your order if we have reason to believe
that you sold or transferred your subscription rights.
Deadline for Orders of Common Stock
If you wish to purchase shares, a properly completed stock order form,
together with payment for the shares must be received by CharterBank no later
than 4:00 p.m., Eastern time, on [], 2001, unless we extend this deadline. You
may submit your order form by mail using the return envelope provided, by
overnight courier to the indicated address on the order form, or by bringing
your order forms to one of our full-service branch offices.
Termination of the Offering
The subscription offering will terminate at 4:00 p.m., Eastern time, on
[], 2001. We expect that the direct and/or syndicated community offerings would
terminate at the same time. We may extend this expiration date without notice to
you, until [], 2001, unless regulators approve a later date. If the subscription
offering and/or community offerings are extended beyond [], 2001, we will be
required to resolicit subscriptions before proceeding with the offerings. All
further extensions, in the aggregate, may not last beyond [].
8
Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares
If we do not receive orders for at least 3,315,000 shares of common
stock, we may take several steps in order to sell the minimum number of shares
in the offering range. Specifically, we may increase the $1,000,000 and
$1,650,000 purchase limitations to a maximum of $2,242,500, which is 5% of the
maximum of the offering range. In addition, we may seek regulatory approval to
extend the offering beyond the [] expiration date, provided that any such
extension will require us to resolicit subscriptions received in the offering.
See "The Reorganization and The Offering - Limitations on Common Stock
Purchases."
Market for the Common Stock
We have applied to have the common stock of Charter Financial quoted on
the Nasdaq National Market under the symbol ["."] Sandler, O'Neill & Partners,
L.P. currently intends to make a market in the common stock but it is under no
obligation to do so. See "Market for Common Stock."
How We Intend to Use the Proceeds We Raise from the Offering
Assuming we sell 4,485,000 shares in the offering, we intend to
distribute the net proceeds from the offering as follows:
. $21,645,500 will be contributed to CharterBank;
. $8,952,000 will be loaned to the ESOP to fund its purchase of
common stock; and
. $12,693,500 will be retained by Charter Financial.
Charter Financial intends to use the net proceeds retained from the
offering to invest in securities, to finance the possible acquisition of other
financial institutions and other businesses that are financial in nature, to pay
dividends, to repurchase common stock or for other general corporate purposes.
CharterBank may use the proceeds it receives to repay certain borrowings, expand
its lending activities and its branch network, to purchase mortgaged-backed
securities and investment securities and for general corporate purposes. See
"How We Intend To Use the Proceeds from the Offering."
Our Policy Regarding Dividends
Although no decision has been made regarding the payment of dividends,
we will consider a policy of paying quarterly cash dividends on the common stock
starting the first quarter after we complete the reorganization. We cannot
guarantee, however, that we will pay dividends, or that we will not reduce or
eliminate dividends in future periods.
9
Our Directors, Officers and Employees Will Have Additional Compensation and
Benefit Programs After the Reorganization
In order to tie our officers', directors' and employees' interests
closer to our stockholders' interests, we intend to establish certain benefit
plans that use our stock as compensation. Accordingly, we are adding new benefit
plans for our officers and employees at no cost to them, including an employee
stock ownership plan (ESOP) and a benefit restoration plan. We also plan to
adopt a stock option plan and management recognition plan in connection with the
reorganization and to enter into an employment agreement with Robert L. Johnson,
our President and Chief Executive Officer. In addition, we also plan to enter
into change in control agreements with certain of our executive officers. These
new benefit plans and employment agreements will increase our future costs of
compensating our directors and employees, thereby reducing our earnings.
Additionally, stockholders will experience a reduction in ownership interest if
newly issued shares are used to fund stock options and the management
recognition plan. See "Risk Factors- The implementation of stock-based benefits
will increase our future compensation expense, reduce our earning and cause
dilution" and "Management- Employment Agreements, -Change of Control Agreements,
-Benefit Plans and -Future Stock Benefit Plans."
Possible Conversion of First Charter, MHC to Stock Form
In the future, First Charter, MHC may convert from the mutual to
capital stock form, in a transaction commonly known as a "second-step
conversion." If First Charter, MHC were to undertake a second-step conversion,
Charter Financial's public stockholders would own approximately the same
percentage of the resulting entity as they owned prior to the second-step
conversion. This percentage may be adjusted to reflect the assets owned by First
Charter, MHC. The board of directors has no current plan to undertake a
"second-step conversion" transaction.
How You May Obtain Additional Information Regarding the Reorganization and
Offering
If you have any questions regarding the offering or the reorganization,
please call the Conversion Center at [ ], Monday through Friday between 10:00
a.m. and 4:00 p.m., Eastern time.
10
RISK FACTORS
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You should consider carefully the following risk factors before
deciding whether to invest in our common stock.
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A decrease in the market value of our Freddie Mac stock investment may reduce
our earnings and capital.
CharterBank currently owns 5,055,000 shares of Freddie Mac stock which,
as of December 31, 2000, had an estimated fair market value of $348.2 million
including an after tax unrealized gain of $209.5 million, and represented
approximately 34.5% of its outstanding total assets. Our current revenue and
strong capital structure are due, in part, to dividend income from the Freddie
Mac stock and the appreciation of the stock investment. Because First Charter,
MHC will retain 400,000 shares of Freddie Mac stock in the reorganization,
Charter Financial's earnings will be reduced by the amount of dividends and
appreciation that we would have realized on the shares of Freddie Mac stock
retained by First Charter, MHC. Therefore, we will be more dependent on income
from our loan and investment portfolio to increase our future earnings. If we
cannot increase income from our loan and investment portfolio and the market
value of our Freddie Mac stock investment declines, our capital and
profitability may be adversely impacted.
In addition, the price of Freddie Mac stock tends to move inversely to
long term interest rates. Accordingly, recent declines in interest rates have
caused Freddie Mac stock to trade near its all time high. The following table
shows the per share high, low, ending and average daily trading price of Freddie
Mac stock for the three months ended December 31, 2000 and for each of the three
years ended September 30, 2000.
Price Per Share($)
---------------------------
Period Ended High Low End Average
-------------------------------------- ---------- ------- -------- ----------
December 31, 2000..................... 69.00 50.75 68.86 59.09
September 30, 2000.................... 55.75 37.69 54.06 45.99
September 30, 1999.................... 51.38 35.13 49.63 57.34
September 30, 1998.................... 65.13 45.31 52.00 44.59
Because the price of Freddie Mac stock may fluctuate significantly, management
believes that the recent trading prices of Freddie Mac stock may not accurately
reflect the value of the asset. If the market value of our Freddie Mac stock
investment declines, our capital will be reduced proportionately.
11
We have a significant deferred tax liability on our Freddie Mac stock
investment. If it became payable, this tax liability would significantly
adversely affect our liquidity, ability to hold Freddie Mac stock and earnings.
At December 31, 2000 we had deferred taxes of $134.8 million which
relate primarily to the unrealized gain on our Freddie Mac stock. The unrealized
gain, net of tax, has been recorded as other comprehensive income and has been
included in the equity section of the statement of financial condition as
Accumulated Other Comprehensive Income and the related deferred taxes have been
included in the liability section as Deferred Income Taxes. We have designated
our Freddie Mac stock investment as held for investment, as opposed to trading,
for tax purposes. If, because of frequent sales or for other reasons, the
Internal Revenue Service designates our Freddie Mac stock investment as trading,
the investment would be marked to market for tax purposes each year. As of
December 31, 2000, this would add $341.3 million to taxable income which,
assuming a 38.6% effective tax rate, would require a combined tax payment of
$131.7 million. The payment of this deferred tax liability would adversely
affect our liquidity, ability to hold Freddie Mac stock and earnings.
If our dividend income exceeds our taxable income for any given year, we will
lose potential tax benefits associated with the dividends received deduction.
We receive a dividends received deduction on dividend income from our
investment in Freddie Mac stock. This deduction is the lesser of 70% of
dividends received or 70% of taxable income before the dividend received
deduction. Therefore, if taxable income exceeds 70% of dividend income or if we
incur a net loss for any given year, the full deduction of 70% of dividends is
allowed, creating significant tax savings for us. However, if 70% of dividend
income exceeds taxable income for any given year, we will not be able to take
full advantage of the dividends received deduction and we would lose potential
tax benefits. The table below shows the tax benefit of the dividends received
deduction at different levels of taxable income assuming constant dividend
income of $3,500,000 and an effective tax rate of 37.72%.
Taxable Income (Loss)
------------------------------------------
Taxable income (loss)
before dividend exclusion $ 4,000,000 $ 100,000 $ (100,000)
----------- ------------ -------------
Dividend income $ 3,500,000 $ 3,500,000 $ 3,500,000
Dividends received deduction $ 2,450,000 $ 70,000 $ 2,450,000
Tax benefit of deduction $ 924,140 $ 26,404 $ 924,140
Our earnings may be reduced if we are required to take our bad debt reserve into
income.
The reorganization will be effected using the "purchase and assumption"
method, under which assets and liabilities of the present CharterBank will be
successively transferred to Charter Financial and to the new CharterBank, in
each case in exchange for at least 80% of the stock of the transferee. Although
such transactions are generally tax-free, it is not clear whether or not the use
of this method would require the present CharterBank to "recapture" (i.e., take
into income) its bad debt reserve, and the IRS will not issue private letter
rulings in that regard. Accordingly,
12
although we may take the position that, under available authority, such
recapture is not required, there is a possibility that the use of the purchase
and assumption method will cause the present CharterBank to recapture the
balance of its bad debt reserve, which would result in a federal tax liability
of approximately $800,000.
A decrease in our sources of funds may affect our ability to fund loans. This
would reduce our earnings.
CharterBank funds its operations with a combination of retail and
wholesale deposits, and with borrowings from the Federal Home Loan Bank of
Atlanta and securities sold under agreements to repurchase. Brokered deposits
and credit union certificates of deposits comprised approximately 33% of our
total deposit base at December 31, 2000. We expect our retail deposit base to
increase in the future and thus reduce our reliance on brokered deposits.
However, wholesale deposits of approximately $69.9 million are scheduled to
mature during the next several quarters. These maturities will most likely
outpace the growth of our retail deposit base. Accordingly, we plan to utilize
either borrowed funds or wholesale deposits to fund asset growth and maturing
liabilities.
Our capacity to borrow is impacted by the amount of available
collateral. This collateral is impacted by interest rates, delinquencies and
other factors related to the underlying loans and securities. In a rising
interest rate environment or a weak economy, the value of our collateral may
decrease thereby reducing our capacity to borrow. Although we have secured a
line of credit based on the value of our Freddie Mac stock, we believe that the
significant negative tax implications associated with borrowing against our
Freddie Mac stock makes this option a last resort.
If sufficient deposits or borrowings are not available to effectively
fund loans, our future earnings may be negatively impacted.
Our local economy may affect our future growth possibilities.
Our current market area is principally located in the Valley region
consisting of West Point, Georgia and Lanett and Valley, Alabama. Our future
growth opportunities depend on the growth and stability of our regional economy
and our ability to expand our market area. While we expect our local economy to
moderately grow over the next several years, a downturn in our local economy may
have an impact on our ability to be profitable. Further, our already strong
market share in the Valley area may limit further growth in this area which
could limit the amount of funds available to fund loans and our customers'
ability to repay their loans on a timely basis.
Our market area has traditionally depended on the textile industry as a
source of employment, and while our local economy has expanded to include other
trade sectors in recent years, our local economy has not experienced the same
growth as other nearby regions. In addition, a local provider of wireless
telephone service, Powertel Inc., which is headquartered in West Point, Georgia
has recently been sold to VoiceStream (Deutsche Telekom). While we will seek to
address this economic risk through expansion of our retail delivery systems into
other
13
nearby markets, we cannot guarantee that a downturn in our local economy
will not have a negative impact on our earnings.
Our return on average equity will be low compared to other companies. This could
hurt the trading price of our common stock.
We will not be able to deploy the increased capital from this offering
into high-yielding earning assets immediately. Our ability to profitably deploy
our new capital will be significantly affected by industry competition for loans
and deposits. Initially, we intend to invest the net proceeds in short-term
investments and mortgage-backed securities, which generally have lower yields
than loans. Freddie Mac stock, based on the price and dividend at December 31,
2000 had a dividend yield of approximately 0.99%. These factors will reduce our
return on average equity to a level that will be lower than our peers. For the
three months ended December 31, 2000, our return on average equity was 2.17%. As
long as we own Freddie Mac stock and until we can invest profitably our
increased capital and increase portfolio loans and retail deposits, we expect
our return on equity to be below the industry average, which may negatively
impact the value of our stock.
Because we intend to pursue conservative and locally-based business goals, our
earnings may not increase significantly, which could negatively affect the price
of your stock.
On a post-reorganization basis, CharterBank intends to continue to
serve the financial needs of the local community and to remain an independent,
community-based institution pursuing our lending and investment strategies. We
will continue to lend primarily within our targeted market area within the I-85
corridor in Georgia and Alabama after our reorganization. We also will not lower
credit standards even though our capital base will be larger. For these reasons,
our future earnings may not increase significantly. If your investment goals are
to invest in companies with high earnings growth, you may find that we may not
suit your investment objectives.
If recent stock market volatility continues, the price of your stock may be
negatively affected.
Publicly traded stocks, including stocks of financial institutions,
have recently experienced substantial market price volatility. These market
fluctuations may be unrelated to the operating performance of particular
companies whose shares are traded. In several cases, common stock issued by
recently converted financial institutions, including many mutual holding
companies, has traded at a price that is below the price at which such shares
were sold in the initial offerings of those companies. The purchase price of our
common stock in the offering is based on the independent appraisal by RP
Financial. After our shares begin trading, the trading price of our common stock
will be determined by the marketplace, and may be influenced by many factors,
including the price of Freddie Mac stock, prevailing interest rates, investor
perceptions of Charter Financial and general industry and economic conditions.
Due to possible continued market volatility, we cannot assure you that,
following the conversion, the trading price of our common stock will be at or
above the $10.00 per share initial offering price.
14
There is no guarantee that an active trading market for your stock will develop.
Because Charter Financial has never issued stock, there is no current
trading market for the common stock. Consequently, Charter Financial cannot
assure or guarantee that an active trading market for the common stock will
develop or that, if developed, will continue. An active and orderly trading
market will depend on the existence and individual decisions of willing buyers
and sellers at any given time over which neither Charter Financial nor any
market maker will have any control. If an active trading market does not develop
or is sporadic, this may hurt the market value of the common stock and make it
difficult to buy or sell shares on short notice.
A decrease in demand for mortgage, commercial and consumer loans may lower our
earnings.
Making loans is a major component of our business and a primary source
of revenues. If customer demand for loans decreases, our earnings may decrease
because our alternative investments earn less revenue for us than real estate,
commercial and consumer loans. Customer demand for loans could be reduced by a
weaker economy, an increase in unemployment, a decrease in real estate values,
an increase in interest rates or increased competition from other institutions.
Because we intend to increase our commercial real estate lending, our lending
risk will increase and downturns in the real estate market or local economy
could adversely impact our earnings.
Loans secured by commercial real estate properties generally involve a
higher degree of risk than residential mortgages. Because payments on loans
secured by commercial real estate properties are often dependent on the
successful operation or management of the properties or a related business,
repayment of such loans may be subject to a greater extent, to adverse
conditions in the real estate market or the local economy. Commercial real
estate loans may also involve relatively large loan balances to single borrowers
or groups of related borrowers. A downturn in the real estate market or the
local economy could adversely impact the value of properties secured by the loan
or the revenues from the business thereby increasing the risk of nonperforming
loans. As the volume of commercial real estate loans in our loan portfolio
increases, the corresponding risks and potential for losses from these
activities may also increase.
Because our loans are concentrated in the states of Georgia and Alabama,
downturns in the economy or real estate market in our market area will adversely
impact our earnings.
Our loan portfolio is secured primarily by real estate located in
Georgia and Alabama. Accordingly, the asset quality of our loan portfolio
depends upon the economy and unemployment rate in this area. A downturn in the
economy or the real estate market in our primary lending area would likely
adversely affect our operations and earnings.
15
Because we plan to expand our traditional and nontraditional delivery channels,
our expense base will increase. This will reduce our earnings in the short term.
We plan to expand by adding traditional branches and other delivery
channels including additional ATMs, a voice response unit, and Internet banking
in order to be more competitive and have the capacity to deepen our
relationships with our existing customers as we attract new customers. As these
investments are made, our expense base will grow. Until our new branches become
profitable through loan and deposit growth, our earnings will be negatively
impacted. In addition, costs will outpace revenue on our alternative delivery
channels referred to above unless and until customer acceptance and usage
generates sufficient fee income to cover costs.
Changing interest rates may adversely affect our earnings.
To be profitable, we must earn more interest on loans and investments
than the interest we pay on deposits and borrowings. We use both net interest
income simulation and gap analysis to measure our interest rate risk. Both of
those models indicate that, if interest rates rise, the interest we pay on
interest-bearing liabilities, such as deposits and borrowings, would increase
more quickly than interest we earn on interest-earning assets, such as loans and
investment securities. This would reduce our net income in the short-term. In
addition, rising interest rates may hurt our income because they may reduce the
demand for loans and the value of our investment securities, adversely affecting
our borrowing capacity, and make it more difficult for our borrowers to repay
their loans. If interest rates decline, however, our loans may be refinanced at
lower rates or paid off and our investments may be prepaid earlier than
expected, which may also lower our income. Interest rates will continue to
fluctuate, and we cannot predict future Federal Reserve Board actions or other
factors that will cause rates to change.
The implementation of stock-based benefits will increase our future compensation
expense, reduce our earnings and cause dilution.
We intend to adopt a stock option plan that will provide for granting
to our eligible officers, employees, and directors options to purchase common
stock; a management recognition plan that will provide for awards of common
stock to eligible employees, officers and directors; and an ESOP which intends
to purchase in the offering 8% of 49.9% of the outstanding stock of Charter
Financial, for allocation to employees as a retirement benefit. These plans will
increase our future costs of compensating our directors and employees, thereby
reducing our earnings. The expense of the ESOP and management recognition plan
may be volatile because such expenses must reflect the market value of the
underlying Charter Financial common stock awarded to participants. Additionally,
stockholders will experience a reduction in ownership interest in the event
newly issued shares are used to fund stock options and awards made under the
management recognition plan.
16
Because First Charter, MHC will own a majority of Charter Financial's common
stock, First Charter, MHC will be able to prevent transactions you might be in
favor of, including a sale or merger of Charter Financial.
Provisions of our federal charter and bylaws and applicable provisions
of federal law and regulations may delay, inhibit or prevent an organization or
person from gaining control of Charter Financial through a tender offer,
business combination, proxy contest or some other method even though some of our
stockholders might believe a change in control is desirable.
In addition, First Charter, MHC will own at least a majority of Charter
Financial's common stock after the reorganization. The same directors and
officers who manage CharterBank will manage First Charter, MHC. The board of
directors of First Charter, MHC will control the outcome of most matters put to
a vote of stockholders of Charter Financial. We cannot assure you that the votes
cast by First Charter, MHC will be in your personal best interests as a
stockholder.
Because banking reform legislation may increase competition, it may reduce our
earnings.
On November 12, 1999, the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 became law. The Gramm-Leach-Bliley Act modernizes the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Since the legislation now permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. Although we plan to diversify and
expand the products and services that we offer, this additional consolidation
could result in a growing number of larger financial institutions that offer a
wider variety of financial services than we are able to offer. This could
adversely impact our ability to retain and attract customers that prefer to
obtain all of their financial services from one provider. This would adversely
impact our earnings.
17
FORWARD LOOKING STATEMENTS
This prospectus contains "forward-looking statements" which 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 our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates. These factors include, but are not limited to:
. general and local economic conditions;
. changes in interest rates, deposit flows, demand for mortgages
and other loans, real estate values, and competition;
. changes in accounting principles, policies, or guidelines;
. changes in legislation or regulation;
. and other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing,
products and services.
Any or all of our forward-looking statements in this prospectus and in
any other public statements we make may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Consequently, no forward-looking statement can be guaranteed.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or otherwise.
18
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The summary information presented below at or for each of the years
presented is derived in part from the consolidated financial statements of
CharterBank. The following information is only a summary, and you should read it
in conjunction with our consolidated financial statements and notes beginning on
page F-1.
At September 30,
At December 31, -------------------------------------------------------------
2000 2000 1999 1998 1997 1996
------------- ---------- --------- ------------ ------------ -----------
(Unaudited) (In thousands)
Selected Financial Data:
Total assets..................... $ 1,010,477 $ 942,687 $ 904,586 $ 729,286 $ 498,011 $ 352,082
Loans receivable, net(1)......... 254,066 253,467 208,456 166,360 135,256 98,105
Investment securities available
for sale(2).................... 384,500 394,178 399,112 262,720 145,554 102,080
Freddie Mac common stock......... 348,163 273,286 262,860 280,877 199,515 139,566
Retail deposits.................. 141,410 144,546 153,731 100,808 89,889 84,778
Total deposits................... 211,270 274,371 282,965 135,611 89,889 84,778
Deferred income taxes............ 134,845 100,247 96,678 101,123 71,894 49,213
Total borrowings................. 398,463 352,219 312,867 288,638 186,925 109,000
Total retained earnings.......... 52,898 51,699 50,826 23,797 23,322 20,267
Accumulated other
comprehensive income........... 204,650 152,828 147,663 171,394 119,790 81,748
Total equity..................... 257,548 204,527 198,489 195,191 143,112 102,015
Allowance for loan losses........ 5,540 6,346 5,710 2,054 1,846 1,627
Non-performing assets............ 3,419 3,461 2,211 436 1,443 1,709
For the Three Months For the Years Ended
Ended December 31, September 30,
----------------------- -------------------------------------------------------------
2000 1999 2000 1999 1998 1997 1996
---------- --------- ----------- ----------- ---------- --------- ----------
(Unaudited) (In thousands)
Selected Operating Data:
Interest and dividend income(3).. $ 12,693 $ 12,010 $ 50,877 $ 34,015 $ 26,571 $ 18,984 $ 13,457
Interest expense................. 9,541 8,075 36,647 23,341 19,409 12,757 8,989
-------- --------- -------- --------- -------- -------- --------
Net interest income(3)........... 3,152 3,935 14,230 10,674 7,162 6,227 4,468
Dividends on Freddie Mac stock... 859 758 3,336 2,954 2,604 2,216 1,930
Provision for loan losses........ 150 90 1,410 240 180 300 171
-------- --------- -------- --------- -------- -------- --------
Net interest and dividend income
after provision for
loan losses.................... 3,861 4,603 16,156 13,388 9,586 8,143 6,227
-------- --------- -------- --------- -------- -------- --------
Total other income (loss)........ 502 398 1,949 38,749(4) (3,307) 3,606 1,118
Total other expense.............. 2,795 3,184 15,943 10,749 6,622 8,326 6,324
-------- --------- -------- --------- -------- -------- --------
Income (loss) before provision
for income taxes.............. 1,568 1,817 2,162 41,388 (343) 3,423 1,021
-------- --------- -------- --------- -------- -------- --------
Income tax expense (benefit)..... 369 495 1,290 14,359 (818) 368 (136)
-------- --------- -------- --------- -------- -------- --------
Net income....................... $ 1,199 $ 1,322 $ 872 $ 27,029 $ 475 $ 3,055 $ 1,157
======== ========= ======== ========= ======== ======== ========
Other comprehensive income
(loss), net of tax(5).......... $ 51,822 $ (15,080) $ 5,165 $ (23,731) $ 51,604 $ 38,042 $ 25,081
======== ========= ======== ========= ======== ======== ========
Comprehensive income(6).......... $ 53,021 $ (13,758) $ 6,037 $ 3,298 $ 52,079 $ 41,097 $ 26,238
======== ========= ======== ========= ======== ======== ========
_________________________
(1) Loans are shown net of deferred loan fees and allowance for loan losses
and excludes loans held for sale.
(2) Includes all CharterBank investment securities available for sale
excluding Freddie Mac common stock.
(3) Excludes dividends on Freddie Mac common stock.
(4) Includes gain recognized of $34.5 million on sale of 570,000 shares of
Freddie Mac common stock.
(5) Consists of unrealized holding gains or losses on Freddie Mac common
stock, investments, mortgage-backed securities, and collateralized
mortgage obligations classified as available-for-sale, net of income
taxes.
(6) Consists of net income for the period plus other comprehensive income
(loss).
19
At or for the Three
Months Ended
December 31, At or for the Years Ended September 30,
-------------------- -----------------------------------------------------
2000 1999 2000 1999 1998 1997 1996
--------- --------- -------- -------- --------- -------- ----------
(unaudited)
Selected Financial Ratios and Other Data(7):
Performance:
Return on average assets...................... 0.50% 0.58% 0.10% 3.39% 0.08% 0.71% 0.37%
Comprehensive return on average assets........ 22.20 (6.00) 0.66 0.41 8.39 9.58 8.46
Return on average equity...................... 2.17 2.66 0.48 11.98 0.27 2.32 1.30
Comprehensive return on average equity........ 95.79 (27.64) 3.34 1.46 29.85 31.17 29.52
Average equity to average assets.............. 23.17 21.70 19.84 28.26 28.11 30.73 28.68
Equity to total assets at end of period....... 25.49 20.19 21.70 21.94 26.76 28.74 28.97
Average interest rate spread.................. 1.59 2.31 1.96 1.91 1.87 2.30 2.13
Net interest margin(8)........................ 1.96% 2.51% 2.18% 2.24% 2.01% 2.53% 2.43%
Average interest earning assets
excluding Freddie Mac stock to
average interest bearing liabilities........ 1.06x 1.04x 1.04x 1.07x 1.02x 1.04x 1.06x
Total noninterest expense to average
assets...................................... 1.17% 1.39% 1.75% 1.35% 1.07% 1.94% 2.04%
Efficiency ratio(9)........................... 61.82% 61.29% 81.17% 54.72% 116.32% 87.32% 86.58%
Regulatory Capital Ratios:
Tangible capital.............................. 7.81 6.89 7.49 7.02 5.20 7.24 9.18
Core capital.................................. 7.81 6.89 7.49 7.02 5.20 7.24 9.18
Risk-based capital............................ 27.53 26.71 26.45 36.66 11.86 15.42 23.15
Asset Quality Ratios:
Non-performing loans as a percent
of total loans............................ 1.12 1.14 1.09 0.93 0.18 0.85 1.61
Non-performing assets as a percent
of total assets............................. 0.34 0.38 0.37 0.24 0.06 0.29 0.49
Allowance for loan losses as a percent
of total loans.............................. 2.13% 2.42% 2.44% 2.67% 1.22% 1.34% 1.63%
Allowance for loan losses as a percent
of non-performing loans..................... 1.91x 2.12x 2.24x 2.87x 6.71x 1.57x 1.01x
Number of:
Full-time equivalent employees................ 124 130 126 129 92 82 82
_______________________________________
(7) Asset quality ratios and regulatory capital ratios are end of period
ratios. Ratios for the period at or for the three months ended December
31, 2000 and 1999 are annualized.
(8) Net interest margin represents net interest income excluding dividend
income from Freddie Mac stock as a percentage of average interest
earning assets excluding Freddie Mac stock.
(9) The efficiency ratio represents the ratio of operating expenses divided
by the sum of net interest income and non- interest income less gain on
sales of investments.
20
CHARTERBANK
CharterBank is a federally-chartered savings and loan association,
established in 1954. We are headquartered in West Point, Georgia, which is
located in west-central Georgia on the Alabama border. Our deposits are insured
by the FDIC and we are examined and regulated by the Office of Thrift
Supervision and the FDIC. Our executive offices are located at 600 Third Avenue,
West Point, Georgia and our telephone number is (706) 645-1391.
We are a community-oriented bank providing retail and small business
customers with value driven products and services to meet customer needs. We
provide a wide variety of deposit products, residential mortgage loans,
commercial real estate loans, commercial loans and consumer loans to our
customers in the cities and towns around the "Valley" area of Georgia, which
includes West Point, Georgia and Valley and Lanett, Alabama, and in LaGrange,
Georgia. We currently operate four full-service branch offices and three loan
production offices. We also plan to open an additional branch in Auburn, Alabama
in October, 2001 and additional branch offices during the next three or four
years. In addition, we operate a service corporation subsidiary, Charter
Insurance Company.
As of June 30, 2000, CharterBank maintained the largest deposit market
share in the Valley area. We are also the largest federal mutual savings and
loan association in the State of Georgia with total assets of $1.0 billion,
total deposits of $211.3 million and total equity of $257.5 million at December
31, 2000. We also currently own 5,055,000 shares of Freddie Mac stock which, as
of December 31, 2000, had an estimated fair market value of $348.2 million
including an after tax unrealized gain of $209.5 million, and represented
approximately 34.5% of our total assets.
As part of our business plan, we will seek to expand our targeted
market area to include the I-85 corridor in east-central Alabama and
west-central Georgia. We believe that our expansion into more profitable markets
will address the economic risks and limited growth potential in our current
market area. As part of this planned branch expansion, on August 18, 1999, we
acquired all of the issued and outstanding shares of Citizens Bancgroup, Inc.
and its wholly-owned subsidiary Citizens National Bank, a national bank
headquartered in Valley, Alabama for a purchase price of approximately $2.25
million in cash (the "Citizens acquisition"). As part of the Citizens
acquisition we acquired approximately $24.7 million in loans, net and $42.0
million in deposits. The acquisition was accounted for using the purchase method
of accounting and, therefore, the results of operations of Citizens National
have been included in our operations since the effective date of the
acquisition.
At December 31, 2000, we had total loans of $259.5 million, of which
$157.1 million were residential mortgage loans. We generally sell the conforming
residential mortgage loans that we originate and retain nonconforming
residential mortgage loans for our loan portfolio. We originate commercial and
multi-family mortgage loans, commercial loans and consumer installment loans. We
also invest in mortgage-backed and other investment securities, including our
investment in Freddie Mac stock. For further information on our operations and
financial condition, see "Business of CharterBank."
21
CHARTER FINANCIAL
Charter Financial will be a federally-chartered stock holding company.
Charter Financial has not engaged in any business to date and will serve as a
holding company of CharterBank and Charter Insurance Company following the
reorganization. Charter Financial will be a savings and loan association holding
company registered with the Office of Thrift Supervision. Following the
reorganization, 1,700,000 shares of Freddie Mac stock currently owned by
CharterBank will be transferred to Charter Financial. As part of the
reorganization, Charter Insurance Company will become a subsidiary of Charter
Financial and will also receive 400,000 shares of Freddie Mac stock. CharterBank
will retain 2,555,000 shares of Freddie Mac stock. First Charter, MHC will own
approximately 80% of Charter Financial's outstanding common stock. Charter
Financial's executive offices are located at 600 Third Avenue, West Point,
Georgia and our telephone number is (706) 645-1391.
FIRST CHARTER, MHC
As part of our reorganization, CharterBank will organize First Charter,
MHC as a federally-chartered mutual savings and loan holding company which will
be registered with the Office of Thrift Supervision. Persons who had liquidation
rights with respect to CharterBank as of the date of the reorganization will
continue to have liquidation rights solely with respect to First Charter, MHC.
Their liquidation rights in First Charter, MHC will exist as long as they
maintain a deposit account of CharterBank. See "The Reorganization and the
Offering - Effects of the Reorganization - Liquidation Rights." First Charter,
MHC's executive offices are located at 600 Third Avenue, West Point, Georgia and
our telephone number is (706) 645-1391.
First Charter, MHC's principal assets will be the common stock of
Charter Financial it receives in the reorganization, $100,000 in cash it
receives as its initial capitalization, and 400,000 shares of Freddie Mac stock
currently owned by CharterBank. At the present time, we expect that First
Charter, MHC will not engage in any business activity other than its investment
in a majority of the common stock of Charter Financial and the management of any
cash dividends received from shares of its Freddie Mac stock. Federal law and
regulations require that as long as First Charter, MHC is in existence it must
own a majority of Charter Financial's common stock. Federal law, regulations,
and the plan of reorganization, permit First Charter, MHC to convert to the
stock form of organization. For additional information regarding a stock
conversion of First Charter, MHC, see "Regulation of CharterBank and Charter
Financial -- Possible Conversion of First Charter, MHC to Stock Form."
CHARTER INSURANCE COMPANY
Charter Insurance Company, a Hawaiian corporation, is a second-tier
service corporation of CharterBank and began operations in December 2000.
Charter Insurance Company generates fee income by reinsuring a portion of
CharterBank's loan originations which carry private mortgage insurance.
Following the reorganization, Charter Insurance Company will become a subsidiary
of Charter Financial and will receive 400,000 shares of Freddie Mac stock,
currently owned by CharterBank. Charter Insurance Company's revenues are
expected to be less than 1% of Charter Financial's total revenues.
22
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
The net proceeds will depend on the total number of shares of common
stock sold in the offering, which in turn will depend on RP Financial's
appraisal, regulatory and market considerations, and the expenses incurred in
connection with the offering. Although we will not be able to determine the
actual net proceeds from the sale of the common stock until we complete the
offering, we estimate the net proceeds to be between $31.7 million and $43.3
million, or $49.9 million if the offering is increased by 15%.
Charter Financial intends to distribute the net proceeds from the offering as
follows:
Number of Shares Sold
-------------------------------------
Minimum Maximum Super-Maximum
---------- ---------- -------------
(In thousands)
Offering proceeds.......................... $ 33,150 $ 44,850 $ 51,578
Less: offering expenses.................... 1,430 1,559 1,633
Net offering proceeds...................... 31,720 43,291 49,945
Less:
Proceeds contributed to CharterBank... 15,860 21,645 24,973
Proceeds used for loan to ESOP........ 6,617 8,952 10,295
--------- ---------- ------------
Proceeds retained by Charter Financial..... $ 9,243 $ 12,694 $ 14,677
========= ========== ============
The net proceeds may vary because total expenses relating to the
reorganization may be more or less than our estimates. For example, our expenses
would increase if a syndicated community offering is used to sell shares not
purchased in the subscription offering and community offering. The net proceeds
will also vary if the number of shares to be sold in the offering are adjusted
to reflect a change in the estimated pro forma market value of Charter Financial
and CharterBank or if our ESOP purchases shares in the open market at an average
cost that is higher or lower than $10.00 per share. Payments for shares made
through withdrawals from existing deposit accounts will not result in the
receipt of new funds for investment by CharterBank but will result in a
reduction of CharterBank's deposits and interest expense as funds are
transferred from interest bearing certificates of deposit or other deposit
accounts.
Charter Financial may use the proceeds it retains from the offering:
. to finance possible acquisitions of financial institutions or
other financially-related businesses, although we have no
current plans to do so;
. to pay dividends to stockholders;
. to invest in securities; and
. for general corporate purposes.
23
Following the reorganization, we may also implement stock repurchase
programs. Our ability to repurchase our common stock may be subject to
regulatory restrictions.
CharterBank may use the proceeds it receives from the offering:
. to fund new loans;
. to establish or acquire new branches in our targeted market
areas within the I-85 corridor;
. to diversify products that we offer;
. to increase delivery systems, including the expanded use of
ATMs and the introduction of Internet banking;
. to repay debt;
. to invest in securities; and
. for general corporate purposes.
OUR POLICY REGARDING DIVIDENDS
Although no decision has been made regarding the payment of dividends,
we will consider a policy of paying quarterly cash dividends on our common stock
beginning the first full quarter after the reorganization. The payment of
dividends will be subject to determination by our board of directors, which will
take into account, among other factors, our financial condition, results of
operations, tax considerations, industry standards, economic conditions and
regulatory restrictions that affect the payment of dividends by CharterBank to
Charter Financial. We cannot guarantee that we will pay dividends or that, if
paid, that we will not reduce or eliminate dividends in the future.
If Charter Financial pays dividends to its stockholders, it will be
required to pay dividends to First Charter, MHC, unless First Charter, MHC
elects to waive dividends. We currently anticipate that First Charter, MHC will
waive dividends paid by Charter Financial. Any decision to waive dividends will
be subject to regulatory approval. See "Regulation of CharterBank and Charter
Financial -- Dividend Waivers by First Charter, MHC."
Charter Financial will not be subject to Office of Thrift Supervision
regulatory restrictions on the payment of dividends. The source of payment of
any dividends paid will initially come from Charter Financial's proceeds
retained in the offering and dividend income on Charter Financial's 1,700,000
shares of Freddie Mac stock. Our ability to pay dividends will also depend on
how much of our common stock we may repurchase and upon the amount of funds
available from CharterBank, which must provide the Office of Thrift Supervision
with 30 days notice of its intention to make a capital distribution to Charter
Financial. Office of Thrift Supervision regulations may also limit, in certain
circumstances, CharterBank's ability to make capital distributions and
CharterBank will not be permitted to pay dividends on its capital stock
24
if, among other things, its stockholders' equity would be reduced below the
amount required for the liquidation account. See "The Reorganization and The
Offering-- Effects of the Reorganization -- Liquidation Account."
MARKET FOR THE COMMON STOCK
We have not previously issued common stock, so there is currently no
established market for the common stock. We have applied to have our common
stock quoted on the Nasdaq National Market under the symbol "[]" after
completion of the offering. One of the conditions for Nasdaq quotation is that
at least three market makers make, or agree to make, a market in our common
stock. We will seek to encourage at least three market makers to make a market
in our stock. Sandler O'Neill & Partners, L.P. has advised us that it intends to
make a market in the common stock following the reorganization, but is under no
obligation to do so. While we anticipate that before completion of the offering
we will obtain a commitment from at least two other broker-dealers to make a
market in our common stock, there can be no assurance that this will occur.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control, or
that of any market maker. The number of active buyers and sellers of the common
stock at any particular time may be limited. Under such circumstances, you could
have difficulty selling your shares on short notice, and, therefore, you should
not view the common stock as a short-term investment. We cannot assure you that
an active trading market for the common stock will develop or that, if it
develops, it will continue. Nor can we assure you that, if you purchase shares,
you will be able to sell them at or above $10.00 per share.
25
REGULATORY CAPITAL COMPLIANCE
At December 31, 2000, CharterBank exceeded all regulatory capital
requirements. Set forth below is a summary of our capital computed under
generally accepted accounting principles in the United States of America
("GAAP") and our compliance with regulatory capital standards at December 31,
2000, on a historical and pro forma basis. We have assumed that the indicated
number of shares were sold as of December 31, 2000 and that CharterBank received
50% of the net proceeds from the offering. For purposes of the table below, the
amount expected to be loaned to the employee stock ownership plan and the cost
of the shares expected to be acquired by the management recognition plan are
deducted from pro forma regulatory capital. For a discussion of the capital
requirements applicable to CharterBank, see "Regulation of CharterBank and
Charter Financial - Federal Banking Regulation - Capital Requirements."
Pro Forma at December 31, 2000 Based Upon the Sale at $10.00 Per Share
-----------------------------------------------------------------------------------------------------
5,157,750 Shares
3,315,000 Shares 3,900,000 Shares 4,485,000 Shares (15% Above
Historical at (Minimum of (Midpoint of (Maximum of Maximum of
December 31, 2000 Range) Range) Range) Range)(1)
------------------- ------------------ ------------------ ------------------ --------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
--------- ---------- ------- ---------- --------- ---------- --------- --------- --------- ----------
(In thousands)
Equity under Generally Accepted
Accounting Principles..... $ 257,548 25.49% $155,859 17.03% $157,000 17.11% $158,141 17.19% $159,454 17.28%
========= ======= ======== ====== ======== ====== ======== ====== ======== ======
Tangible capital(3) ......... 52,898 7.81 54,783 7.99 55,924 8.13 57,065 8.27 58,378 8.42
Requirement(4)............... 10,158 1.50 10,285 1.50 10,320 1.50 10,354 1.50 10,394 1.50
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Excess....................... 42,740 6.31 44,498 6.49 45,605 6.63 46,711 6.77 47,984 6.92
========= ====== ======== ====== ======== ====== ======== ====== ======== ======
Core capital(3).............. 52,898 7.81 54,783 7.99 55,924 8.13 57,065 8.27 58,378 8.42
Requirement(4)............... 20,315 3.00 20,570 3.00 20,640 3.00 20,709 3.00 20,788 3.00
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Excess....................... 32,583 4.81 34,213 4.99 35,285 5.13 36,357 5.27 37,859 5.42
========= ====== ======== ====== ======== ====== ======== ====== ======== ======
Risk-Based capital(3)(5)..... 105,796 27.53 109,566 28.08 111,849 28.52 114,131 28.96 116,756 29.46
Requirement(4)............... 30,744 8.00 31,216 8.00 31,372 8.00 31,529 8.00 31,709 8.00
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Excess....................... $ 75,052 19.53% $ 78,350 20.08% $ 80,477 20.52% $ 82,602 20.96% $ 85,047 21.46%
========= ====== ======== ====== ======== ====== ======== ====== ======== ======
____________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated price range of up to
15% as a result of changes in market conditions or general financial
and economic conditions following the commencement of the offering.
(2) Tangible capital levels are shown as a percentage of tangible assets.
Core capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighted
assets.
(3) Pro forma capital levels assume receipt by CharterBank of 50% of the
net proceeds from the shares of common stock sold at the minimum,
midpoint and maximum of the offering range. These levels assume funding
by Charter Financial of the management recognition plan equal to 4% of
49% of the common stock of Charter Financial, and the purchase by the
employee stock ownership plan of 8% of the 49% of the outstanding
stock of Charter Financial.
(4) The current minimum core/leverage capital requirement for savings
associations under FIRREA is 3% of total adjusted assets. The current
core/leverage capital ratio applicable to savings associations under
FDICIA is 4%. Well capitalized financial institutions, as defined, must
maintain a 5% core capital ratio.
(5) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the average risk-weighting of CharterBank's risk-weighted
assets as of December 31, 2000.
26
CAPITALIZATION
The following table presents the historical deposits and consolidated
capitalization of CharterBank at December 31, 2000, and the pro forma
capitalization of Charter Financial and subsidiaries after giving effect to the
reorganization, based upon the sale of the number of shares shown below and the
other assumptions set forth under "Pro Forma Data." A change in the number of
shares to be sold in the offering may materially affect the capitalization.
Pro Forma Based Upon Sale at $10.00 Per Share
---------------------------------------------------------------------
5,175,750 Shares
Historical 3,315,000 Shares 3,900,000 Shares 4,485,000 Shares (15% Above
as of (Minimum (Midpoint (Maximum Maximum of
December 31, 2000 of Range) of Range of Range) Range) (1)
----------------- ---------------- ---------------- ----------------- ---------------
(In thousands)
Deposits(2).............................. $ 211,270 $ 211,270 $ 211,270 $ 211,270 $ 211,270
Borrowings............................... 398,463 398,463 398,463 398,463 398,463
--------- --------- --------- --------- ---------
Total deposits and borrowed funds........ 609,733 609,733 609,733 609,733 609,733
========= ========= ========= ========= =========
Stockholders' equity:
Common stock, $0.01 par value, 60,000,000
shares authorized; shares to be issued
as reflected(3)..................... - 166 195 224 258
Preferred stock, $.01 par value, 10,000,000
shares authorized; no shares to be issued - - - - -
Additional paid-in capital)(3)........ - 31,554 37,311 43,067 49,687
Retained earnings(4) ................. 52,898 52,238 52,238 52,238 52,238
Accumulated other comprehensive income (5) 204,650 188,078 188,078 188,078 188,078
Less:
Common stock acquired by ESOP(6)...... - (6,617) (7,784) (8,952) (10,295)
Common stock acquired by management
recognition plan(7) ................ - (3,308) (3,892) (4,476) (5,147)
--------- --------- --------- --------- ---------
Total stockholders' equity............... $ 257,548 $ 262,111 $ 266,145 $ 270,179 $ 274,818
========= ========= ========= ========= =========
_________________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering of up to 15% as a result
of regulatory considerations or changes in market or general financial
and economic conditions following the commencement of the offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of shares sold in the offering at a value of
$10.00 per share. No effect has been given to the issuance of
additional shares of common stock pursuant to Charter Financial's
proposed stock option plan intended to be adopted by Charter Financial
at the time of the reorganization.
(4) The retained earnings of CharterBank will be substantially restricted
after the offering. The pro forma retained earnings is reduced by
$100,000 cash and the historical cost of Freddie Mac stock retained by
First Charter, MHC ($560,000, which equals 400,000 shares) retained by
First Charter, MHC with a cost basis of $1.40 per share.
(5) Pro forma accumulated other comprehensive income excludes the net after
tax unrealized gain on the 400,000 shares of Freddie Mac stock retained
by First Charter, MHC, equal to $16.572 million.
(6) Assumes that 3.96% of the outstanding stock of Charter Financial will
be purchased by the employee stock ownership plan at an average cost of
$10 per share and that the funds used to acquire such shares will be
borrowed from Charter Financial. The common stock acquired by the
employee stock ownership plan is reflected as a reduction of
stockholders' equity.
(7) Assumes that, subsequent to the offering, an amount equal to 1.96% of
the outstanding shares of common stock of Charter Financial is
purchased by a management recognition plan through open market
purchases. The proposed management recognition plan is intended to be
adopted by Charter Financial at the time of the reorganization. The
common stock purchased by the management recognition plan is reflected
as a reduction of stockholders' equity.
27
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of the common
stock until the offering is completed. However, we estimate that net proceeds
will be between $31.7 million and $43.3 million, or $49.9 million if the
offering range is increased by 15%, based upon the following assumptions:
. we will sell all shares of common stock in the subscription
offering;
. we will pay Sandler O'Neill & Partners, L.P. fees and expenses
of approximately $525,000; and
. total expenses, excluding fees and expenses paid to Sandler
O'Neill & Partners, L.P. will be approximately $1.0 million.
We calculated the pro forma consolidated net income and stockholders'
equity of Charter Financial for the three months ended December 31, 2000 and the
year ended September 30, 2000, as if the common stock had been sold at the
beginning of the year and the net proceeds had been invested at 5.11% for both
periods. We chose this yield because it represents the yield on one-year U.S.
Government securities for the corresponding periods. In light of changes in
interest rates in recent periods, we believe this rate more accurately reflects
pro forma reinvestment rates than the arithmetic average method which assumes
reinvestment of the net proceeds at a rate equal to the average of yield on
interest earning assets and cost of deposits for these periods. We assumed a tax
rate of 38% for both periods. This results in an annualized after-tax yield of
3.17% for both periods. We assumed that $2.0 million of net proceeds would not
be invested as it will be expended for the proposed Auburn branch.
We calculated historical and pro forma per share amounts by dividing
historical and pro forma amounts of consolidated net income and stockholders'
equity by the indicated number of shares of common stock. We adjusted these
figures to give effect to the shares purchased by the employee stock ownership
plan. We computed per share amounts for each period as if the common stock was
outstanding at the beginning of the periods, but we did not adjust per share
historical or pro forma stockholders' equity to reflect the earnings on the
estimated net proceeds. As discussed under "How We Intend to Use the Proceeds
from the Offering," Charter Financial intends to infuse CharterBank with 50% of
the net proceeds from the offering, make a loan to the employee stock ownership
plan to fund the employee stock ownership plan's purchase of 3.992% of our
outstanding common stock, and retain all of the rest of the proceeds at the
holding company for capital needs that arise in the future.
The following tables give effect to the restricted stock program or
"management recognition plan," which we expect to adopt as part of the
reorganization and present to subscribers for approval on their stock order
forms. If the management recognition plan is approved by the subscribers, the
management recognition plan will acquire an amount of common stock equal to
1.996% of the outstanding shares of common stock of Charter Financial following
the reorganization, either through open market purchases or from authorized but
unissued shares of common stock. In preparing the following tables we assumed
that stockholder approval has been obtained and that the shares acquired by the
management recognition plan are purchased in the open market at $10.00 per
share.
28
An increase in the number of shares of common stock outstanding as a
result of an increase in the estimated pro forma market value of the common
stock would decrease both the percentage of outstanding shares owned by a
subscriber and the pro forma net income and stockholders' equity on a per share
basis while increasing pro forma net income and stockholders' equity on an
aggregate basis. A decrease in the number of shares of common stock outstanding
would increase both a subscriber's ownership interest and the pro forma net
income and stockholders' equity on a per share basis while decreasing pro forma
net income and stockholders' equity on an aggregate basis.
The following tables do not give effect to:
. the shares to be reserved for issuance under the stock option
plan, which requires the approval of subscribers on the stock
order form;
. withdrawals from deposit accounts to purchase common stock in
the reorganization;
. Charter Financial's results of operations after the
reorganization; or
. changes in the market price of the common stock after the
reorganization.
The following pro forma information may not represent the financial
effects of the reorganization at the date on which the reorganization actually
occurs and you should not use the table to indicate future results of
operations. Pro forma stockholders' equity represents the difference between the
stated amount of assets and liabilities of Charter Financial computed in
accordance with generally accepted accounting principles. We did not increase or
decrease stockholders' equity to reflect the difference between the carrying
value of loans and other assets and their market value. Pro forma stockholders'
equity is not intended to represent the fair market value of the common stock
and may be different than amounts that would be available for distribution to
stockholders if we liquidated.
29
At or for the Three Months Ended December 31, 2000
-------------------------------------------------------------------
Maximum
Minimum Midpoint Maximum As Adjusted
3,315,000 3,900,000 4,485,000 5,157,750
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share(1)
------------- --------------- ------------- ---------------
(Dollars in thousands, except per share amounts)
Gross proceeds................................. $ 33,150 $ 39,000 $ 44,850 $ 51,578
Less expenses.................................. 1,430 1,494 1,559 1,633
Estimated net proceeds......................... 31,720 37,506 43,291 49,945
Less: Common stock purchased by ESOP(2)(4).... (6,617) (7,784) (8,952) (10,295)
Less: Common stock purchased by MRP(3)........ (3,308) (3,892) (4,476) (5,147)
--------- --------- --------- ---------
Estimated net proceeds, as adjusted..... $ 21,795 $ 25,829 $ 29,863 $ 34,502
========= ========= ========= =========
For the 3 months ended December 31, 2000:
-----------------------------------------
Consolidated net income:
Historical................................. $ 1,199 $ 1,199 $ 1,199 $ 1,199
Adjustment for mutual holding company
formation............................... (72) (72) (72) (72)
Pro forma income on net proceeds........... 157 189 221 257
Pro forma ESOP adjustment(2)(4)............ (85) (101) (116) (133)
Pro forma MRP adjustment(3)................ (103) (121) (139) (160)
--------- --------- --------- ---------
Pro forma net income.................... $ 1,096 $ 1,094 $ 1,093 $ 1,091
========= ========= ========= =========
Per share net income (reflects SOP 93-6):
Historical................................. $ 0.08 $ 0.06 $ 0.06 $ 0.05
Adjustment for mutual holding company
formation............................... - - - -
Pro forma income on net proceeds........... 0.01 0.01 0.01 0.01
Pro forma ESOP adjustment(2)(4)............ (0.01) (0.01) (0.01) (0.01)
Pro forma MRP adjustment(3)................ (0.01) (0.01) (0.01) (0.01)
--------- --------- --------- ---------
Pro forma net income per share.......... $ 0.07 $ 0.05 $ 0.05 $ 0.04
========= ========= ========= =========
Offering price as a ratio of pro forma net
annualized income per share................ 35.71x 50.00x 50.00x 62.50x
At December 31, 2000
--------------------
Stockholders' equity:
Historical................................. $ 257,548 $ 257,548 $ 257,548 $ 257,548
Adjustment for mutual holding company
formation.................................. (17,232) (17,232) (17,232) (17,232)
Estimated net proceeds..................... 31,720 37,506 43,291 49,945
Less: Common Stock acquired by ESOP(2)(4).. (6,617) (7,784) (8,952) (10,295)
Less: Common Stock acquired by MRP(3)...... (3,308) (3,892) (4,476) (5,147)
--------- --------- --------- ---------
Pro forma stockholders' equity.......... $ 262,111 $ 266,145 $ 270,179 $ 274,818
========= ========= ========= =========
Stockholders' equity per share(5):
Historical................................. $ 15.54 $ 13.21 $ 11.48 $ 9.99
Adjustment for mutual holding company
formation............................... (1.04) (0.88) (0.77) (0.67)
Estimated net proceeds..................... 1.91 1.92 1.93 1.94
Less: Common Stock acquired by ESOP(2)(4).. (0.40) (0.40) (0.40) (0.40)
Less: Common stock acquired by MRP(3)...... (0.20) (0.20) (0.20) (0.20)
--------- --------- --------- ---------
Pro forma stockholders' equity per share $ 15.81 $ 13.65 $ 12.04 $ 10.66
========= ========= ========= =========
Offering price as a percentage of pro forma
stockholders' equity per share............. 63.25% 73.26% 83.06% 93.81%
========= ========= ========= =========
30
_________________________
(1) We reserve the right to issue up to a total of 5,157,750 shares at $10.00
per share, or 15% above the maximum of the offering range. Unless otherwise
required by the regulators, subscribers will not be given the right to
modify their subscriptions unless the aggregate purchase price of the
common stock is increased to exceed $51.6 million (15% above the maximum of
the offering range.)
(2) Assumes 8% of 49.9% of the outstanding shares of Charter Financial are
purchased by the employee stock ownership plan under all circumstances, and
that the funds used to purchase such shares are borrowed from Charter
Financial. The approximate amount expected to be borrowed by the ESOP is
reflected in this table as a reduction of capital. Although repayment of
such debt will be secured solely by the shares purchased by the employee
stock ownership plan, we expect to make discretionary contributions to the
employee stock ownership plan in an amount at least equal to the principal
and interest payments on the employee stock ownership plan debt.
CharterBank's total annual payment of the employee stock ownership plan
debt is based on 12 equal installments of principal. Pro forma net income
has been adjusted to give effect to such contributions, based upon a fully
amortizing debt with a twelve-year term. The provisions of SOP 93-6 have
been applied for shares to be acquired by the employee stock ownership plan
and for purposes of computing earnings per share.
(3) Assumes a number of issued and outstanding shares of common stock equal to
4% of 49.9% of the outstanding common stock of Charter Financial following
the reorganization will be purchased by the management recognition plan.
Before the management recognition plan is implemented, it must be approved
by the purchasers of a majority of the shares sold in the stock offering.
The dollar amount of the common stock possibly to be purchased by the
management recognition plan is based on $10.00 per share and represents
unearned compensation and is reflected as a reduction of capital. Such
amount does not reflect possible increases or decreases in the price per
share after the offering. As we accrue compensation expenses to reflect the
vesting of such shares over 5 years pursuant to the management recognition
plan, the charge against capital will be reduced accordingly. In the event
the shares issued under the management recognition plan consist of newly
issued shares of common stock at the price per share in the offering, the
per share financial condition and result of operations of Charter Financial
would be proportionately reduced and the interest of existing stockholders
would be diluted by approximately 1.96% . For purposes of the preceding
table, it was assumed that the number of unvested management recognition
plan shares at December 31, 2000 was 330,800, 389,200, 447,600 and 514,700
for the minimum, midpoint, maximum, and 15% above the maximum of the
offering range, respectively.
(4) CharterBank intends to record compensation expense related to the employee
stock ownership plan in accordance with SOP 93-6. As a result, to the
extent the value of the common stock appreciates over time, compensation
expense related to the employee stock ownership plan will increase. SOP 93-
6 also changes the earnings per share computations for leveraged employee
stock ownership plans to include as outstanding only shares that have been
committed to be released to participants. For purposes of the preceding
table, it was assumed that the number of employee stock ownership plan
shares that were committed to be released at December 31, 2000 was 13,785,
16,217, 18,650 and 21,448 for the minimum, midpoint, maximum and 15% above
the maximum of the offering range, respectively.
(5) Stockholders' equity per share data is based upon 16,575,000, 19,500,000,
22,425,000 and 25,788,750 shares outstanding representing shares sold in
the offering, shares purchased by the ESOP and management recognition plan
and shares issued to First Charter, MHC.
31
At or for the Year Ended September 30, 2000
-----------------------------------------------------------------------
Maximum as
Minimum Midpoint Maximum Adjusted
3,315,000 3,900,000 4,485,000 5,157,750
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share(1)
----------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Gross proceeds................................. $ 33,150 $ 39,000 $ 44,850 $ 51,578
Less expenses.................................. 1,430 1,494 1,559 1,633
Estimated net proceeds..................... 31,270 37,506 43,291 49,945
Less: Common stock purchased by ESOP(2)(4). (6,617) (7,784) (8,952) (10,295)
Less: Common stock purchased by MRP(3)..... (3,308) (3,892) (4,476) (5,147)
----------- ----------- ---------- -----------
$ 21,795 $ 25,829 $ 29,863 $ 34,502
=========== =========== ========== ===========
For the 12 months ended September 30, 2000
Consolidated net income
Historical................................. $ 872 $ 872 $ 872 $ 872
Adjustment for mutual holding company
formation.............................. (287) (287) (287) (287)
Pro forma income on net proceeds........... 627 755 883 1,030
Pro forma ESOP adjustment(2)(4)............ (342) (402) (463) (532)
Pro forma MRP adjustment(3)................ (410) (483) (555) (638)
----------- ----------- ---------- -----------
Pro forma net income.................... $ 460 $ 455 $ 450 $ 445
=========== =========== ========== ===========
Per share net income (reflects SOP 93-6)
Historical................................. $ 0.05 $ 0.05 $ 0.04 $ 0.04
Adjustment for mutual holding company
formation.............................. (0.02) (0.02) (0.01) (0.01)
Pro forma income on net proceeds........... 0.04 0.04 0.04 0.04
Pro forma ESOP adjustment(2)(4)............ (0.02) (0.02) (0.02) (0.02)
Pro forma MRP adjustment(3)................ (0.03) (0.03) (0.03) (0.03)
----------- ----------- ---------- -----------
Pro forma net income per share.......... $ 0.02 $ 0.02 $ 0.02 $ 0.02
=========== =========== ========== ===========
Offering price as a percentage of pro forma net
earnings per share......................... N/A N/A N/A N/A
At September 30, 2000
---------------------
Stockholders' equity:
Historical................................. $ 204,527 $ 204,527 $ 204,527 $ 204,527
Adjustment for mutual holding company
formation............................... (13,594) (13,594) (13,594) (13,594)
Estimated net proceeds..................... 31,720 37,506 43,291 49,945
Less: Common Stock acquired by ESOP(2)(4).. (6,617) (7,784) (8,952) (10,295)
Less: Common Stock acquired by MRP(3)..... (3,308) (3,892) (4,476) (5,147)
----------- ----------- ---------- -----------
Pro forma stockholders' equity.......... $ 212,728 $ 216,762 $ 220,796 $ 225,435
=========== =========== ========== ===========
Stockholders' equity per share:(5)
Historical................................. $ 12.34 $ 10.49 $ 9.12 $ 7.93
Adjustment for mutual holding company
formation.............................. (0.82) (0.70) (0.61) (0.53)
Estimated net proceeds..................... 1.91 1.92 1.93 1.94
Less: Common Stock acquired by ESOP(2)(4).. (0.40) (0.40) (0.40) (0.40)
Less: Common Stock acquired by MRP(3)..... (0.20) (0.20) (0.20) (0.20)
----------- ----------- ---------- -----------
Pro forma stockholders' equity per share $ 12.83 $ 11.11 $ 9.84 $ 8.74
=========== =========== ========== ===========
Offering price as a percentage of pro forma
stockholders' equity per share............. 77.94% 90.01% 101.63% 114.42%
=========== =========== ========== ===========
32
_______________________
(1) We reserve the right to issue up to a total of 5,157,750 shares at $10.00
per share, or 15% above the maximum of the Independent Valuation. Unless
otherwise required by the regulators, subscribers will not be given the
right to modify their subscriptions unless the aggregate purchase price of
the common stock is increased to exceed $51.6 million (15% above the
maximum of the Independent Valuation.)
(2) Assumes 8% of 49.9% of the outstanding shares of Charter Financial are
purchased by the employee stock ownership plan under all circumstances, and
that the funds used to purchase such shares are borrowed from Charter
Financial. The approximate amount expected to be borrowed by the ESOP is
reflected in this table as a reduction of capital. Although repayment of
such debt will be secured solely by the shares purchased by the employee
stock ownership plan, we expect to make discretionary contributions to the
employee stock ownership plan in an amount at least equal to the principal
and interest payments on the employee stock ownership plan debt.
CharterBank's total annual payment of the employee stock ownership plan
debt is based on 12 equal installments of principal. Pro forma net income
has been adjusted to give effect to such contributions, based upon a fully
amortizing debt with a twelve-year term. The provisions of SOP 93-6 have
been applied for shares to be acquired by the employee stock ownership plan
and for purposes of computing earnings per share.
(3) Assumes a number of issued and outstanding shares of common stock equal to
4% of 49.9% of the outstanding common stock of Charter Financial following
the reorganization will be purchased by the management recognition plan.
Before the management recognition plan is implemented, it must be approved
by the purchasers of a majority of the shares sold in the stock offering.
The dollar amount of the common stock possibly to be purchased by the
management recognition plan is based on $10.00 per share and represents
unearned compensation and is reflected as a reduction of capital. Such
amount does not reflect possible increases or decreases in the price per
share after the offering. As we accrue compensation expenses to reflect the
vesting of such shares over 5 years pursuant to the management recognition
plan, the charge against capital will be reduced accordingly. In the event
the shares issued under the management recognition plan consist of newly
issued shares of common stock at the price per share in the offering, the
per share financial condition and result of operations of Charter Financial
would be proportionately reduced and the interest of existing stockholders
would be diluted by approximately 1.96%. For purposes of the preceding
table, it was assumed that the number of unvested management recognition
plan shares at September 30, 2000 was 330,800, 389,200, 447,600 and 514,700
for the minimum, midpoint, maximum and 15% above the maximum of the
offering range, respectively.
(4) CharterBank intends to record compensation expense related to the employee
stock ownership plan in accordance with SOP 93-6. As a result, to the
extent the value of the common stock appreciates over time, compensation
expense related to the employee stock ownership plan will increase. SOP 93-
6 also changes the earnings per share computations for leveraged employee
stock ownership plans to include as outstanding only shares that have been
committed to be released to participants. For purposes of the preceding
table, it was assumed that the number of employee stock ownership plan
shares that were committed to be released at September 30, 2000 was 55,140,
64,870, 74,601 and 85,791 for the minimum, midpoint, maximum and 15% above
the maximum of the offering range, respectively.
(5) Stockholders' equity per share data is based upon 16,575,000, 19,500,000,
22,425,000 and 25,788,750 shares outstanding representing shares sold in
the offering, shares purchased by the ESOP and management recognition plan
and shares issued to First Charter, MHC.
33
CHARTERBANK
CONSOLIDATED STATEMENTS OF OPERATIONS
The Consolidated Statements of Operations of CharterBank for the years
ended September 30, 2000, 1999 and 1998 have been audited by KPMG LLP,
independent certified public accountants, and are included in this prospectus,
along with their Auditors' Report on page F-44. The following consolidated
statements of operations have been derived from the audited consolidated
statements of operations and should be read in conjunction with the Consolidated
Financial Statements and accompanying Notes to Consolidated Financial Statements
in this prospectus and "Management's Discussion and Analysis of the Financial
Condition and Results of Operations" beginning on page [_] of this prospectus.
The consolidated statements of operations for the three month periods ended
December 31, 2000 and 1999 are unaudited, but in the opinion of management,
reflect all adjustments consisting of normal recurring adjustments that are
necessary for a fair presentation of the results for such periods and are in
accordance with generally accepted accounting principles. The results for the
three month period ended December 31, 2000 are not necessarily indicative of the
results of CharterBank for the entire year or any other period.
34
For the Three Months For the Years Ended
Ended December 31, September 30,
--------------------------- -----------------------------------------
2000 1999 2000 1999 1998
----------- ----------- ----------- ----------- ----------
(unaudited) (In thousands)
Interest and dividend income excluding
Freddie Mac common stock:
Interest-bearing deposits in other
financial institutions.............. $ 47 $ 34 $ 159 $ 148 $ 103
FHLB and other equity investment
securities.......................... 245 222 971 736 672
Mortgage-backed securities and
collateralized mortgage
obligations available for sale...... 6,464 6,663 27,477 16,592 12,163
Other investment securities available
for sale............................ 245 418 1,194 1,524 480
Loans ................................. 5,692 4,673 21,076 15,015 13,153
---------- ----------- ----------- ---------- -----------
Total interest and dividend income.. 12,693 12,010 50,877 34,015 26,571
---------- ----------- ----------- ---------- -----------
Interest expense:
NOW accounts........................... 71 69 282 128 123
Savings accounts....................... 40 127 275 292 168
Money market deposit accounts.......... 156 99 483 321 277
Certificate of deposit accounts........ 3,168 3,109 12,892 9,682 5,410
---------- ----------- ----------- ---------- -----------
Interest on deposits................... 3,435 3,404 13,932 10,423 5,978
Interest on borrowed funds............. 6,106 4,671 22,715 12,918 13,431
---------- ----------- ----------- ---------- -----------
Total interest expense.............. 9,541 8,075 36,647 23,341 19,409
---------- ----------- ----------- ---------- -----------
Net interest income................. 3,152 3,935 14,230 10,674 7,162
Dividend income from
Freddie Mac common stock............... 859 758 3,336 2,954 2,604
Net interest income including
dividend income from
Freddie Mac common stock......... 4,011 4,693 17,566 13,628 9,766
---------- ----------- ----------- ---------- -----------
Provision for loan losses................. 150 90 1,410 240 180
---------- ----------- ----------- ---------- -----------
Net interest income after
provision for loan losses........ 3,861 4,603 16,156 13,388 9,586
---------- ----------- ----------- ---------- -----------
Other income:
Service charges on deposit accounts.... 186 189 701 377 327
Net gain (loss) on sale of investment
securities.......................... (8) (104) (128) 36,261 766
Gain on sale of loans and servicing
released loan fees.................. 211 162 730 1,133 1,030
Loan servicing fees.................... 101 107 411 291 228
Equity in earnings (loss) of limited
partnerships........................ - - (28) 448 (5,797)
Other.................................. 12 44 263 239 139
---------- ----------- ----------- ---------- -----------
Total noninterest income (loss)..... 502 398 1,949 38,749 (3,307)
---------- ----------- ----------- ---------- -----------
Other expenses:
Salaries and employee benefits......... 1,574 1,209 4,956 4,193 3,499
Occupancy and equipment expenses....... 505 585 2,361 1,632 1,315
Marketing.............................. 87 108 376 315 248
Legal and professional................. 183 427 1,455 753 373
Amortization and impairment of
intangible assets................... - 242 4,533 67 -
Other.................................. 446 613 2,262 3,789 1,187
---------- ----------- ----------- ---------- -----------
Total............................... 2,795 3,184 15,943 10,749 6,622
---------- ----------- ----------- ---------- -----------
Income (loss) before provision
for income taxes....................... 1,568 1,817 2,162 41,388 (343)
Income tax expense (benefit).............. 369 495 1,290 14,359 (818)
---------- ----------- ----------- ---------- -----------
Net income................................ $ 1,199 $ 1,322 $ 872 $ 27,029 $ 475
========== =========== =========== ========== ===========
Other comprehensive income (loss)......... $ 51,822 $ (15,080) $ 5,165 $ (23,731) $ 51,604
========== =========== =========== ========== ===========
Comprehensive income (loss)............... $ 53,021 $ (13,758) $ 6,037 $ 3,298 $ 52,079
========== =========== =========== ========== ===========
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
This discussion and analysis reflects CharterBank's financial statements and
other relevant statistical data and is intended to enhance your understanding of
our financial condition and results of operations. You should read the
information in this section in conjunction with CharterBank's Financial
Statements and accompanying Notes to Financial Statements beginning on page F-1
of this prospectus, and the other statistical data provided in this prospectus.
Unless otherwise indicated, the financial information presented in this section
reflects the financial condition and operations of CharterBank.
--------------------------------------------------------------------------------
General
CharterBank's results of operations depend primarily on earnings on
investments and net interest income. Net interest income is the difference
between the interest income we earn on our interest-earning assets and the
interest we pay on interest-bearing liabilities. Our interest-earning assets
consist primarily of residential mortgage loans, commercial mortgage loans,
consumer loans, mortgage-backed securities and investment securities, such as
our Freddie Mac stock investment. Interest-bearing liabilities consist primarily
of retail and wholesale deposits, repurchase agreements and borrowings from the
Federal Home Loan Bank of Atlanta. Our balance sheet also contains non-interest
bearing liabilities of approximately $131.7 million of deferred taxes on the
unrealized gain on our Freddie Mac stock. Our results of operations also depend
on our provision for loan losses, non-interest income and our non-interest
expense. Non- interest expense includes salaries and employee benefits,
occupancy expenses and other general and administrative expenses. Non-interest
income includes service fees and charges.
Our results of operations may also be affected significantly by economic
and competitive conditions in our market area and elsewhere, including those
conditions that influence market interest rates, government policies and the
actions of regulatory authorities. Future changes in applicable laws,
regulations or government policies may materially impact us. Furthermore,
because our lending activity is concentrated in loans secured by real estate
located in Georgia and Alabama, downturns in the regional economy encompassing
these states could have a negative impact on our earnings.
Management Strategy
In recent years, we have adopted a growth-oriented strategy that has
focused on expanding our retail banking operations, using our strong capital
position to increase net income by funding the purchase of mortgage related
securities with borrowings, and continuing to hold our Freddie Mac stock
investment.
Our retail banking strategy is to operate as a well-capitalized community
bank dedicated to providing quality services at competitive prices. We have
sought to implement this strategy by maintaining our core product offerings,
including residential and commercial mortgage loans and a variety of checking
and savings deposit products, while at the same time broadening our
36
product lines and services, expanding delivery systems for our customers and
extending our branch network. More specifically, we seek to:
. continue to focus on expanding our residential lending and retail
banking franchise, and increasing the number of households served
within our market area;
. expand our commercial loan and deposit banking products and
services for businesses, as a means to increase the yield on our
loan portfolio, to attract lower cost deposit accounts and
increase non-interest income;
. increase convenience to customers as a means to compete for an
increased share of our customers' financial service business; and
. increase the use of our existing alternative delivery channels,
such as ATMs and telephone banking, and implement new alternative
delivery channels, such as Internet banking.
In addition, we offer competitive interest rates to attract new
deposits and attempt to cross sell additional services to our customers as a way
of expanding these relationships. We train our employees not only in the
technical aspects of their jobs, but also in how to provide outstanding quality
service to customers. We also continue our dedication to our community through
continual support of, and donations to, the Charter Foundation. We believe that
this growth- oriented strategy is best for our long term success and viability,
and complements our existing commitment to high quality customer service.
CharterBank's GAAP capital position has allowed us to engage in a
second strategy of maximizing net interest income through investment in mortgage
related securities funded with advances from the Federal Home Loan Bank and
repurchase agreements. The margins involved in this type of wholesale investment
strategy are narrower than those of a traditional retail bank due to lower
yields on mortgage securities than other retail investments and the higher cost
of borrowed funds than traditional retail deposits. While this wholesale
strategy has helped to increase net interest income, it also has a negative
effect on our interest rate spread and net interest margin. We have recently
embarked on a strategy of investing more of the borrowed funds in higher-
yielding commercial real estate loans in order to improve our interest rate
spread and net interest margin thereby increasing the profitability of our core
banking operations.
Our third strategy is to hold our large position of Freddie Mac common
stock. This strategy has worked well for us with the total return on Freddie Mac
stock averaging better than 20% for the past ten years.
Following the reorganization, we intend to utilize proceeds from the
offering to further the objectives of our growth-oriented strategy. We may also
use the offering proceeds to acquire branches from other banks or to make other
acquisitions, although we have no current plans to do so. See "How We Intend to
Use the Proceeds from the Offering."
37
Management of Interest Rate Risk
As a financial institution, we face risk from interest rate volatility.
Fluctuations in interest rates impact both our level of income and expense on a
large portion of our assets and liabilities. Fluctuations in interest rates also
affect the market value of all interest-earning assets.
The primary goal of our interest rate management strategy is to limit
fluctuations in net interest income as interest rates vary up or down. We seek
to coordinate asset and liability decisions so that, under changing interest
rate scenarios, portfolio equity will remain within an acceptable range.
Our lending activities have emphasized one- to four-family and
commercial mortgage loans. Our sources of funds includes retail deposits,
consisting primarily of certificates of deposit, which have shorter terms to
maturity than the loan portfolio, and transaction accounts, Federal Home Loan
Bank advances, repurchase agreements and wholesale deposits. Recently, we have
employed several strategies to manage the interest rate risk inherent in the
asset/liability mix, including but not limited to:
. Selling a majority of the 30 and 15 year fixed-rate mortgages we
originate to the secondary market, generally on a servicing
released basis;
. Maintaining the diversity of our existing loan portfolio through
the origination of commercial real estate and consumer loans which
typically have variable rates and shorter terms than residential
mortgages; and
. Emphasizing investments with adjustable interest rates.
The actual amount of time before loans are repaid can be significantly
impacted by changes in market interest rates. Prepayment rates also vary due to
a number of other factors, including the regional economy in the area where the
loans were originated, seasonal factors, demographic variables, the assumability
of the loans, related refinancing opportunities and competition. We monitor
interest rate sensitivity so that we can attempt to adjust our asset and
liability mix in a timely manner and thereby minimize the negative effects of
changing rates.
We believe that our high level of capital historically has allowed us
to support a high level of interest rate risk to enhance long term income at the
cost of increased volatility in the income stream. Our reliance on borrowings
rather than deposits presents an interest rate challenge for us. As part of our
efforts to address our interest rate risk, subsequent to December 31, 2000,
CharterBank extended its interest rate reset on $102.0 million of Federal Home
Loan Bank borrowings from one month to seven or more years.
Net Interest Income Simulation. We use a simulation model to monitor
interest rate risk. This model reports the net interest income at risk primarily
under two different interest rate environments. Specifically, an analysis is
performed of changes in net interest income assuming changes in interest rates,
both up and down 100, 200 and 300 basis points from current rates over the one
year time period following the current financial statement.
38
The table below sets forth, as of January 31, 2001, the estimated
changes in net interest income that would result from a 300 basis point change
in interest rates over the applicable twelve-month period.
Change Net Portfolio Value Post Shock
In Rates $ Amount $ Change % Change Capital Ratio
---------------- ------------- ------------ ----------- --------------
(Dollars in thousands)
+300 bp $ 180,266 $ (52,146) (22.44)% 20.72%
+200 bp 198,050 (34,362) (14.78)% 22.16%
+100 bp 216,191 (16,221) (6.98)% 23.55%
0 bp 232,412 - - % 24.69%
-100 bp 242,881 (10,469) 4.50% 25.27%
-200 bp 235,571 3,159 1.36% 24.41%
-300 bp 227,865 (4,547) (1.96)% 23.50%
The net portfolio value is the capital, the excess of assets over
liabilities, after all assets and liabilities are marked to market. The net
portfolio value decreases as interest rates increase because our fixed rate
assets with long maturities decline in value while our liabilities generally
have adjustable rates and therefore do not increase in value with the combined
result of a reduction of net portfolio value. At December 31, 2000, fixed rate
investment and mortgage securities comprised of $227.7 million or 61.2% of our
total portfolio of investment and mortgage securities of $371.8 million. We do
not have a parallel gain in portfolio value when rates go down 200 or 300 basis
points because most of our fixed rate assets, whether in loan or security form,
have a borrower option to prepay and so the assets do not gain value with the
reduced rates. The disparate results on net portfolio value of interest rate
increases versus interest rate decreases is sometimes referred to as negative
convexity. The post shock capital ratio is the post shock net portfolio value as
a percent of total assets.
The effects of interest rates on net portfolio value and net interest
income are not predictable. Nevertheless, CharterBank's management does not
expect current interest rates to have a material adverse effect on CharterBank's
net portfolio value or net interest income in the near future. Computations of
prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, prepayments,
and deposit run-offs, and should not be relied upon as indicative of actual
results. Certain shortcomings are inherent in these computations. Although some
assets and liabilities may have similar maturity or periods of repricing, they
may react at different times and in different degrees to changes in the market
interest rates. Rates on other types of assets and liabilities may lag behind
changes in market interest rates. Assets, such as adjustable rate mortgages,
generally have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. After a change in interest rates,
prepayments and early withdrawal levels could deviate significantly from those
assumed in making calculations set forth above. Additionally, an increased
credit risk may result if our borrowers are unable to meet their repayment
obligations as interest rates increase.
Average Balance Sheet and Analysis of Net Interest Income. The following
tables depict the significant effect of the Freddie Mac stock on our traditional
bank ratios, such as net interest income, net interest rate spread, and net
interest margin. The tables show these measures
39
with and without the effects of the Freddie Mac stock, which had a dividend
return on cost basis of approximately 50% at December 31, 2000. However, the
appreciation on the market value of the Freddie Mac stock results in only 0.99%
dividend return on market value. The appreciation in the market value of the
Freddie Mac stock has been the cause of our strong comprehensive income.
Overall, ratios have weakened for the three months ended December 31, 2000,
as compared to the three months ended December 31, 1999, due to the effects of
the rising interest rate environment during this time period on our wholesale
investment strategy. We hold a significant amount of short-term, variable rate
borrowings whose costs increased 96 basis points during this time period, while
long-term fixed rate mortgage securities only had a 6 basis point increase in
yield.
In the table below, we derived the yields and costs by dividing income or
expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods shown. We derived average balances
from actual daily balances over the periods indicated. Interest income includes
fees we earned from making changes in loan rates or terms, and fees we earned
when commercial real estate loans were prepaid or refinanced.
40
At December 31 For the Three Months Ended December 31,
------------------------------------------
2000, 2000
---------------------- ------------------------------------------
Average
Actual Yield/ Average Yield/
Balance Cost Balance Interest Cost
---------- -------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Interest-bearing deposits in other
financial institutions........................ $ 4,291 6.57% $ 4,094 $ 47 4.59%
FHLB common stock and other equity.............. 12,700 7.75 12,625 245 7.76
Mortgage-backed securities and collateralized
mortgage obligations available for sale...... 356,967 7.00 358,311 6,464 7.22
Other investment securities available for sale.. 14,833 6.37 14,122 245 6.94
Loans receivable................................ 255,180 9.15 253,511 5,692 8.98
---------- -------- -------
Total interest earning assets excluding
Freddie Mac common stock.................... 643,971 7.85 642,663 12,693 7.90
Freddie Mac common stock........................ 348,163 0.99 295,672 859 1.16
---------- -------- -------
Total interest earning assets including
Freddie Mac common stock..................... 992,134 5.18 939,263 13,552 5.77
Total non-interest earning assets............. 18,343 - 17,163 - -
---------- -------- -------
Total assets.................................. $1,010,477 5.18 $955,498 $13,552 5.67
========== ======== =======
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts.................................... 14,558 1.75 14,537 71 1.95
Savings accounts................................ 7,968 2.00 8,161 40 1.96
Money market deposit accounts................... 11,338 3.20 11,355 156 5.50
Certificates of deposit accounts................ 168,777 5.52 202,885 3,168 6.25
---------- -------- -------
Total interest-bearing deposits............... 202,641 4.98 236,938 3,435 5.80
Borrowed funds.................................. 398,463 6.51 368,224 6,106 6.63
---------- -------- -------
Total interest-bearing liabilities............ 601,104 5.99 605,162 9,541 6.31
Noninterest-bearing deposits.................... 8,629 - 8,390 - -
Other noninterest-bearing liabilities........... 143,196 - 120,538 - -
---------- -------- -------
Total noninterest-bearing liabilities......... 151,825 - 128,928 - -
---------- -------- -------
Total liabilities............................. 752,929 4.78 734,091 9,541 5.19
Total equity.................................. 257,548 221,407 -
---------- -------- -------
Total liabilities and equity.................. $1,010,477 3.57% $955,498 $ 9,541 3.99%
========== ======== =======
Net interest income............................. - $ 3,152
=======
Net interest rate spread(1)..................... 1.59%
Net interest margin(2).......................... 1.96%
Ratio of interest-earning assets to average
interest-bearing liabilities.................. 1.06x
Net interest income including
Freddie Mac common stock...................... $ 4,011
=======
Net interest rate spread including
Freddie Mac common stock...................... (0.53)%
Net interest rate margin including
Freddie Mac common stock...................... 1.71%
Ratio of interest-earning assets to average
interest-bearing liabilities, including
Freddie mac common stock...................... 1.55x
------------------------------------------
1999
------------------------------------------
Average
Average Yield/
Balance Interest Cost
---------- ---------- --------
Assets:
Interest-earning assets:
Interest-bearing deposits in other
financial institutions........................ $ 2,425 $ 34 5.61%
FHLB common stock and other equity.............. 11,406 222 7.79
Mortgage-backed securities and collateralized
mortgage obligations available for sale...... 372,083 6,663 7.16
Other investment securities available for sale.. 27,708 418 6.03
Loans receivable................................ 213,690 4,673 8.75
-------- -------
Total interest earning assets excluding
Freddie Mac common stock.................... 627,312 12,010 7.66
Freddie Mac common stock........................ 261,555 758 1.16
-------- -------
Total interest earning assets including
Freddie Mac common stock..................... 891,514 12,768 5.73
Total non-interest earning assets............. 28,517 - -
-------- -------
Total assets.................................. $917,384 $12,768 5.57
======== =======
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts.................................... 13,734 69 2.01
Savings accounts................................ 8,680 127 5.85
Money market deposit accounts................... 9,522 99 4.16
Certificates of deposit accounts................ 240,198 3,109 5.18
-------- -------
Total interest-bearing deposits............... 272,134 3,404 5.00
Borrowed funds.................................. 331,291 4,671 5.64
-------- -------
Total interest-bearing liabilities............ 603,425 8,075 5.35
Noninterest-bearing deposits.................... 8,049 - -
Other noninterest-bearing liabilities........... 106,838 - -
-------- -------
Total noninterest-bearing liabilities......... 114,887 - -
-------- -------
Total liabilities............................. 718,313 8,075 4.50
Total equity.................................. 199,071 -
-------- -------
Total liabilities and equity.................. $917,384 $ 8,075 3.52%
======== =======
Net interest income............................. $ 3,935
=======
Net interest rate spread(1)..................... 2.31%
Net interest margin(2).......................... 2.51%
Ratio of interest-earning assets to average
interest-bearing liabilities.................. 1.04x
Net interest income including
Freddie Mac common stock...................... $ 4,693
=======
Net interest rate spread including
Freddie Mac common stock...................... 0.39%
Net interest rate margin including
Freddie Mac common stock...................... 2.11%
Ratio of interest-earning assets to average
interest-bearing liabilities, including
Freddie mac common stock...................... 1.47x
(footnotes on following page)
41
For the Years Ended September 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------- ----------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------ ----------- ---------- ------------- ------------ ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Interest-bearing deposits in other
financial institutions........................ $ 2,625 $ 159 6.06% $ 3,053 $ 148 4.85%
FHLB common stock and other equity.............. 12,660 971 7.67 10,059 736 7.32
Mortgage-backed securities and collateralized
mortgage obligations available for sale...... 381,924 27,477 7.19 261,272 16,592 6.35
Other investment securities available for sale.. 18,152 1,194 6.58 26,218 1,524 5.81
Loans receivable................................ 237,429 21,076 8.88 176,020 15,015 8.53
------------ ---------- ------------- ------------
Total interest earning assets excluding
Freddie Mac common stock...................... 652,790 50,877 7.79 476,622 34,015 7.14
Freddie Mac common stock........................ 232,471 3,336 1.44 306,379 2,954 0.96
------------ ---------- ------------- ------------
Total interest earning assets including
Freddie Mac common stock...................... 885,261 54,213 6.12 783,001 36,969 4.72
Total non-interest earning assets............. 25,728 - - 15,434 - -
------------ ---------- ------------- ------------
Total assets.................................. $ 910,989 $ 54,213 5.95 $ 798,435 $ 36,969 4.63
============ ========== ============= ============
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts.................................... 13,717 282 2.06 6,601 128 1.94
Savings accounts................................ 8,585 275 3.20 6,503 292 4.49
Money market deposit accounts................... 10,063 483 4.80 8,189 321 3.92
Certificates of deposit accounts................ 230,482 12,892 5.59 177,416 9,682 5.46
------------ ---------- ------------- ------------
Total interest-bearing deposits............... 262,847 13,932 5.30 198,709 10,423 5.25
Borrowed funds.................................. 365,745 22,715 6.21 247,914 12,918 5.21
------------ ---------- ------------- ------------
Total interest-bearing liabilities............ 628,592 36,647 5.83 446,623 23,341 5.23
Noninterest-bearing deposits.................... 8,472 - - 3,411 - -
Other noninterest-bearing liabilities........... 93,187 - - 122,751 - -
------------ ---------- ------------- ------------
Total noninterest-bearing liabilities......... 101,659 - - 126,162 - -
------------ ---------- ------------- ------------
Total liabilities............................. 730,251 36,647 5.02 572,785 23,341 4.08
Total equity.................................. 180,738 - 225,650 -
------------ ---------- ------------- ------------
Total liabilities and equity.................. $ 910,989 $ 36,647 4.02% $ 798,435 $ 23,341 2.92%
============ ========== ============= ============
Net interest income............................. $ 14,230 $ 10,674
========== ============
Net interest rate spread(1)..................... 1.96% 1.91%
Net interest margin(2).......................... 2.18% 2.24%
Ratio of interest-earning assets to average
interest-bearing liabilities.................. 1.04x 1.07x
Net interest income including
Freddie Mac common stock...................... $ 17,566 $ 13,628
========== ============
Net interest rate spread including
Freddie Mac common stock...................... 0.29% (0.50)%
Net interest rate margin including
Freddie Mac common stock...................... 1.98% 1.74%
Ratio of interest-earning assets to average
interest-bearing liabilities, including
Freddie mac common stock...................... 1.41x 1.75x
1998
------------------------------------------
Average
Average Yield/
Balance Interest Cost
------------- ----------- -----------
Assets:
Interest-earning assets:
Interest-bearing deposits in other
financial institutions........................ $ 1,710 $ 103 6.02%
FHLB common stock and other equity.............. 9,348 672 7.19
Mortgage-backed securities and collateralized
mortgage obligations available for sale...... 187,883 12,163 6.47
Other investment securities available for sale.. 7,244 480 6.63
Loans receivable................................ 150,452 13,153 8.74
------------- -----------
Total interest earning assets excluding
Freddie Mac common stock...................... 356,637 26,571 7.45
Freddie Mac common stock........................ 246,136 2,604 1.06
------------- -----------
Total interest earning assets including
Freddie Mac common stock..................... 602,773 29,175 4.84
Total non-interest earning assets............. 17,972 - -
------------- -----------
Total assets.................................. $ 620,745 $ 29,175 4.70
============= ===========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts.................................... 5,104 123 2.41
Savings accounts................................ 6,357 168 2.64
Money market deposit accounts................... 6,538 277 4.24
Certificates of deposit accounts................ 94,416 5,410 5.73
------------- -----------
Total interest-bearing deposits............... 112,415 5,978 5.32
Borrowed funds.................................. 235,542 13,431 5.70
------------- -----------
Total interest-bearing liabilities............ 347,957 19,409 5.58
Noninterest-bearing deposits.................... 2,496 - -
Other noninterest-bearing liabilities........... 95,815 - -
------------- -----------
Total noninterest-bearing liabilities......... 98,311 - -
------------- -----------
Total liabilities............................. 446,268 19,409 4.35
Total equity.................................. 174,477 -
------------- -----------
Total liabilities and equity.................. 620,745 $ 19,409 3.13%
============= ===========
Net interest income............................. $ 7,162
===========
Net interest rate spread(1)..................... 1.87%
Net interest margin(2).......................... 2.01%
Ratio of interest-earning assets to average
interest-bearing liabilities.................. 1.03x
Net interest income including
Freddie Mac common stock...................... $ 9,766
===========
Net interest rate spread including
Freddie Mac common stock...................... (0.74)%
Net interest rate margin including
Freddie Mac common stock...................... 1.62%
Ratio of interest-earning assets to average
interest-bearing liabilities, including
Freddie mac common stock...................... 1.73x
_______________
(1) Net interest rate spread represents the difference between the weighted
average yield on interest earning assets and the weighted average cost
of interest bearing liabilities.
(2) Net interest margin represents net interest income as a percentage of
average interest earning assets.
Rate/Volume Analysis. The following table shows how changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to:
(1) interest income changes attributable to changes in volume
(changes in volume multiplied by prior rate);
(2) interest income changes attributable to changes in rate (changes
in rate multiplied by prior volume); and
(3) the net change.
43
Three Months Ended December 31, 2000 Year Ended September 30, 2000
Compared to Three Months Ended Compared to Year Ended
December 31, 1999 September 30, 1999
Increase/(Decrease) Increase/(Decrease)
-------------------------------------- ---------------------------------------
Due to Due to
---------------------------- ------------------------------
Volume Rate Combined Net Volume Rate Combined Net
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
Interest earning assets:
Interest-bearing deposits
in other financial institutions............. $ 19 $ (10) $ 4 $ 13 $ (26) $ 32 $ 5 $ 11
FHLB common stock and other
equity securities........................... 24 (1) - 23 199 45 (9) 235
Mortgage-backed securities
and collateralized mortgage
obligations available for sale.............. (248) 48 2 (199) 8,680 3,223 (1,018) 10,885
Other investment securities
available for sale.......................... (236) 32 31 (173) (531) 139 62 (330)
Loans Receivable.............................. 894 148 (23) 1,019 5,451 823 (213) 6,061
-------- -------- -------- -------- -------- -------- -------- --------
Total interest earning assets............... 453 217 14 683 13,774 4,261 (1,173) 16,862
Freddie Mac common stock...................... 99 2 - 101 (1,061) 1,095 348 382
-------- -------- -------- -------- -------- -------- -------- --------
Total Interest-earning assets
including Freddie Mac
common stock............................. $ 510 $ 267 $ 7 $ 784 $ 12,714 $ 5,356 $ (825) $ 17,244
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
NOW accounts.................................. $ 4 $ (2) $ - $ 2 $ 146 $ 16 $ (8) $ 154
Savings accounts.............................. (3) (79) (5) (87) 67 (110) 27 (17)
Money market deposit accounts................. 25 38 (6) 57 90 89 (16) 162
Certificates of deposit....................... (583) 542 100 59 2,968 314 (72) 3,210
-------- -------- -------- -------- -------- -------- -------- --------
Total Interest-bearing deposits............. (556) 498 89 31 3,271 308 (70) 3,509
Borrowed funds.................................. 612 914 (92) 1,435 7,318 3,657 (1,178) 9,797
-------- -------- -------- -------- -------- -------- -------- --------
Total interest bearing liabilities......... $ 56 $ 1,413 $ (3) $ 1,466 $ 10,589 $ 3,965 $ (1,249) $ 13,306
-------- -------- -------- -------- -------- -------- -------- --------
Change in net interest income
including Freddie Mac
common stock........................... $ (62) $ (761) $ 140 $ (682) $ (234) $ 2,050 $ 2,123 $ 3,938
======== ======== ======== ======== ======== ======== ======== ========
Year Ended September 30, 1999
Compared to Year Ended
September 30, 1998
Increase/(Decrease)
-------------------------------------
Due to
----------------------------
Volume Rate Combined Net
-------- -------- -------- --------
Interest earning assets:
Interest-bearing deposits
in other financial institutions............. $ 65 $ (36) $ 16 $ 45
FHLB common stock and other
equity securities........................... 52 13 (1) 64
Mortgage-backed securities
and collateralized mortgage obligations
available for sale.......................... 4,661 (322) 90 4,429
Other investment securities
available for sale.......................... 1,103 (213) 154 1,044
Loans Receivable.............................. 2,181 (373) 54 1,862
-------- -------- -------- --------
Total interest earning assets............... 8,062 (931) 314 7,444
Freddie Mac common stock...................... 581 (287) 56 350
-------- -------- -------- --------
Total Interest-earning assets
including Freddie Mac
common stock............................. $ 8,642 $ (1,219) $ 370 $ 7,794
-------- -------- -------- --------
Interest-bearing liabilities:
NOW accounts.................................. $ 29 $ (31) $ 7 $ 5
Savings accounts.............................. 7 120 (3) 124
Money market deposit accounts................. 65 (26) 5 44
Certificates of deposit....................... 4,530 (484) 226 4,272
-------- -------- -------- --------
Total Interest-bearing deposits............. 4,630 (421) 236 4,445
Borrowed funds.................................. 645 (1,218) 61 (513)
-------- -------- -------- --------
Total interest bearing liabilities.......... $ 5,274 $ (1,639) $ 297 $ 3,932
-------- -------- -------- --------
Change in net interest income
including Freddie Mac
common stock........................... $ (412) $ 784 $ 3,489 $ 3,862
======== ======== ======== ========
44
Comparison of Financial Condition at December 31, 2000 and September 30, 2000
Our consolidated total assets increased $67.8 million, or 7.2%, to $1.0
billion at December 31, 2000 from $942.7 million at September 30, 2000. The
increase was primarily due to a $74.9 million, or 27.4%, increase in the market
value of the Freddie Mac stock.
Total mortgage securities available for sale decreased $10.7 million,
or 2.9%, to $357.0 million. This reduction was part of our strategy to increase
the interest rate spread and net interest margin by shifting assets from
lower-yielding, fixed rate mortgage securities to higher-yielding loans and
reduce interest rate risk by selling long-term fixed rate securities and either
reducing asset size or replacing securities with floating rate securities.
Deposits decreased $63.1 million, or 23.0%, to $211.3 million at
December 31, 2000 from $274.3 million at September 30, 2000. The primary cause
of the decrease was our decision to replace approximately $60.0 million of
brokered certificates of deposit with repurchase agreements. This decrease in
deposits also includes a decline in retail deposits of approximately $3.1
million that we have experienced since September 30, 2000, due to significant
competition in our market area for retail deposits and possibly by loss of
deposits acquired in the Citizens acquisition due to FDIC insurance limits and
other issues.
Borrowings, including Federal Home Loan Bank advances and repurchase
agreements, totaled $398.5 million at December 31, 2000 which was $46.3 million
or 13.1% above the level of $352.2 million at September 30, 2000. The increase
reflects the use of repurchase agreements to replace brokered deposits and our
continued use of borrowings to fund loan growth in light of the decline in
retail deposits. Interest bearing liabilities decreased by a net of $16.8
million.
Total equity increased $53.0 million, or 26.0%, to $257.5 million at
December 31, 2000 from $204.5 million at September 30, 2000. The increase was
primarily due to a $51.8 million increase in accumulated other comprehensive
income driven by after tax unrealized gains on securities, primarily Freddie Mac
stock, and $1.2 million in net income for the quarter.
Comparison of Operating Results for the Three Months Ended December 31, 2000 and
1999
General
Net income was $1.2 million for the three months ended December 31,
2000, a decrease of $123,000, or 9.3%, compared with net income of $1.3 million
for the three months ended December 31, 1999. Operations were adversely affected
by a $682,000 decrease in net interest income primarily related to the increased
cost of borrowed funds. In addition, we had a $60,000 increase in the provision
for loan losses due to management's identification of additional risk in the
loan portfolio we acquired in the Citizens acquisition during the last quarter
of 1999. These were largely offset by a $104,000 increase in total non-interest
income, a decrease of $389,000 in total non-interest expense and a $126,000
decrease in income tax expense.
Other comprehensive income was $51.8 million for the three months ended
December 31, 2000, which represented a $66.9 million improvement as compared to
the other comprehensive loss of $15.1 million for the three months ended
December 31, 1999. This improvement in other comprehensive income relates to an
increase in the value of our investment in Freddie Mac stock and the recovery in
value of other, largely fixed rate, investments. Given the composition of our
investment portfolio, the recovery was due to the more favorable interest rate
environment at December 31, 2000 compared to that at December 31, 1999.
Comprehensive Income
Other comprehensive income was $51.8 million for the three months ended
December 31, 2000 compared to a loss of $15.1 million for the prior year. The
major component of this increase was the appreciation in the price of Freddie
Mac stock from $54.0625 per share at September 30, 2000 to $68.875 at December
31, 2000, resulting in an after tax increase of $46.0 million. The mortgage
securities portion of the balance sheet provided the remaining $5.8 million of
other comprehensive income for the 2000 period. The per share price of Freddie
Mac stock declined from $52.00 to $47.625 during the three months ended December
31, 1999, resulting in an after tax total decrease of $13.6 million which
represented essentially all of the other comprehensive loss for the 1999 period.
The impact of appreciation in the price of Freddie Mac stock on our
total comprehensive income is shown in the table below.
Market Price Per Total Market
Shares Share Value After Tax Value
-------------- ------------------ ----------------- --------------------
September 30, 2000................... 5,055,000 $ 54.0625 $ 273,285,938 $ 170,455,607
December 31, 2000.................... 5,055,000 68.875 348,163,125 216,430,200
---------- -------------- --------------
Change in Freddie Mac stock.......... - $ 14.8125 $ 74,877,187 45,974,593
45
Other comprehensive
income related to
mortgage securities
and other investments........... 5,847,451
Total other comprehensive income..... $ 51,822,044
=============
Market Price Per Total Market
Shares Share Value After Tax Value
------------- ------------------ ----------------- --------------------
September 30, 1999................... 5,055,000 $ 52.0000 $ 262,860,000 $ 164,054,081
December 31, 1999.................... 5,055,000 47.6250 $ 240,744,375 $ 150,475,087
---------- -------------- --------------
Change in Freddie Mac stock.......... - $ (4.3750) $ (22,115,625) $ (13,578,994)
Other comprehensive
income (loss) related
to mortgage securities
and other investments........... (1,500,475)
Total other comprehensive $ (15,079,469)
income (loss)................... ==============
Interest Income
Total interest and dividend income, excluding Freddie Mac stock
dividends, was $12.7 million for the three months ended December 31, 2000, a
$683,000 or 5.7% increase, compared with $12.0 million for the same period in
1999. This increase related primarily to an increase in interest income on loans
receivable which rose $1.0 million, or 21.4%, to $5.7 million from $4.7 million
for the three months ended December 31, 1999. The increase in interest income on
loans receivable relates to our continued strategy to grow our commercial real
estate loan portfolio. Interest income on investment debt securities available
for sale decreased $173,000 to $245,000 from $418,000 for the three months ended
December 31, 1999. In addition, interest on mortgage-backed securities and
collateralized mortgage obligations decreased by $199,000 to $6.5 million for
the three months ended December 31, 2000 from $6.7 million for the three months
ended December 31, 1999. These decreases were primarily related to our sale of
certain securities consistent with our strategy to reduce interest rate risk.
The decrease from the sale of securities more than offset the increase in yield
on adjustable rate securities which increased with the increase in short term
interest rates.
The growth in interest income on loans was due in part to a $23.4
million or 14.7% increase in the balance of total loans, which rose to $259.5
million at December 31, 2000. Average loans for the three months ended December
31, 2000 were $254.4 million compared to $216.3 million for the three months
ended December 31, 1999. This increase reflects our continued emphasis on the
origination of residential one-to-four-family mortgage and commercial real
estate loans.
The average balance of our other investment securities available for
sale, mortgage-backed securities, and collateralized mortgage obligations
decreased $27.4 million from $399.8 million for the three months ended December
31, 1999 to $372.4 million for the
46
three months ended December 31, 2000. The decrease in the average balance of
these securities reflects our ongoing strategy of using proceeds from sales of
securities to fund growth in higher yielding residential and commercial real
estate loans, thereby reducing our interest rate risk. We expect this strategy
of replacing securities with loans to have a positive affect on our performance
ratios, including interest rate spread and net interest margin, because our
average yield on loans is over 150 basis points greater than the average yields
on our other investment securities available for sale, mortgage-backed
securities, and collateralized mortgage obligations taken as a whole.
The yield on interest earning assets, excluding Freddie Mac stock,
increased 26 basis points for the three months ended December 31, 2000 when
compared to the same period in 1999. Total interest-earning assets averaged
$643.6 million for the three months ended December 31, 2000, up from $630.0
million for the comparable 1999 period, a 2.2% increase. The average yield on
loans, net, increased 31 basis points to 8.95% due to the increase in
higher-yielding commercial real estate loans in our portfolio. The yield on
mortgage-related securities increased modestly from 7.16% to 7.22% as fears
about inflation caused the yields of fixed-rate investments to increase
slightly. Generally, the higher interest rate environment, particularly with
respect to short term investment rates, resulted in the upward repricing of our
interest rate-sensitive assets.
Dividend income on Freddie Mac stock increased by $101,000 to $859,000
for the three months ended December 31, 2000 from $758,000 for the three months
ended December 31, 1999 due to an increase in Freddie Mac's quarterly dividend
from $0.15 to $0.17 per share.
Interest Expense
Total interest expense for the three months ended December 31, 2000 was
$9.5 million, a $1.5 million, or 18.2%, increase from the three months ended
December 31, 1999. This increase in interest expense was primarily due to a 96
basis point increase in average cost of funds. The average balance of
interest-bearing liabilities was essentially unchanged with an increase from
$603.4 million to $605.2 million for the three months ended December 31, 2000.
The increase in average cost was spread across borrowed funds (99 basis points),
certificates (107 basis points), and money market accounts (134 basis points).
The increase reflects the higher interest rate environment that prevailed during
the 2000 period as compared to the 1999 period. In addition, it is indicative of
the rate-sensitive nature of our liabilities including our significant exposure
to variable rate debt and short term, highly competitive wholesale certificates
of deposit which typically carry rates of 50 to 100 basis points higher than
similarly termed retail certificates of deposit.
Interest expense on deposits increased $32,000, or 0.9%, to $3.4
million for the three months ended December 31, 2000 compared with $3.4 million
for the same period in 1999. The average balance of certificates of deposit
decreased to $202.9 million in 2000 from $240.2 million in 1999 due to the
replacement of certain wholesale certificates of deposit with borrowings.
However, due to a 107 basis point increase in their average cost, interest
expense on certificates of deposit increased $59,000 for the three months ended
December 31, 2000 compared with 1999. Interest expense on money market balances
increased $57,000, reflecting a
47
$1.8 million rise in average money market account balances and a 134 basis point
increase in average cost.
Interest expense on borrowings increased $1.4 million as a result of
the $36.9 million rise in the average balance of borrowings resulting from
repayment of wholesale certificates of deposit and a 99 basis point increase in
average cost.
Net Interest Income
Net interest income, excluding Freddie Mac stock, for the three months
ended December 31, 2000 decreased $783,000, or 20.0%, to $3.1 million from $3.9
million for the three months ended December 31, 1999. The net interest rate
spread - the difference between the average yield on average total
interest-earning assets and the average cost of average total interest-bearing
liabilities - decreased 69 basis points to 1.58% for the three months ended
December 31, 2000 from 2.27% for the comparable period in 1999. Net interest
margin, which is net interest income divided by average total interest-earning
assets, decreased 54 basis points to 1.96% for the three months ended December
31, 2000 as compared to the three months ended December 31, 1999. These
decreases are due to the rising interest rate environment between the two time
periods and its significant effect on our short-term variable rate liabilities.
The asset side of our balance sheet is much less sensitive to changes in
interest rates resulting in a reduction of interest rate spread and margin in an
increasing rate environment. We believe that our current strategy of reinvesting
the proceeds of mortgage security sales in higher-yielding adjustable rate loans
and floating rate securities will lower, but not eliminate, the risk of changing
interest rates on our net interest income.
Over half of CharterBank's earning assets are invested in mortgage
related securities that had a yield of 7.2% for the three months ended December
31, 2000 and over half of the interest-bearing liabilities were borrowings which
had a cost of 6.6% for the same period. Accordingly, the majority of our balance
sheet, excluding our Freddie Mac stock, reflects a wholesale or marginal
investment strategy that yielded a modest 59 basis point spread during the three
months ended December 31, 2000. In addition, this portion of our balance sheet
tends to be the most sensitive to changes in interest rates resulting in a
significant narrowing of spread when compared to the same period in 1999.
Conversely, the spread between loans receivable and deposits, including
wholesale deposits, was 335 basis points at December 31, 2000 which compares
more favorably to the thrift industry as a whole.
CharterBank's net interest margin and net interest spread are low when
compared to industry standards primarily due to two factors. First, the dividend
rate as compared to the market value of our Freddie Mac stock is low. However,
when compared to our cost basis in the investment, the dividend rate is
excellent (almost 50%). Second, under our wholesale investment strategy, our
assets include a high proportion of securities with rates lower than those that
would typically be earned on loans and our liabilities include a high proportion
of borrowings and wholesale deposits with higher costs than those typically paid
on retail deposits. This lowers our net interest margin and net interest spread.
However, our wholesale investment strategy has historically increased annual
interest income. Net interest income including Freddie Mac stock for the three
months ended December 31, 2000 decreased $682,000 or 14.5%, to $4.0 million
compared with $4.7 million for 1999. The net interest rate spread including
Freddie Mac stock -
48
the difference between the average yield on average total interest-earning
assets including Freddie Mac stock and the average cost of average total
interest-bearing liabilities - decreased 92 basis points to negative 0.54% for
2000 from 0.38% for the prior year. The net interest margin, which is net
interest income including dividends on Freddie Mac stock divided by average
total interest-earning assets, decreased 40 basis points to 1.71% for the three
months ended December 31, 2000. Our Freddie Mac stock had a dividend yield of
1.16% which lowered the yield on assets from 7.89% to 5.77% for the three months
ended December 31, 2000.
Provision for Loan Losses
During the three months ended December 31, 2000, we provided $150,000
for loan losses, compared to $90,000 for the 1999 period. The provision for the
three months ended December 31, 2000 reflected the collection experience on the
consumer loans acquired in the Citizens acquisition, the possible higher losses
as the economy shows signs of slowing, and growth in our commercial real estate
portfolio. Charge-offs for the quarter slightly exceeded $1.0 million and
consisted primarily of loans acquired in the Citizens acquisition for which loan
loss reserves were provided in a prior period.
At December 31, 2000, the allowance for loan losses as a percentage of
total loans was 2.13% compared with 2.42% at December 31, 1999. The lower level
at December 31, 2000 reflected the collection and charge-off of a portion of the
acquired Citizens National Bank portfolio.
Future provisions for loan losses will continue to be based upon our
assessment of the overall loan portfolio and its underlying collateral, the mix
of loans within the portfolio, delinquency trends, economic conditions, current
and prospective trends in real estate values, and other relevant factors.
Non-interest Income
Non-interest income includes service fees on deposit accounts,
servicing released loan fees, other service charges and net gains on sales of
securities. Total non-interest income increased $104,000, or 26.1%, to $502,000
for the three months ended December 31, 2000 compared with $398,000 for the 1999
period. This partially resulted from a $49,000 increase in gain on sale of
loans, net and servicing released loan fees from $162,000 for the three months
ended December 31, 1999 to $211,000 for the three months ended December 31,
2000. This $49,000 increase was caused by management's decision during 2000 to
sell loans servicing released as opposed to selling a portion of loans servicing
retained. The three months ended December 31, 1999 included a loss on sale of
securities of $104,000 compared to only $8,000 for the three months ended
December 31, 2000. Fees on deposits were relatively level with $186,000 in the
three months ended December 31, 2000, which represented a $3,000 decrease from
the $189,000 for the three months ended December 31, 1999.
49
Non-interest Expense
Total non-interest expense is high in comparison to the retail
operations of CharterBank. Total non-interest expense decreased $389,000, or
12.2%, to $2.8 million during the three months ended December 31, 2000 compared
with $3.2 million for the three months ended December 31, 1999. The 1999
non-interest expense included $242,000 of intangible amortization. There was no
comparable expense during the three months ended December 31, 2000 since
management had assessed the intangible assets associated with the Citizens
acquisition as impaired and, accordingly, wrote them off during the quarter
ended September 30, 2000. Non-interest expense included $427,000 for
professional services for the three months ended December 31, 1999 compared to
$183,000 for the same period in 2000. The decrease in professional fees and
services was related to the expense of formation of Charter Insurance Company
and our subsequently withdrawn application to form a non-stock mutual holding
company.
Salaries and employee benefits combined with occupancy and equipment
expense comprised 56.3% of total non-interest expense for the three months ended
December 31, 2000. Salaries and employee benefits increased $365,000, or 30.2%,
to $1.6 million for the three months ended December 31, 2000 compared with $1.2
million for 1999, reflecting salary increases and staff increases particularly
related to geographic expansion and our increased emphasis on commercial real
estate lending.
Our efficiency ratio, determined by dividing non-interest expense by
the sum of net interest income and non-interest income excluding gains on
securities transactions, was 61.8% for the three months ended December 31, 2000
compared with 69.3% for the comparable 1999 period. The ratio of non-interest
expense to average assets including Freddie Mac stock was 1.2% for 2000 and 1.4%
for 1999. The ratio of non-interest expense to average assets excluding Freddie
Mac stock was 1.7% for the three months ended December 31, 2000 and 2.0% for the
same period in 1999. Annual operating expenses are expected to increase in the
near term due to the planned expansion of our facilities, products and services
and the increased costs of operating as a public company. The efficiency ratio
is lower than it would be if the balance sheet had more retail assets and
liabilities instead of the high proportion of wholesale assets and liabilities.
Income Taxes
Income tax expense decreased $126,000, or 25.5%, to $369,000 for the
three months ended December 31, 2000 compared with $495,000 for the comparable
1999 period, resulting in an effective tax rate of 23.5% for the three months
ended December 31, 2000 and 27.2% for the comparable 1999 period. The effective
tax rate also reflects the dividend exclusion for 70% of the Freddie Mac stock
dividends. The lower rate for the three months ended December 31, 2000 reflects
the higher proportion of income that qualified for that tax exclusion and the
elimination of nondeductible goodwill amortization.
50
Comparison of Financial Condition at September 30, 2000 and 1999
Our total assets increased $38.1 million, or 4.2%, to $942.7 million at
September 30, 2000 from $904.6 million at September 30, 1999. The increase was
primarily due to growth in the commercial loan portfolio and an increase in the
market price of our Freddie Mac stock.
Total loans increased $45.5 million, or 21.2%, to $259.7 million at
September 30, 2000 compared to $214.2 million at September 30, 1999 as
management grew the commercial real estate portfolio by $14.3 million and the
residential real estate portfolio by $20.8 million. Mortgage-backed securities
and collateralized mortgage obligations increased from $356.5 million to $367.7
million for an increase of $11.2 million or 3.1%. Other investment securities
were reduced from $31.9 million to $13.9 million for a decrease of $18.0 million
or 56.4%. Proceeds from the sales of these securities were used to purchase
collateralized mortgage obligations or to fund loan growth. The market value of
Freddie Mac stock and other equity securities increased $12.4 million, or 4.5%,
from $274.3 million to $285.9 million. Management recorded an impairment loss of
$3.6 million in addition to the scheduled amortization of $930,000 for
intangible assets associated with the Citizens acquisition. The impairment was
determined based on an analysis that indicated that the undiscounted future cash
flows associated with the purchase of assets and the assumption of liabilities
would be negative, and therefore insufficient to recover the carrying amount of
the related intangible assets.
Asset growth was funded primarily by a $39.4 million increase in
borrowings, which grew from $312.9 million at September 30, 1999 to $352.2
million at September 30, 2000, a 12.6% increase. Management placed increased
reliance on borrowings, especially Federal Home Loan Bank advances, in light of
the limited capacity to raise significant new retail deposits. Accordingly,
total deposits fell from $283.0 million to $274.4 million.
Our total equity, which is comprised of retained earnings and
accumulated other comprehensive income, increased $5.3 million, or 2.7%, to
$204.5 million at September 30, 2000. Accumulated other comprehensive income at
CharterBank is comprised of net unrealized holding gains on securities available
for sale. The balance of accumulated other comprehensive income at September 30,
2000 was $152.8 million, a $5.2 million dollar increase from the balance at
September 30, 1999 of $147.7 million.
Comparison of Operating Results for the Years Ended September 30, 2000 and 1999
General
Net income of $872,000 for the year ended September 30, 2000 represents
a $26.2 million decrease from net income of $27.0 million for the year ended
September 30, 1999. This decrease was due primarily to the unusually high level
of income in the year ended September 30, 1999 attributed to a $35.9 million
pre-tax gain on the sale of Freddie Mac stock.
Net interest income during the year ended September 30, 2000 increased
significantly due to internal growth in loans, earnings on additional
mortgage-related securities, and the earnings stream associated with the assets
and core deposits from the Citizens acquisition being included for the entire
year. Non-interest expenses for the year ended September 30, 2000 were increased
51
by a charge of $4.5 million for amortization and impairment of intangible assets
resulting from the Citizens acquisition, a $1.2 million increase in the loan
loss provision attributed to increased risk identified in the auto loan
portfolio acquired in the Citizens acquisition, and a $763,000 increase in
compensation due to additional talent hired to help grow the commercial and
mortgage loan portfolios and the additional expense of having employees added in
the Citizens acquisition for an entire year.
Comprehensive Income
Other comprehensive income for the year ended September 30, 2000 was
$5.2 million compared to $23.7 million for the year ended September 30, 1999.
The per share price of Freddie Mac stock increased from $52.00 at September 30,
1999 to $54.063 at September 30, 2000, resulting in an after tax increase in our
Freddie Mac investment of $6.4 million. Other comprehensive loss relating to
mortgage securities and other investments decreased by $1.2 million as a result
of high interest rates. Other comprehensive loss for the year ended September
30, 1999 was $23.7 million which was a result of comprehensive income relating
to mortgage and other securities of $14.4 million. The net unrealized gains on
Freddie Mac stock decreased during fiscal year 1999 because of the sale and
donation of 605,000 shares. There was also a comprehensive loss relating to
mortgage securities and other investments because of increasing interest rates
on the fair market value of fixed rate securities in our portfolio.
52
Market Price Total Market
Shares Per Share Value After Tax Value
-------------- ---------------- ------------------- ------------------
September 30, 1999................... 5,055,000 $ 52.0000 $ 262,860,000 $ 164,054,081
September 30, 2000................... 5,055,000 54.0625 273,285,938 170,455,607
---------- -------------- -------------
Change in Freddie Mac stock.......... - $ 2.0625 10,425,938 6,401,526
Other comprehensive
income (loss) related
to mortgage securities
and other investments........... (1,236,354)
Total other comprehensive income..... $ 5,165,172
=============
Market Price Total Market
Shares Per Share Value After Tax Value
------------ ---------------- ------------------- -----------------
September 30, 1998................... 5,660,000 $ 49.625 $ 280,877,500 $ 177,812,894
September 30, 1999................... 5,055,000 52.000 $ 262,860,000 $ 164,054,081
----------- -------------- -------------
Change in Freddie Mac stock.......... (605,000) $ 2.375 $ (18,017,500) $ (13,758,813)
Other comprehensive
income (loss) related
to mortgage securities
and other investments........... (9,972,456)
Total other comprehensive $ (23,731,269)
income (loss)................... =============
Interest Income
The total interest and dividend income excluding Freddie Mac stock was
$50.9 million for the year ended September 30, 2000, a 49.6% increase over
interest and dividend income excluding Freddie Mac stock of $34.0 million for
the year ended September 30, 1999. Interest on loans rose $6.1 million, or
40.4%, to $21.1 million from $15.0 million for the year ended September 30,
1999. This increase is due to growth in CharterBank's higher-yielding commercial
real estate loan portfolio and growth in the residential mortgage portfolio
between these time periods. Interest on investment debt securities available for
sale decreased $330,000 to $1.2 million for the year ended September 30, 2000
from $1.5 million for the year ended September 30, 1999. Dividend income on
Freddie Mac stock increased by $382,000 to $3.3 million for the year ended
September 31, 2000 from $2.9 million for the year ended September 30, 1999 due
to the increase in quarterly dividends of Freddie Mac stock from $0.15 per share
to $0.17 per share. Interest on mortgage-backed securities and collateralized
mortgage obligations increased by $10.9 million to $27.4 million for the year
ended September 30, 2000 from $16.6 million for the year ended September 30,
1999. The increase was primarily due to the $119.8 million increase in the
average balance of mortgage related securities from $261.2 million for the year
ended September 30, 1999 to $381.9 million for the year ended September 30,
2000.
The growth in interest income on loans was due in part to a $45.0
million, or 21.6%, increase in the balance of total loans, which rose to $259.5
million at September 30, 2000. Average loans for the year ended September 30,
2000 were $237.4 million compared to $176.0
53
million for the year ended September 30, 1999. This increase reflects our
continued emphasis on residential one-to-four-family mortgage and commercial
loan originations as well as the effects of the Citizens acquisition. The
average balance of investment securities available for sale and mortgage
securities increased $112.6 million from $287.5 million for the year ended
September 30, 1999 to $400.1 million for the year ended September 30, 2000. This
increase reflected our strategy of using borrowings to fund the purchase of
investment securities.
The yield on interest earning assets excluding Freddie Mac stock
increased 65 basis points and total interest-earning assets excluding Freddie
Mac stock averaged $652.8 million for the year ended September 30, 2000, up from
$476.6 million from the comparable 1999 period, a 37.0% increase. The average
yield on loans, net, increased 35 basis points to 8.88%, while the yield on
mortgage-related securities increased from 6.35% for the year ended September
30, 1999 to 7.19% for the year ended September 30, 2000 reflecting the rising
interest rate environment during this time period. In addition, the average
yield on our loans was positively impacted by the increase in higher-yielding
commercial real estate loans.
Interest Expense
Total interest expense for the year ended September 30, 2000 was $36.6
million, a $13.3 million, or 57.0%, increase from the year ended September 30,
1999. The increase is attributable to a 60 basis point increase in the average
cost and a $182.0 million increase in the average balance of interest-bearing
liabilities from $446.6 million for the year ended September 30, 1999 to $628.6
million for the year ended September 30, 2000. The majority of the growth was in
wholesale certificates of deposit and borrowings, as we relied on these sources
of funds to match the growth of the securities and loan portfolios. The increase
in average cost was primarily due to the cost of borrowed funds (up 100 basis
points as compared to the year ended September 30, 1999). The increase reflects
the higher interest rate environment that prevailed during 2000 compared to the
1999 period and the rate-sensitive nature of our liabilities.
Interest expense on deposits increased $3.5 million, or 33.7% to $13.9
million for the year ended September 30, 2000 compared with $10.4 million for
the year ended September 30, 1999. The average balance of certificates of
deposit increased $53.1 million to $230.5 million for the year ended September
30, 2000 from $177.4 million for the year ended September 30, 1999 because of
our wholesale deposit strategy coupled with the Citizens acquisition. Despite
the rising interest rate environment during this time period, the average cost
of interest-bearing deposits increased only 5 basis points during the year ended
September 30, 2000 because of growth in NOW, savings, and money market accounts
coupled with disciplined time deposit pricing. Interest expense on money market
balances increased $162,000 from the year ended September 30, 1999 to the year
ended September 30, 2000, as the average balance of these accounts increased
$1.9 million and the cost increased 88 basis points as we more aggressively
competed with rates offered by brokerage competition due to relatively low
transaction volume and strong average balances for these accounts.
Interest expense on borrowed funds increased $9.8 million as a result
of the $117.8 million rise in the average balance of borrowed funds and the 100
basis point increase in average cost. The increase in average balance is
attributable to our use of borrowed funds to purchase mortgage related
securities and fund loan growth during the year. The increase in the average
54
costs was attributed to the rising interest rate environment during this time
period on these short-term, rate sensitive liabilities.
Net Interest Income
Net interest income excluding the effects of Freddie Mac stock
increased $3.6 million, or 33.3%, to $14.2 million for the year ended September
30, 2000 compared with $10.7 million for the year ended September 30, 1999. The
net interest rate spread - the difference between the average yield on average
total interest-earning assets and the average cost of average total
interest-bearing liabilities - was relatively flat as increases in yields on
loans receivable and mortgage related securities were offset by a large increase
in the average cost of borrowings. The net interest margin - net interest income
divided by average total interest-earning assets - decreased 6 basis points,
primarily because of increased borrowings cost. As the interest spread and
interest margin were flat, the increase in net interest income is attributable
to the $176.2 million increase in average earning assets. The annual dividend
yield on Freddie Mac stock was 1.44% for the year ended September 30, 2000 and
0.96% for the prior year.
CharterBank's net interest margin and net interest spread are low when
compared to industry standards primarily due to two factors. First, the dividend
rate as compared to the market value of our Freddie Mac stock is low. However,
when compared to our cost basis in the investment, the dividend rate is
excellent (almost 50%). Second, under our wholesale investment strategy, our
assets include a high proportion of securities with rates lower than those that
would typically be earned on loans and our liabilities include a high proportion
of borrowings and wholesale deposits with higher costs than those typically paid
on retail deposits. This lowers our net interest margin and net interest spread.
However, our wholesale investment strategy has historically increased annual
interest income. Net interest income including Freddie Mac stock dividends for
the year ended September 30, 2000 increased $4.0 million, or 28.9%, to $17.6
million compared with $13.6 million for the year ended September 30, 1999. The
net interest rate spread including Freddie Mac stock increased 79 basis points
to 0.29% for the year ended September 30, 2000 from negative 0.50% for the prior
year. The increase was attributable to the lower market value of the Freddie Mac
stock during the year and an increase on the dividend per share of Freddie Mac
stock during the year from $0.15 per share to $0.17 per share. Traditional bank
measures such as the net interest rate spread and the net interest rate margin
should improve as the market value of the Freddie Mac stock becomes a smaller
portion of our earning assets. The average balance of the Freddie Mac stock was
$232.4 million for the year ended September 30, 2000 as compared to $306.4
million for the year ended September 30, 1999. The net interest margin, which is
net interest income including dividends on Freddie Mac stock divided by average
total interest-earning assets, increased 24 basis points to 1.98% for the year
ended September 30, 2000.
Provision for Loan Losses
For the year ended September 30, 2000, we provided $1.41 million for
loan losses, compared to $240,000 for the year ended September 30, 1999. The
higher provision in 2000 reflects a $1.0 million special provision made during
the fourth fiscal quarter of 2000 that reflects growth in the commercial real
estate loan portfolio, deterioration of the loans acquired in the
55
Citizens acquisition and deteriorating general economic conditions. Gross
charge-offs totaled $1.1 million for the year ended September 30, 2000 as
compared to the prior year total of $420,000, primarily relating to this auto
loan portfolio and other loans acquired in the Citizens acquisition.
The allowance for loan losses as of September 30, 2000 was 2.44% of
total loans compared with 2.67% at the end of the comparable 1999 period. The
decrease in the coverage ratio reflects the increased fiscal 2000 charge-offs.
The relatively high coverage ratio for both years as compared to other community
banks and CharterBank's historical level reflects the additional risk associated
with the portfolio acquired in the Citizens acquisition, the growth in the
commercial real estate portfolio, and signs of a slowdown in the local economy.
Non-interest Income
Non-interest income decreased to $1.9 million for the year ended
September 30, 2000 compared with $38.7 million in the prior year. The major
cause of the decrease was that non-interest income for the year ended September
30, 1999 included a $35.9 million gain on the sale of Freddie Mac stock.
Excluding the gain on disposition of Freddie Mac stock, non-interest income
decreased $1.0 million from $2.9 million to $1.9 million.
Non-interest income for the year ended September 30, 1999 included
$448,000 of equity in earnings of limited partnerships for which there was a
$29,000 loss recognized in 2000. The limited partnerships are involved in
mortgage loan servicing. Accordingly, income substantially fluctuates based on
the underlying market value of related mortgage servicing rights. This market
value is impacted by loan prepayment activity and the future expectation of such
activity. As rates fall, the level of prepayment and expectation for future
prepayments increase which results in lower market values for the underlying
servicing rights. Loan prepayments and a decline in interest rates in the last
six months of fiscal 2000 adversely affected our equity in earnings of limited
partnerships.
Non-interest income for the year ended September 30, 1999 as compared
to the same period in 2000 was also higher due to comparative gains on the sale
of loans and servicing released loan fees.
Despite an increased volume of sales, gains in fiscal 2000 declined as
a result of declining margins in the secondary market and an overall rising
interest rate environment during the year ended September 30, 2000. Loss on sale
of mortgage-backed securities was $128,000 for the year ended September 30, 2000
as compared to a gain of $396,000 for the same period in 1999, a difference of
$524,000 in income for the year ended September 30, 2000. The losses resulted on
these sales during 2000 as CharterBank sought to decrease its investment in
fixed rate mortgage related securities. Deposit fees increased to $701,000 from
$377,000 due to the additional transaction deposits acquired in the Citizens
acquisition and a re-evaluation of the structure on deposit accounts.
56
Non-interest Expense
Total non-interest expense increased $5.2 million, or 48.3%, to $15.9
million for the year ended September 30, 2000 compared with $10.7 million for
the prior year. The primary causes of the increase were the $4.5 million
amortization and impairment of intangible assets recorded in fiscal 2000 versus
$67,000 of amortization in fiscal 1999 and increases in salaries and benefits
due to additional employees. Salaries and employee benefits expense increased
$763,000 from $4.2 million for the year ended September 30, 1999 compared to
$5.0 million for the same time period in 2000. Major causes include the addition
of employees through the Citizens acquisition and new personnel employed in both
the residential and commercial real estate portions of the Bank.
Occupancy and equipment expenses increased $729,000, or 44.7%, for the
year ended September 30, 2000 as compared to the same period in 1999 due to the
expense of Citizens National properties for the entire fiscal year in 2000.
Amortization and impairment of intangible assets increased to $4.5
million for the year ended September 30, 2000 from $67,000 for the year ended
September 30, 1999. CharterBank recorded its normal amortization expense
relating to intangibles acquired in the CharterBank purchase business
combination of $930,000 and $67,000 for the years ended September 30, 2000 and
1999, respectively. Additionally, CharterBank recorded an impairment loss of
$3.6 million for the year ended September 30, 2000 based on an analysis of
expected cash flows associated with the purchase of assets and assumption of
liabilities of Citizens National. Such analysis indicated that undiscounted
future cash flows associated with these assets and liabilities would be negative
and therefore insufficient to recover the carrying amount of the related
intangible assets, primarily due to charge-offs of loans purchased.
Legal and professional increased to $1.5 million for the year ended
September 30, 2000 from $753,000 for the year ended September 30, 1999. The high
level of professional fees and expenses in fiscal 2000 was attributable to
expenses related to regulatory applications for Charter Insurance Company and
the withdrawn application to reorganize CharterBank into a non-stock mutual
holding company without sale of stock. Charitable contributions dropped from
$2.2 million for the year ended September 30, 1999 to $62,000 for the same time
period in 2000. The 1999 charitable contribution was primarily a donation of
Freddie Mac stock to The Charter Foundation. The donation was made pursuant to
CharterBank's desire to support The Charter Foundation and its community efforts
and to the extent that contributions to The Charter Foundation provide tax
benefits.
Income Taxes
Income taxes decreased from $14.4 million for the year ended September
30, 1999 to $1.3 million for the year ended September 30, 2000. The 1999 income
tax expense included $12.5 million attributable to the gain on the sale of
Freddie Mac stock. The effective tax rate was 59.7% in 2000 and 34.7% in 1999.
The 2000 effective tax rate was exorbitantly high because of the high level of
goodwill amortization, which is not deductible, compared to taxable income. In
both fiscal 2000 and fiscal 1999, the dividends received deduction relating to
70% of the Freddie Mac cash dividends received has reduced federal income tax.
There can be no assurance that future periods will result in similar benefits.
57
Comparison of Operating Results for the Years Ended September 30, 1999 and 1998
General
Net income for the year ended September 30, 1999 increased $26.6
million to $27.0 million from $475,000 for the year ended September 30, 1998.
The most significant factor affecting net income for the year ended September
30, 1999 was a $35.9 million gain on the sale of Freddie Mac stock. No Freddie
Mac stock was sold during 1998. Equity in earnings of limited partnerships was
$448,000 for the year ended September 30, 1999 compared with a loss of $5.8
million for the year ended September 30, 1998. The equity loss of limited
partnerships in 1998 was primarily due to the decline in value of mortgage
servicing rights assets owned by the partnerships due to declining interest
rates leading to significant refinancing activity. During 1999, the interest
rate environment led to a small recovery in the mortgage servicing rights. The
Citizens acquisition did not have a significant impact on operating results for
the year ended September 30, 1999 as only one month of income and expense was
included in net income. Other comprehensive loss for the year ended September
30, 1999 was $23.7 million compared to other comprehensive income of $51.6
million in the prior year. The decline in comprehensive income was primarily due
to a decline in market value of our securities portfolio due to increasing
interest rates and the decrease in unrealized gains attributable to the sale of
Freddie Mac stock.
Comprehensive Income
Other comprehensive loss for the year ended September 30, 1999 was
$23.7 million compared to other comprehensive income of $51.6 million in the
prior year. The price of a share of Freddie Mac stock increased from $49.625 at
September 30, 1998 to $52.00 at September 30, 1999. However, during the period,
CharterBank sold or made charitable contributions of 605,000 shares which caused
an overall reduction in unrealized gains on Freddie Mac stock. The other
comprehensive income of $51.6 million for the year ended September 30, 1998
primarily resulted from an increase in the per share market price of Freddie Mac
common stock from $35.25 at September 30, 1997 to $49.625 at September 30, 1998.
The impact of appreciation in the price of Freddie Mac stock on our
total comprehensive income in shown in the tables below.
Market Price Total Market
Shares Per Share Value After Tax Value
----------- ----------------- ------------------ ------------------
September 30, 1998................... 5,660,000 $ 49.625 $ 280,877,500 $ 177,812,894
September 30, 1999................... 5,055,000 52.000 262,860,000 164,054,081
------------- -------------- -------------
Change in Freddie Mac stock.......... (605,000) $ 2.375 $ (18,017,500) (13,758,813)
Other comprehensive
income (loss) related
to mortgage securities
and other investments........... (9,972,456)
Total other comprehensive $ (23,731,269)
income (loss)................... =============
58
Market Price Total Market
Shares Per Share Value After Tax Value
----------- ----------------- ------------------ ------------------
September 30, 1997................... 5,660,000 $ 35.250 $ 199,515,000 $ 127,140,329
September 30, 1998................... 5,660,000 49.625 280,877,500 177,812,894
------------- --------------- ---------------
Change in Freddie Mac stock.......... - $ 14.375 $ 81,362,500 50,672,565
Other comprehensive
income related to
mortgage securities
and other investments........... 931,912
Total other comprehensive income..... $ 51,604,477
===============
Interest Income
Total interest income, excluding Freddie Mac stock, increased $7.4
million to $34.0 million for the year ended September 30, 1999 compared to $26.6
million for the same period in 1998. The primary causes of the increase were
additional investments in mortgage related securities and additional income
derived from growth within the residential and commercial real estate lending
portfolios. The average balance of interest earning assets excluding Freddie Mac
stock increased $120.0 million to $476.6 million for the year ended September
30, 1999 as compared to $356.6 million for the year ended September 30, 1998.
The average yield on interest earning assets excluding Freddie Mac stock
decreased 31 basis points for the year ended September 30, 1999 as compared to
the prior year due to the growth in lower-yielding mortgage securities and U.S.
Government Treasuries, as well as a slight decrease in yield on loans.
Interest income on mortgage related securities increased by $4.4
million from the year ended September 30, 1998 to the year ended September 30,
1999, a 36.4% increase. As mentioned above, this increase was primarily caused
by an increase in the average balance of these securities, which increased $73.4
million over the time period, a 39.0% increase. This increase was indicative of
our strategy during 1999 to grow our balance sheet and leverage equity with
wholesale investments funded primarily with borrowings. Interest income on
investment debt securities increased $1.0 million, or 217.5%, to $1.5 million
for the year ended September 30, 1999 from $480,000 for the year ended September
30, 1998 due to the U.S. Treasury investments held as part of our Year 2000
liquidity planning.
Interest on loans increased $1.9 million, or 14.2%, to $15.0 million
for the year ended September 30, 1999 as compared to $13.1 million for the same
period in 1998. The average balance of loans increased $25.5 million to $176.0
million for the year ended September 30, 1999 as compared to $150.5 million for
the year ended September 30, 1998. The bulk of the increase was due to growth in
the residential mortgage loan portfolio resulting from success in marketing our
5-1 Adjustable Rate Mortgage product in fiscal 1999. The average yield on loans
decreased from 8.74% for the year ended September 30, 1998 to 8.53% for the same
period in 1999 due to the lower interest rates that prevailed in the mortgage
market during the majority of 1999.
59
Dividends on Freddie Mac common stock increased from $2.6 million for
the year ended September 30, 1998 to $2.9 million for the same period in 1999, a
$350,000 increase. The increase was primarily due to an increase in the
quarterly dividend on Freddie Mac stock from $0.12 per share to $0.15 per share
during the time period.
Interest Expense
Interest expense on deposits increased $4.4 million or 74.4%, to $10.4
million for the year ended September 30, 1999 compared with $6.0 million for
year ended September 30, 1998. The increase in interest expense on deposits is
almost entirely due to an increase in the average balance of deposits from
$112.4 million for the year ended September 30, 1998 to $198.7 million over the
same time period in 1999. The increases in balances were primarily the result of
a build-up of wholesale deposits, brokered and credit union certificates of
deposit, used to fund the increase in our investment portfolio and as a
precaution for possible Year 2000 liquidity issues. The weighted average cost of
total deposits decreased by a modest 7 basis points from 5.32% for the year
ended September 30, 1998 to 5.25% for the same period in 1999 with the higher
cost of brokered and credit union deposits offset by reduced rates on retail
deposits in a lower interest rate environment.
Interest expense on borrowed funds decreased $513,000 from $13.4
million for the year ended September 30, 1998 to $12.9 million for the year
ended September 30, 1999 while the average balance of borrowings increased by
$12.4 million from $235.5 million for the year ended September 30, 1998 to
$247.9 million for the same time period in 1999. The decrease in interest
expense was due to a 49 basis point decrease in the average cost of borrowed
funds from 5.70% for the year ended September 30, 1998 to 5.21% for the 1999
period and resulted from lower wholesale short term interest rates.
Net Interest Income
Net interest income, excluding Freddie Mac stock, for the year ended
September 30, 1999 increased $3.5 million or 49.0%, to $10.7 million compared
with $7.2 million for the year ended September 30, 1998. The net interest rate
spread - the difference between the average yield on average total
interest-earning assets, excluding Freddie Mac stock, and the average cost of
average total interest-bearing liabilities - increased 4 basis points from the
1998 period to the 1999 period. The net interest margin increased 23 basis
points. Modest increases in net interest margin and interest rate spread were
expected in the declining rate environment present during most of 1999 since our
interest-bearing liabilities adjusted more quickly to market conditions than our
interest-earning assets. This decrease was moderated by the increased leverage
of lower spread on mortgage related securities and borrowings.
CharterBank's net interest margin and net interest spread are low when
compared to industry standards primarily due to two factors. First, the dividend
rate as compared to the market value of our Freddie Mac stock is low. However,
when compared to our cost basis in the investment, the dividend rate is
excellent (almost 50%). Second, under our wholesale investment strategy, our
assets include a high proportion of securities with rates lower than those that
would typically be earned on loans and our liabilities include a high proportion
of borrowings and wholesale deposits with higher costs than those typically paid
on retail deposits. This lowers our
60
net interest margin and net interest spread. However, our wholesale investment
strategy has historically increased annual interest income. The high proportion
of securities assets and borrowings also lower the net interest spread and net
interest margin compared to industry standards. Net interest income including
Freddie Mac stock for the year ended September 30, 1999 increased $3.8 million,
or 39.5%, to $13.6 million compared with $9.8 million for the year ended
September 30, 1998. The net interest rate spread including Freddie Mac stock -
the difference between the average yield on average total interest-earning
assets including Freddie Mac stock and the average cost of average total
interest-bearing liabilities -increased 24 basis points to -0.50% for the year
ended September 30, 1999 from negative 0.74% for the prior year. The increase
was attributable to growth in interest-earning assets other than our Freddie Mac
common stock, during the year and an increase in the quarterly dividend per
share of Freddie Mac stock during the year from 12 cents per share to 15 cents
per share. Traditional bank performance measures such as the net interest rate
spread and the net interest rate margin would improve as the proportion of
earning assets invested in Freddie Mac stock is reduced. The average balance of
the Freddie Mac stock was $306.4 million for the year ended September 30, 1999
as compared to $246.1 million for the year ended September 30, 1998. The net
interest margin, which is net interest income including dividends on Freddie Mac
stock divided by average total interest-earning assets, including Freddie Mac
stock, increased 12 basis points to 1.74% for the year ended September 30, 1999.
Provision for Loan Losses
During fiscal 1999, we provided $240,000 for loan losses, compared to
$180,000 for the year ended September 30, 1998. The higher provision reflected
primarily the risk associated with growth in commercial real estate loans during
the year ended September 30, 1999.
The allowance for loan losses at September 30, 1999 was 2.67% of total
loans compared with 1.22% at September 30, 1998. The increase in coverage was
attributable to approximately $3 million in loan loss reserves that were
acquired in the Citizens acquisition. The increased coverage reflected the
significantly higher risk in the acquired loan portfolio. In particular, the
consumer auto loan portfolio acquired in the Citizens acquisition was identified
by management as containing significant risk due to the payment history of many
borrowers, low credit scores of many borrowers, significant collateral
shortcomings, nonamortizing loans and the overall quality of the underwriting on
these loans. With the Citizens acquisition closing late in fiscal 1999,
management aggressively worked and charged off these loans during fiscal 2000.
Non-interest Income
Total non-interest income increased $42.0 million to $38.7 million for
the year ended September 30, 1999 from a loss of $3.3 million for the year ended
September 30, 1998. The increase was primarily due to a $35.9 million gain on
the sale of Freddie Mac stock and $448,000 of equity in earnings of limited
partnerships during fiscal 1999 as compared with no gains on the sale of Freddie
Mac stock and a $5.8 million equity in loss of limited partnerships during 1998.
The 1998 equity in loss of limited partnerships resulted from a significant
decline in the value of mortgage servicing rights owned by the partnerships
resulting from decreases in mortgage interest rates. As rates stabilized and
increased slightly during the last quarter of the year ended
61
September 30, 1999, prepayments slowed and modest income resulted. Freddie Mac
stock was sold in 1999 to improve our regulatory capital and liquidity as a Year
2000 precaution. Additionally, gain on sale of loans increased $103,000 in the
1999 period compared to 1998. The increase was attributable to the increase in
production of residential mortgage loans and the subsequent sales of these loans
to the secondary market that occurred as interest rates were declining during
most of fiscal year 1999. Loan servicing fee income increased $63,000 as
management retained servicing on a portion of the loans that were sold to
institutional investors such as Freddie Mac.
Non-interest Expense
Total non-interest expense increased $4.1 million or 62.3%, to $10.7
million for the year ended September 30, 1999 compared with $6.6 million for the
prior year. Charitable contributions were $2.2 million during the year ended
September 30, 1999 as compared to $25,000 during 1998. This increase was
primarily due to a $2.1 million contribution of Freddie Mac stock to The Charter
Foundation. The donation resulted in tax benefits for the Bank.
Salaries and employee benefits increased by $694,000 from September 30,
1998 to September 30, 1999 primarily due to increased short term and long term
incentive compensation, routine salary adjustments, and the addition of
approximately 30 full time equivalent employees resulting from the Citizens
acquisition. Occupancy and equipment expenses increased $317,000 as we made
equipment replacements and upgrades in preparation for Year 2000, opened a loan
production office and made replacements due to the Citizens acquisition.
Professional fees for the year ended September 30, 1999 increased by $380,000 to
$753,000 from $373,000 for the prior year. The increase in the professional fee
expense was attributable to tax consulting in connection with the sale of the
Freddie Mac common stock and the fees associated with the formation of Charter
Insurance Company and CharterBank's subsequently withdrawn application for
reorganization into a non-stock mutual holding company.
Income Taxes
Income taxes increased $15.2 million to $14.4 million for the year
ended September 30, 1999, resulting in an effective tax rate of 34.7% in fiscal
1999. The primary reason for the increase was the approximately $35.0 million
pre-tax gain on the sale of Freddie Mac stock during the year ended September
30, 1999. The increase in the effective tax rate is due to the high level of
taxable income which minimized the effect of the dividends received deduction on
the reduction of the effective tax rate. In fiscal 1998, we had a tax benefit of
$818,000 for the year due to the operating loss of $343,000 for the year and the
dividends received deduction on Freddie Mac stock.
62
Liquidity and Capital Resources
The term "liquidity" refers to our ability to generate adequate amounts
of cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of liquidity are deposits, borrowings,
scheduled amortization and prepayments of loan principal and mortgage related
securities, maturities and calls of investment securities and funds provided by
our operations. We can borrow funds from the Federal Home Loan Bank based on
eligible collateral of loans and securities up to a limit of 30% of assets. At
December 31, 2000 and September 30, 2000, our maximum borrowing capacity from
the Federal Home Loan Bank is approximately $303.1 million and $283.9 million,
respectively. In addition, we may enter into reverse repurchase agreements with
approved broker-dealers. Reverse repurchase agreements are agreements that allow
us to borrow money using our securities as collateral. We can obtain funds in
the brokered deposit markets. We can also obtain funds using our Freddie Mac
stock as collateral and have established a line of credit that provides for
borrowing up to half of the market value of the stock. We consider this source
of funds a last resort due to the potential adverse tax consequences on the
dividends received deduction which exempts 70% of our Freddie Mac dividends from
taxable income. CharterBank has increasingly relied on wholesale fundings
including advances from the Federal Home Loan Bank, repurchase agreements and
brokered deposits to fund securities and loan growth in the past two fiscal
years. This reflects a growth in our loan portfolio that has outpaced growth in
retail deposits. CharterBank monitors its liquidity position frequently and
anticipates that we will have sufficient funds to meet our current funding
commitments.
At December 31, 2000 and September 30, 2000, outstanding borrowings
from Federal Home Loan Bank were $240.5 million and $234.8 million,
respectively. At December 31, 2000, repurchase agreements totaled $158.0
million, a $40.5 million increase over the amount outstanding at September 30,
2000 of $117.5 million. The increase reflects management's decision to replace
approximately $60.1 million in wholesale deposits maturing during the quarter
with repurchase agreements. Accordingly, wholesale deposits were $69.8 million
at December 31, 2000 as compared to $129.9 million at September 30, 2000.
Loan repayment and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, general and local economic conditions and
competition in the marketplace. These factors reduce the predictability of the
timing of these sources of funds.
Our primary investing activities are the origination of one- to four-
family real estate, commercial real estate, commercial and consumer loans, and
the purchase of mortgage and investment securities. During the three months
ended December 31, 2000, we originated approximately $29.8 million in total
loans. Residential mortgage loans accounted for 56.1% of the originations,
construction loans accounted for 28.9% and commercial real estate for 11.1% of
the originations during the three month period ended December 31, 2000. During
the year ended September 30, 2000, we originated loans of approximately $171.2
million, and during the comparable period of 1999 we originated loans of
approximately $175.5 million excluding loans acquired in the Citizens
acquisition. Residential mortgage loans accounted for 54.0% of total loan
originations for fiscal 2000 as compared to 79.5% of total loans originated for
fiscal 1999. Commercial real estate loans accounted for 32.4% of total
originations for fiscal 2000 as
63
compared to 6.1% of total origination for fiscal 1999. This reflects
management's strategy of increasing the amount of commercial real estate loans.
Purchases of investment securities totaled $4.1 million for the quarter ended
December 31, 2000 and $124.1 million for the year ended September 30, 2000 and
$474.3 million for the year ended September 30, 1999. At December 31, 2000 and
September 30, 2000, CharterBank had loan commitments to borrowers of
approximately $3.3 million and $5.1 million, respectively and available home
equity and unadvanced lines of credit of approximately $8.1 million and $7.4
million, respectively.
Deposit flows are affected by the level of interest rates, by the
interest rates and products offered by competitors and by other factors. Total
deposits were $211.3 million at December 31, 2000, a $63.0 million decrease from
the $274.3 million balance at September 30, 2000. The decrease reflects the
maturing of approximately $60.0 million in wholesale deposits during the quarter
which were replaced with borrowings. Total deposits decreased by $8.6 million
during the year ended September 30, 2000 as compared to fiscal 1999, as retail
certificates of deposits obtained through the Citizens acquisition matured and
some were not renewed. Total deposits of $283.0 million at September 30, 1999, a
$147.4 million increase over total deposits of $135.6 million at September 30,
1998, reflects the acquisition of brokered deposits as a Year 2000 precaution
and additional deposit accounts acquired in the Citizens acquisition. Time
deposit accounts scheduled to mature within one year were $141.1 million and
$202.2 million at December 31, 2000 and September 30, 2000, respectively. While
CharterBank has experienced deposit run-off, we anticipate that a significant
portion of these certificates of deposit will remain on deposit. Management is
currently working on a new deposit pricing strategy that we believe will
strengthen our focus on customer relationships.
CharterBank has traditionally been a well-capitalized savings bank,
due, among other factors, to the unrealized gains on Freddie Mac stock. At
December 31, 2000 and September 30, 2000, we exceeded each of the applicable
regulatory capital requirements. Our tier 1 capital was $52.9 million and $51.7
million at December 31, 2000 and September 30, 2000, respectively. Tier 1
capital represented 13.8% and 13.2% of risk-weighed assets at December 31, 2000
and September 30, 2000 respectively. Tier 1 capital represented 7.8% and 7.4% of
total regulatory assets at December 31, 2000 and September 30, 2000 which
exceeds the well capitalized requirements of 5.0%. At December 31, 2000 and
September 30, 2000, respectively, we had a risk-based total capital of $105.8
million and $103.4 million, a risk-based capital ratio of 27.5% and 26.5% which
significantly exceeds the applicable well capitalized requirements of 10%. We
had additional unrealized gains that could not be included in Tier 2 capital due
to the limitation that Tier 2 capital cannot exceed Tier 1 capital.
The construction of our new Auburn branch is under contract for $1.7
million. We anticipate incurring an additional $200,000 of equipment related
capital expenses in connection with the Auburn branch. We also anticipate that
the purchase of a customer voice response system and Internet banking software
will cost approximately $250,000. Establishing other satellite branches and ATMs
will involve additional capital expenditures which have not yet been determined.
Other larger expenditures may include the purchase of land or buildings for
future branch sites within our target market area. Except for the above, we do
not anticipate any other material capital expenditures during fiscal year 2001.
We do not have any balloon or other payments due on any long-term obligations or
any off-balance sheet items other than the commitments and unused lines of
credit noted above.
64
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain instruments embedded in other contracts (collectively referred
to as derivatives), and for hedging activities. It requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those financial instruments at fair value. If
certain conditions are met, an entity may elect to designate a derivative as
follows: a hedge of the exposure or changes in the fair value of a recognized
asset or liability, or of an unrecognized firm commitment that are attributable
to a particular risk. A hedge of the exposure to variability in the cash flows
of a recognized asset or liability, or of a forecasted transaction, that is
attributable to a particular risk. Or, a hedge of the foreign currency exposure
of an unrecognized firm commitment, an available- for-sale security, a
forecasted transaction, or a net investment in a foreign operation. This
Statement generally provides for matching the timing of the recognition of the
gain or loss of the hedging instrument with the recognition of the changes in
the fair value of the item being hedged. Depending on the type of hedge, such
recognition will be in either net income or other comprehensive income. For a
derivative not designated as a hedging instrument, changes in fair value are
recognized in net income in the period of change. The effective date of SFAS No.
133 was delayed until fiscal years beginning after June 15, 2000 with the
issuance of SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133. In June
2000, the Financial Accounting Standards Board issued SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities an amendment
of FASB Statement No. 133. SFAS No. 138 amends the accounting and reporting
standards of Statement No. 133 for certain derivative instruments and certain
hedging activities. CharterBank adopted SFAS No. 133 and its related amendments
on October 1, 2000 and, accordingly, conducted an assessment of the nature of
its derivative instruments including an assessment of its embedded derivatives,
which were determined to be clearly and closely related to its investment and
debt instruments. SFAS No. 133 and its related amendments did not have a
material impact on CharterBank's financial statement presentations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities". This statement requires
that after the securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments. CharterBank's adoption of this statement on January 1, 1999,
did not have a material impact on our financial position or results of
operation.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No. 125 issued in
June 1996 and is effective for fiscal years ending after December 15, 2000. SFAS
No. 140 addresses implementation issues that were identified in applying SFAS
No. 125. SFAS No. 140 is not expected to have a material impact on CharterBank.
65
Impact of Inflation and Changing Prices
The financial Statements and accompanying notes of CharterBank have
been prepared in accordance with GAAP. GAAP generally requires the measurement
of financial position and operating results in terms of historical dollars
without consideration for changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of our operations. Unlike industrial companies, our assets and liabilities
are primarily monetary in nature. As a result, changes in market interest rates
have a greater impact on performance than do the effects of inflation.
66
BUSINESS OF CHARTERBANK
General
We are a federally-chartered mutual savings and loan association
founded in 1954. Our mission is to be a profitable community-oriented provider
of banking products and services to individuals and small businesses, including
residential and commercial mortgages, consumer loans, commercial loans, and a
variety of deposit instruments. We operate through four full service banking
offices and three loan production offices located in west-central Georgia and
east-central Alabama.
Our revenues are derived principally from interest on our loans and
mortgage-backed securities and interest and dividends on our investment
securities, including our investment in Freddie Mac stock. Our primary sources
of funds are deposits (both wholesale and retail), scheduled amortization and
prepayments of loan principal and mortgage-backed securities, maturities and
calls of investment securities, reverse repurchase agreements, deferred income
taxes, and funds provided by operations and borrowings. We also use borrowings
from the Federal Home Loan Bank as a source of funds for loans, investments and
other assets. See "-- Sources of Funds."
The largest component of our expenses is the interest that we pay on
deposits and borrowings.
Market Area
We conduct our operations in west-central Georgia and east-central
Alabama through our main office in West Point, Georgia, two branch offices in
Valley, Alabama and a branch office in LaGrange, Georgia. The main office and
two Valley, Alabama offices serve the "Valley" region of our market area which
consists of West Point, Georgia, and Lanett and Valley, Alabama. The LaGrange
office serves an adjacent community on Interstate 85. In addition, we are
building a branch in Auburn, Alabama which is expected to open in October, 2001.
We also operate loan production offices in Newnan and Columbus, Georgia, and in
Auburn, Alabama. The Valley area is a small market area and we hope to expand
our market area to nearby counties along the Interstate I-85 corridor which are
larger and have more growth potential.
The economy of our market areas has been historically supported by the
textile industry. Manufacturing represents more than 30% of the workers in our
market area. Over the last several decades, government, services and related
trade have expanded significantly. Several large employers in our market area
include the corporate headquarters of West Point Stevens, Powertel Inc., Batson
Cook, ITC Deltacom and Intercall. Powertel Inc., which is headquartered in West
Point, Georgia has recently been sold to VoiceStream, which is in the process of
merging with Deutsche Telekom. Unemployment in our market area is generally low
and, specifically, the unemployment rates in Troup and Chambers Counties are
below the national average. The median household income in our area is also
below national and state-wide levels. Our loan production offices are located in
more urbanized areas, generally with comparatively higher income levels. We
believe that our new Auburn branch office and the areas served by our loan
production offices will provide the best opportunity for growth and significant
opportunities for profitable banking relationships.
67
Competition
We face intense competition both in making loans and attracting
deposits. West-central Georgia and east-central Alabama have a high
concentration of financial institutions, many of which are branches of large
money center, super-regional and regional banks which have resulted from the
consolidation of the banking industry in Alabama and Georgia. Many of these
competitors have greater resources than we do and may offer services that we do
not provide.
Our competition for loans comes from commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies,
insurance companies and brokerage and investment banking firms. Our most direct
competition for deposits has historically come from commercial banks, savings
banks, savings and loan associations, credit unions and mutual funds. We face
additional competition for deposits from short-term money market funds and other
corporate and government securities funds and from brokerage firms and insurance
companies.
Lending Activities
Loan Portfolio Composition. Our loan portfolio consists of one to
four-family residential first mortgage loans, commercial real estate loans, real
estate construction loans, consumer loans and commercial loans.
At December 31, 2000 and September 30, 2000, we had total loans
receivable of $259.5 million and $259.7 million, respectively. Approximately
$27.0 million of the growth in loans between September 30, 1998 and September
30, 1999 was due to loans acquired in the Citizens acquisition. Residential
mortgage loans comprised $157.2 million, or 60.5%, and $152.8 million, or 58.9%,
of total loans at December 31, 2000 and September 30, 2000, respectively. Loans
secured by mortgages on commercial real estate totaled $59.2 million at December
31, 2000 and $60.8 million at September 30, 2000. The $60.8 million balance of
these loans at September 30, 2000 was a $14.3 million, a 30.7% increase over the
balance of commercial real estate loans at September 30, 1999. Management's
strategy is to grow the commercial real estate loan portfolio. We hired
additional personnel in the commercial lending area during fiscal 2000 to
strengthen our operations in this area.
At December 31, 2000, management estimates that approximately $35.0
million of total commercial real estate loans are secured by real estate in the
Atlanta metropolitan area, approximately $10.0 million of total commercial real
estate loans are secured by real estate in the West Point /Valley area, and
approximately $15.0 million of total commercial real estate loans are secured by
commercial real estate in other areas, primarily in the southeast United States.
We expect continued growth in our commercial real estate portfolio in the
future.
The remaining portion of our loan portfolio at December 31, 2000 and
September 30, 2000 consisted of consumer loans totaling $28.1 million and $29.9
million, respectively, real estate construction loans of $6.7 million and $7.1
million, respectively, and commercial loans of $8.4 million and $9.0 million,
respectively. Our consumer loan portfolio at December 31, 2000 contains about
$2.7 million in auto loans acquired as a result of the Citizens acquisition.
Our loans are subject to federal and state law and regulations. The
interest rates we charge on loans are affected principally by the demand for
loans, the supply of money available
68
for lending purposes and the interest rates offered by our competitors. These
factors are, in turn, affected by general and local economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, legislative tax policies and governmental budgetary matters.
69
The following table presents the composition of our loan portfolio in
dollar amounts and in percentages of the total portfolio at the dates indicated.
At September 30,
--------------------------------------------------
At December 31,
2000 2000 1999
----------------------- ------------------------ ------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
1-4 family residential
real estate(1)................... $ 157,151 60.6% $ 152,822 58.9% $ 132,036 61.6%
Commercial real estate............. 59,158 22.8 60,838 23.4 46,545 21.7
Consumer and other(2).............. 28,121 10.8 29,915 11.5 24,353 11.4
Commercial......................... 8,426 3.2 8,987 3.5 3,245 1.5
Real estate construction........... 6,687 2.6 7,138 2.7 8,038 3.8
--------- ----- --------- ----- --------- -----
Total loans...................... 259,543 100.0% 259,700 100.0% 214,217 100.0%
===== ===== =====
Less:
Net deferred loan fees
(costs).......................... (63) (113) 51
Allowance for loan losses.......... 5,540 6,346 5,710
--------- --------- ---------
Loans receivable, net............ $ 254,066 $ 253,467 $ 208,456
========= ========= =========
At September 30
---------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------ ------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------- ---------- ---------- ---------- ---------- ----------
1-4 family residential
real estate(1)................... $ 116,395 69.0% $ 101,399 73.7% $ 78,951 78.9%
Commercial real estate............. 34,343 20.4 22,419 16.3 10,902 10.9
Consumer and other(2).............. 9,026 5.4 6,126 4.5 5,411 5.4
Commercial......................... 3,601 2.1 3,116 2.3 3,878 3.9
Real estate construction........... 5,295 3.1 4,390 3.2 875 0.9
--------- ------ --------- ------ -------- ------
Total loans...................... 168,660 100.0% 137,450 100.0% 100,017 100.0%
====== ====== ======
Less:
Net deferred loan fees
(costs).......................... 246 348 285
Allowance for loan losses.......... 2,054 1,846 1,627
--------- --------- --------
Loans receivable, net............ $ 166,360 $ 135,256 $ 98,105
========= ========= ========
___________
(1) Excludes loans held for sale.
(2) Includes home equity loans and second mortgage loans.
70
Loan Maturity and Repricing. The following table shows the repricing
dates or contractual maturity dates as of December 31, 2000. The table does not
reflect prepayments or scheduled principal amortization. Demand loans, loans
having no stated maturity, and overdrafts are shown as due in one year or less.
At December 31, 2000
----------------------------------------------------------------------------------------
1-4 Family
Residential
Real Estate Commercial Consumer Real Estate
Loans Real Estate and Other Commercial Construction Totals
------------- -------------- ----------- ------------- --------------- -----------
(In thousands)
Amounts due:
Within one year............... $ 50,131 $ 14,645 $ 10,965 $ 4,156 $ 6,687 $ 86,584
After one year:
One to three years........ 27,931 4,867 3,478 659 - 36,935
Three to five years....... 51,095 13,508 1,490 2,980 - 69,073
Five to ten years......... 9,672 19,108 4,247 580 - 33,607
Over ten years............ 18,322 7,030 7,941 51 - 33,344
------------- -------------- ----------- ------------- --------------- -----------
Total due after one year...... 107,020 44,513 17,156 4,270 - 172,959
------------- -------------- ----------- ------------- --------------- -----------
Total amount due:............. $ 157,151 $ 59,158 $ 28,121 $ 8,426 $ 6,687 $ 259,543
============= ============== =========== ============= =============== ===========
The following table presents, as of December 31, 2000, the dollar
amount of all loans contractually due or scheduled to reprice after December 31,
2001 and whether such loans have fixed interest rates or adjustable interest
rates.
Due After December 31, 2001
--------------------------------------------
Fixed Adjustable Total
------------ ----------- -----------
(In thousands)
1-4 family residential
real estate.................... $ 32,583 $ 74,437 $ 107,020
Commercial real estate............. 31,679 12,834 44,513
Consumer and other................. 17,156 - 17,156
Commercial......................... 3,509 761 4,270
Real estate construction........... - - -
------------ ----------- -----------
Total loans.................... $ 84,927 $ 88,032 $ 172,959
============ =========== ===========
71
The following table presents our loan originations, purchases, sales
and principal payments for the periods indicated.
For the Three Months
Ended December 31, For the Years Ended September 30,
------------------------ -------------------------------------
2000 1999 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(In thousands)
Loans(1):
Balance outstanding at beginning of period......... $ 259,700 $ 214,217 $ 214,217 $ 168,660 $ 137,450
Originations:
1-4 family residential real estate................. 16,740 25,559 92,504 139,499 95,766
1-4 family real estate acquired
in Citizens acquisition......................... - - - 8,405 -
Commercial real estate and commercial.............. 3,325 6,563 55,445 10,725 16,561
Commercial real estate and commercial
acquired in Citizens acquisition................ - - - 9,122 -
Consumer and other loans........................... 1,146 4,198 15,506 10,769 4,576
Consumer and other loans acquired
through Citizens acquisition.................... - - - 9,455 -
Real estate construction........................... 8,636 5,169 7,696 14,457 8,202
Real estate construction loans acquired
through Citizens acquisition.................... - - - 369 -
----------- ----------- ----------- ----------- -----------
Total originations and loans acquired
through Citizens acquisition................... 29,847 41,489 171,151 202,801 125,105
Less:
Principal repayments, unadvanced funds and
other, net...................................... 18,114 17,705 87,385 133,403 30,588
Sale of residential mortgage loans, principal
balance......................................... 10,880 10,807 36,186 23,129 63,204
Loan charge-offs (recoveries), net................. 956 334 774 336 (29)
Transfers to foreclosed real estate................ 54 637 1,323 376 132
----------- ----------- ----------- ----------- -----------
Total deductions................................ 30,004 29,483 125,668 157,244 93,895
Net loan activity.................................. (157) 12,006 45,483 45,557 31,210
----------- ----------- ----------- ----------- -----------
Ending balance.................................. $ 259,543 $ 226,223 $ 259,700 $ 214,217 $ 168,660
=========== =========== =========== =========== ===========
_________________
(1) Excludes loans held for sale.
72
Residential Mortgage Loans and Originations. We emphasize the
origination of first and second mortgages secured by one- to four-family
properties primarily within Georgia and Alabama. At December 31, 2000 and
September 30, 2000, loans on one-to-four-family properties accounted for 60.5%
and 58.8% of our total loan portfolio, respectively.
Our mortgage origination strategy is to offer a broad array of products
to meet customer needs. These products include nonconforming loans which are
held in our portfolio, fixed rate loans sold to investors with servicing
released for fee income, and fixed rate loans sold to the secondary market where
we retain the servicing rights. Management's current strategy has been to sell
more loans with servicing released, as we believe that this improves our overall
profitability. Current originations of nonconforming loans are nonconforming due
to property or income exceptions. Our loan portfolio also contains some loans
that are nonconforming due to loan to value or credit exceptions.
Our originations of all types of residential first mortgages amounted
to $16.7 million for the quarter ending December 31, 2000, $92.5 million for the
year ended September 30, 2000, $139.5 million for the year ended September 30,
1999, and $95.8 million for the year ended September 30, 1998. Due to the low
interest rate environment, a significant portion of loans originated in 1998 and
1999 were refinances, including refinances of our existing portfolio loans and
loans in our servicing portfolio. The average size of our residential mortgage
loans originated in the quarter ended December 31, 2000 was $105,000 and $96,000
for the year ended September 30, 2000.
We utilize a variety of strategies to originate new mortgage loans
including third party alliances with mortgage lenders, dedicated mortgage
originators, and branch referrals. Our mortgage originators develop referrals
from real estate brokers, attorneys, past customers and other key referral
sources.
We offer a variety of mortgage products to allow customers to select
the best product for their needs. A description of the products and underwriting
guidelines are highlighted below.
Adjustable Rate Mortgage Loans. We offer a variety of adjustable rate
mortgage products that initially adjust after one, three, five, or seven years.
After the initial term, adjustable rate mortgage loans generally adjust on an
annual basis at a fixed spread over the monthly average yield on United States
Treasury securities. The adjusted rates are based on a constant maturity of one
year (constant treasury maturity index). The interest rate adjustments are
generally subject to a maximum increase of 2% per adjustment period and the
aggregate adjustment is generally subject to a maximum increase of 6% over the
life of the loan. We originated approximately $12.0 million in one- to
four-family adjustable rate mortgage loans in the quarter ended December 31,
2000 and approximately $70.0 million in the year ended September 30, 2000. At
December 31, 2000 and September 30, 2000, 74.9% and 75.3%, respectively, of the
residential mortgage loans in our portfolio were adjustable rate mortgage loans.
Generally, we offer adjustable rate mortgage loans in amounts up to
$1.0 million depending on the loan-to-value ratio and the type of property. The
loan-to-value ratio is the loan amount divided by the lower of (a) the appraised
value of the property or (b) the purchase price
73
of the property. The loan-to-value ratio is commonly used by financial
institutions as one measure of potential exposure to risk.
Our most popular portfolio product is a 5-1 adjustable rate loan that
is not conforming to secondary market standards due to property or income
exceptions. This type of loan yields a fixed rate for the first five years and
adjusts to a pre-determined index annually thereafter. At December 31, 2000, our
portfolio contained $58.4 million of 5-1 adjustable rate loans with a weighted
average rate of 8.27%. Loans on owner occupied one- to four-family residences
are generally subject to a maximum loan to value ratio of 80% or have mortgage
insurance.
All adjustable rate mortgage loans are underwritten using
specifications set by Freddie Mac. Generally, our adjustable rate mortgage loans
with loan balances below the Freddie Mac maximum loan standard ($275,000 for a
single-family property) are conforming loans maintained in our portfolio. Jumbo
loans (amounts above the secondary market conforming standards) are considered
non-conforming but may be saleable to other investors.
Fixed Rate Mortgages Sold Servicing Released. We offer a variety of
fixed-rate products that we sell to investors on a servicing released basis.
These loans are underwritten to the investors' standards and are generally sold
to the investor after the loan closes. The rate on these loans is committed with
the investor on a best efforts basis when the borrower locks in their interest
rate. Gains on sales of residential loans amounted to $211,000 and $730,000 of
our non-interest income for the quarter ended December 31, 2000 and the year
ended September 30, 2000, respectively.
Fixed Rate Mortgages Sold with Servicing Retained. We are an approved
seller/servicer for Freddie Mac. Our fixed rate loans are underwritten to comply
with Freddie Mac standards for sale to this investor. At December 31, 2000 and
September 30, 2000, CharterBank serviced loans for Freddie Mac with an aggregate
balance of $148.3 million and $152.8 million, respectively.
Home Equity Credit Lines and Second Mortgages. We offer home equity
lines of credit as a complement to our one- to four-family lending activities.
We believe that offering home equity credit lines helps to expand and create
stronger ties to our existing customer base by increasing the number of customer
relationships and providing cross-marketing opportunities. Home equity credit
lines provide adjustable-rate loans secured by a first or second mortgage on
owner-occupied one- to four-family residences located primarily in Georgia and
Alabama. Home equity credit lines enable customers to borrow at rates tied to
the prime rate as reported in The Wall Street Journal. The underwriting
standards applicable to home equity credit lines are generally the same as one-
to four-family first mortgage loans with the exception of loan to value ratios
which may go to 100%. Starting in 1999, equity lines with loan to value ratios
over 80% were generally insured with lender paid mortgage insurance. At December
31, 2000 and September 30, 2000, we had $21.9 million and $22.3 million,
respectively, of home equity and second mortgage loans. We also had $5.1 million
and $5.0 million of unfunded home equity commitments at December 31, 2000 and
September 30, 2000 respectively.
Commercial Real Estate Loans. CharterBank embarked on a strategy of
increasing its commercial real estate loan portfolio during fiscal 1998. We
originate commercial real estate loans secured by properties located in our
primary market area and metropolitan Atlanta. In
74
underwriting commercial real estate loans, we consider not only the property's
historic cash flow, but also its current and projected occupancy, location, and
physical condition. We generally lend up to a maximum loan-to-value ratio of 80%
on commercial properties and require a minimum debt coverage ratio of 1.25 or
compensating factors. At December 31, 2000 and September 30, 2000, respectively,
we had $59.2 million and $60.8 million of loans in our commercial real estate
portfolio. The average loan size at September 30, 2000 is larger than the
average loan size in prior years due to several multi-million commercial loans
that were closed during fiscal 2000. Our largest loan exposure is a commercial
real estate loan with a commitment of $5.6 million at September 30, 2000 and
$5.5 million at December 31, 2000 with approximately $130,000 drawn. This loan
was secured by a hotel located in Auburn, Alabama. We also have a $15.0 million
credit line secured by two properties in Florida. CharterBank sold 66.6% of this
relationship in a loan participation, leaving us with a maximum exposure of $5.0
million on the line of credit.
Commercial real estate lending involves additional risks compared with
one-to four-family residential lending. Payments on loans secured by commercial
real estate properties often depend on the successful management of the
properties, on the amount of rent from the properties, or on the level of
expenses needed to maintain the properties. Repayment of such loans may
therefore be adversely affected by conditions in the real estate market or the
general economy. Also, commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. In order to
mitigate this risk, we monitor our loan concentration and our loan policies
generally limit the amount of loans to a single borrower or group of borrowers.
We also utilize the services of an outside consultant to conduct credit quality
reviews of the commercial loan portfolio. Because of increased risks associated
with commercial real estate loans, our commercial real estate loans generally
have higher rates and shorter maturities than residential mortgage loans. We
usually offer commercial real estate loans at fixed rate and adjustable rates
tied to the prime rate or to yields on U.S. Treasury securities. The terms of
such fixed rate loans generally do not exceed 25 years.
We closely monitor the performance of our commercial real estate loan
portfolio. We are in the process of expanding our internal risk rating system
for our commercial real estate loans. In order to update the grades assigned to
individual commercial real estate loans under the internal risk rating system,
we will be regrading the entire commercial real estate loan portfolio according
to the new criteria established.
Commercial Loans. Commercial loans generally are limited to terms of
five years or less. Whenever possible, we collateralize these loans with a lien
on commercial real estate, or alternatively, with a lien on business assets and
equipment. We also generally require the personal guarantee of the business
owner. Interest rates on commercial loans generally have higher yields than
residential or commercial real estate loans due to the risk inherent in this
type of loan.
Commercial loans are generally considered to involve a higher degree of
risk than residential or commercial real estate loans because the collateral may
be in the form of intangible assets and/or inventory subject to market
obsolescence. Commercial loans may also involve relatively large loan balances
to single borrowers or groups of related borrowers, with the repayment of such
loans typically dependent on the successful operation and income stream of the
borrower. Such risks can be significantly affected by economic conditions. In
addition, business lending generally requires substantially greater supervision
efforts by our management
75
compared to residential or commercial real estate lending. In this regard, we
have recently hired three senior commercial banking officers who have extensive
experience in business banking in our market. Commercial loans however, comprise
a small portion of our loan portfolio, at approximately 3% of total loans
receivable at December 31, 2000 and September 30, 2000.
Consumer Loans. We offer a variety of consumer loans to retail
customers in the communities we serve in order to increase the yield on our loan
portfolio. Examples of our consumer loans include:
. home equity loans-open and closed end;
. secured deposit loans;
. credit lines tied to deposit accounts to provide
overdraft protection; and
. unsecured credit lines and installment loans.
At December 31, 2000 and September 30, 2000, the consumer loan
portfolio totaled $28.1 million and $29.9 million, respectively, or 10.8% and
11.5% of total loans.
Consumer loans are generally originated at higher interest rates than
residential and commercial mortgage loans and tend to have a higher credit risk
than residential loans because they may be secured by a home with a
loan-to-value of 100%, secured by rapidly depreciable assets, or unsecured.
Despite these risks, our level of consumer loan delinquencies, excluding auto
loans, has generally been low. We cannot assure you, however, that our
delinquency rate on consumer loans will continue to remain low in the future, or
that we will not incur future losses on these activities.
At December 31, 2000, we had a total of $2.7 million of auto loans in
our consumer loan portfolio. These loans were acquired in connection with the
Citizens acquisition. The balance of the portfolio was approximately $7.0
million at the time of the Citizens acquisition. During due diligence,
management identified numerous risks associated with the portfolio. Notably,
underwriting standards on these loans were well below CharterBank standards.
Many of the borrowers displayed low credit scores, had collateral shortages, or
poor income coverage ratios. Management also discovered that over $1.0 million
of these loans had balloon payments at the end of their terms and were not
amortizing properly. Accordingly, many of these loans have had poor payment
histories and CharterBank has continually worked this loan portfolio and charged
off auto loans as appropriate. Charge-offs on the auto loan portfolio amounted
to approximately $875,000 for the quarter ended December 31, 2000 and $470,000
for the year ending September 30, 2000. At December 31, 2000, management has
established reserves of over $900,000 for consumer loans with the reserves on
auto loans being the primary component of these reserves.
We make loans for up to 50% of the amount of a borrower's savings
account or certificates of deposit balance. These savings secured loans totaled
$648,000 and $639,000 at December 31, 2000 and September 30, 2000, respectively.
Loan Approval Procedures and Authority. Our lending policies provide
that various lending departments may review and approve loans and lines up to
prescribed limits as follows:
76
. Residential mortgage loans up to conforming limits of
$275,000;
. Commercial real estate mortgage loans up to $250,000
that meet our underwriting standards;
. Home equity loans or lines for owner occupied one to
four properties up to $250,000 that conform to our
underwriting guidelines;
. Home equity loans or lines up to $100,000 for
vacation and non-owner occupied properties;
. Unsecured loans up to $50,000; and
. Commercial loans up to $250,000.
All loan applications that exceed the above mentioned amounts up to
$500,000 require a senior management loan authority approval and all loans above
$500,000 require approval of either the Executive Committee of the Board of
Directors or approval of the Board Loan Committee. In addition, on loans with a
loan to value ratio of greater than 80%, we generally require the borrower to
obtain private mortgage insurance.
The following generally describes our current lending procedures for
residential mortgages and home equity lines and loans. Upon receipt of a
completed loan application from a prospective borrower, we order a credit report
and verify other information. If necessary, we obtain additional financial or
credit related information. We require an appraisal for all mortgage loans,
except for home equity loans or lines where an alternative evaluation may be
used to determine the loan to value ratio. Appraisals are performed by licensed
or certified third-party appraisal firms and are reviewed by our lending
department. We require title insurance or a title opinion on all mortgage loans,
except for home equity lines and loans.
We require borrowers to obtain hazard insurance and we may require
borrowers to obtain flood insurance prior to closing. For properties with a
private sewage disposal system, we also require evidence of compliance with
applicable law on residential mortgage loans. Further, we generally require
borrowers to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage escrow account from which we make
disbursements for items such as real estate taxes, hazard insurance, flood
insurance and private mortgage insurance premiums, if required.
Commercial real estate loans are approved through the Bank's Credit
Committee process. The Credit Committee consists of the President, the Executive
Vice President, the Chief Financial Officer and certain other senior lending and
credit officers. The Credit Committee has authority to approve individual loans
and modifications up to $500,000. Commercial real estate loans less than
$250,000 may be approved outside the Committee process by an officer who has
commercial real estate loan authority.
77
Asset Quality
One of our key operating objectives has been and continues to be the
achievement of a high level of asset quality. We maintain a large proportion of
loans secured by residential one- to four-family properties and commercial
properties; we set sound credit standards for new loan originations; and we
follow careful loan administration procedures. These practices and relatively
favorable economic and real estate market conditions have resulted in a low
level of non-performing assets in recent years. Subsequent to December 31, 2000,
we strengthened our focus on credit risk by hiring additional personnel in the
credit risk management area. Currently, we are re-assessing our loan review
process and other credit risk factors in light of the new talent in this area.
Delinquencies increased during the year ended September 30, 2000 due to loans
acquired in the Citizens acquisition and higher delinquencies in nonconforming
residential loans as the average age of these loans reaches the third year.
Freddie Mac has estimated that most mortgage loans that encounter delinquency
troubles usually begin in the third to sixth year of the mortgage.
Delinquent Loans and Foreclosed Assets. Our policies require that
management continuously monitor the status of the loan portfolio and report to
the Loan Committee of the Board of Directors on a monthly basis. These reports
include information on delinquent loans and foreclosed real estate, and our
actions and plans to cure the delinquent status of the loans and to dispose of
the foreclosed property. The Loan Committee approves action plans on all loans
that are 90 days delinquent. The Loan committee consists of two outside
directors and at least one Board member who is a member of management. One of
the outside directors acts as Chairman of the Loan Committee, while other Board
members rotate monthly in the second outside director position.
The following table presents information regarding total nonaccrual
loans, accruing loans delinquent 90 days or more, and foreclosed real estate as
of the dates indicated. At December 31, 2000, and September 30, 2000, 1999 and
1998, we had $2.9 million, $2.8 million, $2.0 million, and $306,000,
respectively, of nonperforming loans. If all nonaccrual loans had been
performing in accordance with their original terms and had been outstanding from
the earlier of the beginning of the period or origination, we would have
recorded additional interest income on these loans of approximately $45,000 for
the three month period ended December 31, 2000. For the year ended September 30,
2000, there would have been $176,000 of additional interest income recorded on
these loans.
78
At September 30,
At December 31, --------------------------------------------------------------------
2000 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------
(In thousands)
Total non-accrual loans....................... $2,499 $2,672 $1,989 $306 $1,173 $1,611
====== ====== ====== ==== ====== ======
Accruing loans delinquent 90 days or more..... 396 159 - - - -
====== ====== ====== ==== ====== ======
Total non-performing loans.................... 2,895 2,831 1,989 306 1,173 1,611
====== ====== ====== ==== ====== =====
Foreclosed real estate, net................... 524 630 222 130 270 98
====== ====== ====== ==== ====== =====
Total non-performing assets................... 3,419 3,461 2,211 436 1,443 1,709
====== ====== ====== ==== ====== =====
Non-performing loans to total loans........... 1.12% 1.09% 0.93% 0.18% 0.85% 1.61%
====== ====== ====== ==== ====== ====
Non-performing assets to total assets......... 0.34% 0.37% 0.24% 0.06% 0.29% 0.49%
====== ====== ====== ==== ====== ====
Nonperforming assets at December 31, 2000 and September 30, 2000, 1999 and 1998
were $3.4 million, $3.5 million, $2.2 million, and $436,000 respectively. Of
these totals, $142,000, $824,000, $523,000, and $0 respectively represented auto
loans.
We stop accruing income when interest or principal payments are 90 days
in arrears. We may stop accruing income on such loans earlier than 90 days when
we consider the timely collectibility of interest or principal to be doubtful.
We may continue to accrue interest income beyond 90 days if the loan is well
secured and we determine that the ultimate collection of all principal and
interest is not in doubt.
When we designate nonaccrual loans, we reverse all outstanding interest
that we had previously credited. If we receive a payment on a nonaccrual loan,
we may recognize a portion of that payment as interest income, if we determine
that the ultimate collectibility of principal is no longer in doubt. However,
such loans would remain on nonaccrual status.
All nonaccrual commercial real estate and commercial loans are
classified as impaired loans. Impaired loans are individually assessed to
determine whether the carrying value exceeds the fair value of the collateral or
the present value of the undiscounted cash flow produced by the underlying
collateral. Smaller balance homogeneous loans, such as residential mortgage
loans and consumer loans, are collectively evaluated for impairment. At December
31, 2000, September 30, 2000, and September 30, 1999, impaired loans totaled
$990,000, $740,000 and $500,000 respectively. Approximately $320,000, $460,000,
and $500,000 of total impaired loans at December 31, 2000, September 30, 2000,
and September 30, 1999, respectively, relate to loans acquired through the
Citizens acquisition. In particular, one commercial real estate loan of
approximately $300,000 has remained on non-accrual status since it was acquired.
After December 31, 2000, foreclosure proceedings on this loan were completed. At
December 31, 2000 and September 30, 2000 and 1999, we had no loans classified as
troubled debt restructurings.
Foreclosed real estate consists of property we have acquired through
foreclosure or deed in lieu of foreclosure. Foreclosed real estate properties
are initially recorded at the lower of the recorded investment in the loan or
fair value. Thereafter, we carry foreclosed real estate at fair value less
estimated selling costs. At December 31, 2000 and September 30, 2000 and 1999,
respectively, we had $524,000, $630,000 and $222,000 in foreclosed real estate.
79
Allowance for Loan Losses. The following table presents the activity in our
allowance for loan losses and other ratios at or for the dates indicated.
At or for Three Months
Ended December 31, At or for Years Ended September 30,
----------------------- -----------------------------------------------------------------
2000 1999 2000 1999 1998 1997 1996
--------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Balance at beginning of period....... $ 6,346 $ 5,710 $ 5,710 $ 2,054 $ 1,846 $ 1,627 $ 1,459
Loan loss reserve of acquired
company (1)......................... -- -- -- 3,752 -- -- --
Charge-offs:
1-4 residential real estate......... (6) (12) (104) (49) (156) (37) (30)
Commercial real estate.............. -- (91) (91) -- -- -- --
Commercial.......................... (137) (16) (26) (133) (1) (2) --
Consumer and other.................. (984) (144) (713) (237) (100) (84) (64)
Real estate construction............ -- (172) (204) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total charge-offs................. (1,127) (435) (1,138) (420) (257) (123) (94)
--------- --------- --------- --------- --------- --------- ---------
Recoveries:
1-4 residential real estate......... 61 1 32 1 25 -- 3
Commercial real estate.............. 21 13 18 -- 220 -- --
Commercial.......................... -- 20 20 -- -- -- 20
Consumer and other.................. 89 67 294 83 40 42 68
Real estate construction............ -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total recoveries.................. 171 101 364 84 285 42 91
--------- --------- --------- --------- --------- --------- ---------
Net (charge-offs) recoveries......... (956) (334) (774) (336) 29 (81) (3)
Provision for loan losses............ 150 90 1,410 240 180 300 171
--------- --------- --------- --------- --------- --------- ---------
Balance at end of period............. $ 5,540 $ 5,466 $ 6,346 $ 5,710 $ 2,054 $ 1,846 $ 1,627
========= ========= ========= ========= ========= ========= =========
Total loans receivable (2)........... $ 259,543 $ 226,223 $ 259,700 $ 214,217 $ 168,660 $ 137,450 $ 100,017
========= ========= ========= ========= ========= ========= =========
Average loans outstanding............ $ 254,439 $ 216,337 $ 237,429 $ 176,020 $ 150,452 $ 118,734 $ 82,135
========= ========= ========= ========= ========= ========= =========
Allowance for loan losses
as a percent of total
loans receivable (2)................ 2.13% 2.42% 2.44% 2.67% 1.22% 1.34% 1.63%
========= ========= ========= ========= ========= ========= =========
Net loans (charged off)
recovered as a percent
of average outstanding (3).......... (1.50)% (0.62)% (0.33)% (0.19)% 0.02% (0.07)% (0.004)%
========= ========= ========= ========= ========= ========= =========
__________________
(1) Established as a result of Citizens acquisition.
(2) Does not include loans held for sale or deferred fees.
(3) Interim periods have been annualized.
80
Our evaluation of the loan portfolio includes the review of all loans
on which the collection of principal might be at risk. We consider the following
factors as part of this evaluation:
. our historical loan loss experience;
. known and inherent risks in the loan portfolio;
. increases in categories with higher loss potential,
such as commercial real estate loans and jumbo loans;
. credit scores and credit history;
. the estimated value of the underlying collateral; and
. current economic and market trends.
There may be other factors that may warrant our consideration in maintaining the
allowance at a level sufficient to cover probable losses. Although we believe
that we have established and maintained the allowance for loan losses at
adequate levels, future additions may be necessary if economic, real estate and
other conditions differ substantially from the current operating environment.
In addition, the Office of Thrift Supervision, as an integral part of
its examination process, periodically reviews our loan and foreclosed real
estate portfolios and the related allowance for loan losses and valuation
allowance for foreclosed real estate. The Office of Thrift Supervision may
require us to increase the allowance for loan losses or the valuation allowance
for foreclosed real estate based on their judgments of information available to
them at the time of their examination, thereby adversely affecting our results
of operations.
For the quarter ended December 31, 2000 and the year ended September
30, 2000, we increased our allowance for loan losses through a $150,000 and $1.4
million provision for loan losses, respectively, based on our evaluation of the
items discussed above. The increase in the allowance for loan losses also
reflects the additional risk associated with the loan portfolio acquired through
the Citizens acquisition in fiscal 1999. We believe that the current allowance
for loan losses adequately reflects the level of risk in the current loan
portfolio. To determine the adequacy of the allowance, we look at historical
trends in the growth and composition of our loan portfolio, among other factors.
The most significant risk trends over the last five years are the growth of our
commercial real estate loan portfolio, the growth of the nonconforming
residential loan portfolio, and the increase in nonperforming loans due to the
Citizens acquisition. We believe that, despite using prudent underwriting
standards, commercial real estate loans contain higher loss potential than one-
to four-family residential mortgages.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--for the Three Months Ended December 31, 2000 and 1999 and
the Years Ended September 30, 2000, 1999 and 1998 -- Provision for Loan Losses."
81
Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category, and the percent of loans in each category to total loans
indicated.
At December 31, At September 30,
2000 2000
--------------------------------------- ----------------------------------------
Percent of Percent of
loans in loans in
Loan Each Loan Each
Balances by Category to Balances by Category to
Loan Category Amount Category Total Loans Amount Category Total Loans
----------- ------------ ------------- ----------- ------------ -------------
(Dollars in thousands)
1-4 family residential
real estate............. $ 1,950 $ 157,151 60.6% $ 1,228 $ 152,822 58.9%
Commercial real estate..... 1,311 59,158 22.8 1,487 60,838 23.4
Consumer loans and
other(1)................ 966 28,121 10.8 2,345 29,915 11.5
Commercial................. 711 8,426 3.2 623 8,987 3.5
Real estate construction... 259 6,687 2.6 236 7,138 2.7
Unallocated................ 343 - - 427 - -
-------- ---------- --------- -------- --------- --------
Total allowance for loan
losses.................. $ 5,540 $ 259,543 100.00% $ 6,346 $ 259,700 100.00%
======== ========== ========= ======== ========= ========
At September 30,
---------------------------------------------------------------------------------
1999 1998
--------------------------------------- ---------------------------------------
Percent of Percent of
loans in loans in
Loan Each Loan Each
Balances by Category to Balances by Category to
Loan Category Amount Category Total Loans Amount Category Total Loans
----------- ------------ ------------- ----------- ------------ -------------
1-4 family residential
real estate............. $ 1,529 $ 132,036 61.6% $ 727 $ 116,395 69.0%
Commercial real estate..... 1,448 46,545 21.7 684 34,343 20.4
Consumer loans and
other(1)................ 2,154 24,353 11.4 248 9,026 5.4
Commercial................. 376 3,245 1.5 54 3,601 2.1
Real estate construction... 119 8,038 3.8 58 5,295 3.1
Unallocated................ 84 - - 283 - -
-------- ---------- --------- -------- --------- --------
Total allowance for loan
losses.................. $ 5,710 $ 214,217 100.00% $2,054 $ 168,660 100.00%
======== ========== ========= ======== ========== ========
At September 30,
1997 1996
--------------------------------------- ----------------------------------------
Percent of Percent of
loans in loans in
Loan Each Loan Each
Balances by Category to Balances by Category to
Loan Category Amount Category Total Loans Amount Category Total Loans
----------- ------------ ------------- ----------- ------------ -------------
(Dollars in thousands)
1-4 family residential
real estate............. $ 625 $ 101,399 73.7% $ 526 $ 78,951 78.9%
Commercial real estate..... 725 22,419 16.3 559 10,902 10.9
Consumer loans and
other(1)................ 162 6,126 4.5 73 5,411 5.4
Commercial................. 56 3,116 2.3 15 3,878 3.9
Real estate construction... 44 4,390 3.2 16 875 0.9
Unallocated................ 234 - - 438 - -
------ --------- ------- ------- ------------ -------
Total allowance for loan
losses.................. $1,846 $ 137,450 100.00% $1,627 $ 100,017 100.00%
====== ========= ======= ======= ============ =======
_________________________________
(1) Includes home equity lines of credit, excludes loans held for sale.
82
Investment Activities
The Board of Directors reviews and approves our investment policy on an
annual basis. The President and Chief Financial Officer, as authorized by the
Board, implements this policy based on the established guidelines within the
written investment policy, and other established guidelines, including those set
periodically by the Asset Liability Management Committee.
The primary goal of our investment policy is to invest funds in assets with
varying maturities which will result in the best possible yield while
maintaining the safety of the principal invested and assist in managing interest
rate risk. We also seek to use our strong capital position to maximize our net
income through investment in higher yielding mortgage related securities funded
by borrowings. The investment portfolio is also viewed as a source of liquidity.
The broad objectives of our investment portfolio management are to:
. Minimize the risk of loss of principal or interest;
. Generate a favorable return without incurring undue interest rate and
credit risk;
. Manage the interest rate sensitivity of our assets and liabilities;
. Meet daily, cyclical and long term liquidity requirements while
complying with our established policies and regulatory liquidity
requirements;
. Diversify assets in stable economic regions and address specific gap
imbalances; and
. Provide collateral for pledging requirements.
In determining our investment strategies, we consider our interest rate
sensitivity, yield, credit risk factors, maturity and amortization schedules,
collateral value and other characteristics of the securities to be held.
Our investment policies and procedures also encompass evaluating and
monitoring our Freddie Mac stock investment.
Liquidity
We calculate liquidity by taking the total of:
. our cash;
. cash we have in other banks;
. unpledged U.S. Government or Government Agency Securities; and
. unpledged mortgage-backed securities guaranteed by the U.S.
Government or Agencies or rated AAA.
83
We utilize borrowing lines of credit supported by available collateral,
including Freddie Mac stock, which provides a high level of liquidity. We borrow
funds from the Federal Home Loan Bank based on eligible collateral of loans and
securities up to a limit of 30% of assets. Our maximum borrowing capacity from
the Federal Home Loan Bank is approximately $282.8 million, net of borrowings
that are already outstanding. We utilize Federal Home Loan Bank advances,
reverse repurchase agreements and other borrowings to fund the purchase of
higher yielding investment securities in order to increase our net income and
return on equity.
Investment Portfolio
General. Federally chartered thrifts have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, mortgage-backed securities, certain certificates of deposit of
insured financial institutions, repurchase agreements, overnight and short term
loans to other banks, corporate debt instruments, and Fannie Mae and Freddie Mac
equity securities. Our investments primarily fall into three major categories:
. U.S. agency obligations;
. equity investments; and
. collateralized mortgage obligations and mortgage-backed securities.
Securities can be classified as trading, held to maturity, or available for
sale at the date of purchase. All of our securities are currently classified as
"available for sale." The weighted average annualized yield of the portfolio was
6.96% and 6.97% as of December 31, 2000 and September 30, 2000, respectively. We
believe the credit quality of the portfolio is high, with 99% of the portfolio,
excluding equity investments, invested in U.S. Government, U.S. Government
Agency, or U.S. Government Agency-guaranteed mortgage-backed securities or
mortgage related securities with a rating of AA or better as of December 31,
2000 and September 30, 2000. For information see "Management Discussion and
Analysis - Carrying Values, Yields and Maturities."
84
Investment Portfolio. The following table sets forth the composition of our
investment securities portfolio at the dates indicated.
At December 31, At September 30,
-----------------------------------------
2000 2000 1999
-------------------- -------------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
Investment Securities:
Federal Home Loan Bank stock.......................... $ 12,700 $ 12,700 $ 12,588 $ 12,588 $ 10,408 $ 10,408
SBA loan participation certificates................... -- -- -- -- -- --
U.S. Government agencies.............................. 14,452 13,798 14,449 12,880 31,388 29,950
Other debt securities................................. 1,000 1,035 1,000 1,003 2,044 2,256
-------- -------- -------- -------- -------- --------
Total investment securities.................. $ 28,152 $ 27,533 $ 28,037 $ 26,471 $ 43,840 $ 42,614
-------- -------- -------- -------- -------- --------
Mortgage-backed and mortgage-related
securities:
Ginnie Mae............................................ 75,895 75,015 85,700 82,171 81,651 77,919
Fannie Mae............................................ 52,035 51,502 52,832 50,783 64,839 62,536
Freddie Mac........................................... 20,862 20,818 25,043 24,355 24,357 23,785
Non-agency............................................ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total mortgage-backed and
mortgage-related securities.................. 148,792 147,335 163,575 157,309 170,847 164,240
-------- -------- -------- -------- -------- --------
Collateralized mortgage obligations:
Fannie Mae............................................ 75,024 74,626 78,831 77,777 61,621 60,528
Freddie Mac........................................... 69,953 69,471 70,513 69,369 60,493 59,464
Non-agency............................................ 67,033 62,123 67,198 59,946 74,288 68,950
Ginnie Mae............................................ 3,517 3,412 3,518 3,306 3,504 3,316
-------- -------- -------- -------- -------- --------
Total collateralized
mortgage obligations......................... 215,527 209,632 220,060 210,398 199,906 192,258
======== ======== ======== ======== ======== ========
Total mortgage-backed
securities and collateralized
mortgage obligations......................... 364,319 356,967 383,635 367,707 370,753 356,498
======== ======== ======== ======== ======== ========
Total investment and
mortgage securities.......................... $392,471 $384,500 $411,672 $394,178 $414,593 $399,112
======== ======== ======== ======== ======== ========
Freddie Mac common stock.............................. $ 6,886 $348,163 $ 6,886 $273,286 $ 6,886 $262,860
======== ======== ======== ======== ======== ========
Total investment and mortgage
securities and Freddie Mac common
stock................................................. $399,537 $732,663 $418,558 $667,464 $421,479 $661,972
======== ======== ======== ======== ======== ========
At September 30,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Investment Securities:
Federal Home Loan Bank stock.......................... $ 9,890 $ 9,890 $ 8,716 $ 8,716 $ 5,488 $ 5,488
SBA loan participation certificates................... -- -- -- -- 3,940 3,946
U.S. Government agencies.............................. -- -- 5,811 5,794 3,806 3,761
Other debt securities................................. 1,756 1,995 1,929 2,047 1,093 1,179
-------- -------- -------- -------- -------- --------
Total investment securities.................. $ 11,646 $ 11,885 $ 16,456 $ 16,557 $ 14,327 $ 14,374
-------- -------- -------- -------- -------- --------
Mortgage-backed and mortgage-related
securities:
Ginnie Mae............................................ 10,564 10,547 5,074 5,057 2,997 2,945
Fannie Mae............................................ 45,591 45,602 23,280 23,247 6,323 6,281
Freddie Mac........................................... 22,498 22,667 6,423 6,426 4,546 4,584
Non-agency............................................ 1,970 1,905 -- -- -- --
-------- -------- -------- -------- -------- --------
Total mortgage-backed and
mortgage-related securities.................. 80,623 80,721 34,777 34,730 13,866 13,810
-------- -------- -------- -------- -------- --------
Collateralized mortgage obligations:
Fannie Mae............................................ 81,894 82,682 45,672 45,805 28,481 28,027
Freddie Mac........................................... 42,180 42,660 37,941 38,138 28,246 28,153
Non-agency............................................ 44,413 44,772 10,240 10,324 17,758 17,716
Ginnie Mae............................................ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total collateralized
mortgage obligations......................... 168,487 170,114 93,853 94,267 74,485 73,896
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities and collateralized mortgage
obligation................................... 249,110 250,835 128,630 128,997 88,351 87,706
-------- -------- -------- -------- -------- --------
Total investment and
mortgage securities.......................... $260,756 $262,720 $145,086 $145,554 $102,678 $102,080
======== ======== ======== ======== ======== ========
Freddie Mac common stock.............................. $ 7,642 $280,877 $ 7,642 $199,515 $ 7,709 $139,566
======== ======== ======== ======== ======== ========
Total investment and mortgage
securities and Freddie Mac common
stock................................................. $268,398 $543,597 $152,728 $345,069 $110,387 $241,646
======== ======== ======== ======== ======== ========
85
The following table sets forth the composition of the investment portfolio
at the dates indicated and whether such investments have fixed or adjustable
interest rates.
At December 31, 2000 At September 30, 2000
--------------------------------- ---------------------------------
Amortized Market Unrealized Amortized Market Unrealized
Costs Value Gain/Loss Costs Value Gain/Loss
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Fixed rate investment
securities:
U.S. Government agencies........ $ 14,452 $ 13,798 $ (654) $ 14,449 $ 12,880 $ (1,569)
--------- --------- --------- --------- --------- ---------
Total fixed rate
investment securities......... 14,452 13,798 (654) 14,449 12,880 (1,569)
Fixed rate mortgage-backed and
mortgage-related securities:
Ginnie Mae...................... 73,707 72,834 (873) 83,450 79,960 (3,490)
Fannie Mae...................... 46,712 46,193 (519) 47,213 45,263 (1,950)
Freddie Mac..................... 4,233 4,203 (30) 4,290 4,088 (202)
--------- --------- --------- --------- --------- ---------
Total fixed rate
mortgage-backed and
mortgage-related
securities.................... 124,652 123,230 (1,422) 134,953 129,311 (5,642)
Fixed rate collateralized
mortgage obligations:
Fannie Mae...................... 10,177 10,167 (10) 15,649 15,330 (319)
Freddie Mac..................... 15,165 15,132 (33) 15,714 15,092 (622)
Non-agency...................... 66,848 61,939 (4,909) 68,425 61,161 (7,264)
Ginnie Mae...................... 3,517 3,412 (105) 3,518 3,306 (212)
--------- --------- --------- --------- --------- ---------
Total fixed rate
collateralized mortgage
obligations.................... 95,707 90,650 (5,057) 103,306 94,889 (8,417)
Total fixed rate
mortgage-backed
securities and collateralized
mortgage obligations.......... 220,359 213,880 (6,479) 238,259 224,200 (14,059)
Total fixed rate investment
and mortgage securities...... 234,811 227,678 (7,133) 252,708 237,080 (15,628)
Variable rate investment
and mortgage securities........ 1,000 1,035 35 1,000 1,003 3
Variable rate mortgage-backed
and mortgage-related
securities..................... 24,140 24,105 (35) 28,622 27,998 (624)
Variable rate collateralized
mortgage obligations........... 119,820 118,982 (838) 116,754 115,509 (1,245)
--------- --------- --------- --------- --------- ---------
Total variable rate
investment and
mortgage securities............ 144,960 144,122 (838) 146,376 144,510 (1,866)
Federal Home Loan
Bank stock..................... 12,700 12,700 -- 12,588 12,588 --
Freddie Mac common stock........ 6,886 348,163 341,277 6,886 273,286 266,400
--------- --------- --------- --------- --------- ---------
Total investment and mortgage
securities and Freddie
Mac common stock............... $ 399,357 $ 732,663 $ 333,306 $ 418,558 $ 667,464 $ 248,906
========= ========= ========= ========= ========= =========
86
Investment Portfolio Maturities. The composition and maturities of the
Investment securities portfolio (debt securities) and the mortgage-backed
securities portfolio at December 31, 2000 are summarized in the following table.
Maturities are based on the final contractual payment dates, and do not reflect
the impact of prepayments or redemptions that may occur.
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Investment securities available for sale:
Federal Agencies........................................ $ -- -- $ -- -- $ -- --
Other debt securities................................... 1,000 8.28% -- -- -- --
-------- -------- --------
Total investment securities.......................... 1,000 8.28 -- -- -- --
-------- -------- --------
Mortgage-backed securities available for sale:
Ginnie Mae.............................................. -- -- -- -- -- --
Fannie Mae.............................................. -- -- 7,561 6.17% 10,638 6.14%
Freddie Mac............................................. -- -- -- -- 67 7.16
-------- -------- --------
Total mortgage-backed securities..................... -- -- 7,561 6.17 10,705 6.15
-------- -------- --------
Collateralized mortgage obligations:
Fannie Mae.............................................. -- -- -- -- -- --
Freddie Mac............................................. -- -- -- -- 219 5.28
Non-agency.............................................. -- -- -- -- 115 6.73
Ginnie Mae.............................................. -- -- -- -- -- --
-------- -------- --------
Total collateralized mortgage obligations............ -- -- -- -- 334 5.78
-------- -------- --------
Total..................................................... $ 1,000 8.28% $ 7,561 6.17% $ 11,039 6.14%
======== ======== ========
More than Ten Years Total Securities
------------------- ----------------------------------
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
-------- -------- -------- -------- --------
Investment securities available for sale:
Federal Agencies........................................ $ 14,452 6.23% $ 14,452 $ 13,798 6.23%
Other debt securities................................... -- -- 1,000 1,035 8.28
-------- -------- --------
Total investment securities.......................... 14,452 6.23 15,452 14,833 6.36
-------- -------- --------
Mortgage-backed securities available for sale:
Ginnie Mae.............................................. 75,895 6.55 75,895 75,015 6.55
Fannie Mae.............................................. 33,836 6.75 52,035 51,502 6.54
Freddie Mac............................................. 20,795 6.19 20,862 20,818 6.19
-------- -------- --------
Total mortgage-backed securities..................... 130,526 6.54 148,792 147,335 6.50
-------- -------- --------
Collateralized mortgage obligations:
Fannie Mae.............................................. 75,024 7.53 75,024 74,626 7.53
Freddie Mac............................................. 69,734 7.63 69,953 69,471 7.62
Non-agency.............................................. 66,918 6.87 67,033 62,123 6.87
Ginnie Mae.............................................. 3,517 6.80 3,517 3,412 6.80
-------- -------- --------
Total collateralized mortgage obligations............ 215,193 7.33 215,527 209,632 7.33
-------- -------- --------
Total..................................................... $360,171 7.00% $379,771 $371,800 6.96%
======== ======== ========
87
U.S. Agency Obligations. The balances of U.S. Agency obligations of
$13.8 million at December 31, 2000 are relatively small compared to mortgage
related securities or total assets. These securities provide some
diversification from the mortgage related securities.
Equity Securities. As of December 31, 2000, equity securities are
primarily comprised of 5,055,000 shares of Freddie Mac common stock which had a
per share market value of $68.875 per share, a total market value of $348.2
million and a cost basis of approximately $1.40 per share. The large unrealized
pre-tax gain of approximately $341.3 million is the result of a series of
well-timed investments in Freddie Mac stock in the middle to late 1980's, the
substantial portion of which we continue to own. As a result of strong
fundamental growth at Freddie Mac and favorable stock market environment, our
Freddie Mac stock investment has appreciated significantly, constituting
approximately 34.5% of our total assets. The unrealized gain in Freddie Mac
stock has substantially strengthened our capital and earnings. The after tax
unrealized gain in Freddie Mac stock constitutes 81.4% of our equity capital,
making it the largest segment of our equity position. In addition, our
substantial investment in Freddie Mac stock has allowed us to increase our
interest rate risk position, with the intent of receiving increased net interest
income. Dividends on Freddie Mac stock have also significantly increased our
dividend and interest income.
Because we believe that our ownership of Freddie Mac stock continues to
present attractive earnings growth potential and because the sale of Freddie Mac
stock would result in substantial tax liability for us, we have no current plans
to liquidate our Freddie Mac stock investment. However, we are reallocating the
Freddie Mac stock so as to more effectively manage our investment and retail
operations. In this regard, as part of the reorganization, 2.5 million shares of
the Freddie Mac stock will be transferred out of CharterBank's portfolio to
Charter Financial, First Charter, MHC and Charter Insurance Company, leaving
50.5% of the Freddie Mac stock in CharterBank's portfolio. Following the
reorganization, we will continue to monitor our Freddie Mac stock investment.
Mortgage Related Securities. Our mortgage-backed security portfolio is
composed of collateralized mortgage obligations and mortgage-backed securities.
Collateralized mortgage obligations and mortgage-backed securities consist of
various types of securities issued by the major secondary market issuers
including Ginnie Mae, Fannie Mae and Freddie Mac, as well as a variety of
private issuers. The portfolio includes securities with a wide variety of
structures including variable rate and fixed rate securities, including many
hybrid securities with balloon terms.
Mortgage-backed securities generally yield less than the loans that
underlie these securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. However, mortgage-backed securities are
more liquid than individual mortgage loans and may be used as collateral for our
borrowings. In general, mortgage-backed securities issued or guaranteed by
Fannie Mae, Freddie Mac, Ginnie Mae or private issuers that rate AA or better
are weighted at not more than 20% for risk-based capital purposes, compared to
50% risk weighting assigned to most non-securitized residential mortgage loans.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, they remain subject to the risk of a fluctuating
interest rate environment. Along with other factors, such as the geographic
distribution of the underlying mortgage loans, changes in interest
88
rates may alter the prepayment rate of those mortgage loans and affect both
prepayment rates and value of mortgage-backed securities.
While mortgage related securities have maturities as stated in the
accompanying tables, average maturities may be significantly shorter based on
interest rates and underlying loan prepayments. Based on interest rates and
market prepayment assumptions as of December 31, 2000, the estimated average
life of or fixed rate mortgage backed security portfolio was 12.4 years and of
our fixed rate collateralized mortgage obligation portfolio was 15.3 years.
As discussed above, we have sought to utilize our strong equity
position to enhance our earnings and return on equity by using Federal Home Loan
Bank advances, reverse repurchase agreements and other borrowings to fund the
purchase of higher yielding investment securities. In this regard, our
mortgage-backed securities portfolio has been effective in leveraging our strong
capital and increasing net earnings levels. Collateralized mortgage obligations
and mortgage-backed securities and other securities will continue to be
purchased in the future with the same general objectives.
89
Mortgage-Backed Securities and Mortgage-Related Securities. The
following table discloses the amortized cost and fair value of our
mortgage-backed and mortgage-related securities, all of which are
classified as available for sale as of the dates indicated. Since 1994, all
mortgage-backed and mortgage-related securities have been classified as
available for sale.
At September 30,
At December 31, -------------------------------------------------------------------
2000 2000 1999
------------------------------ ---------------------------------- --------------------------------
Amortized Percent of Market Amortized Percent of Market Amortized Percent of Market
Cost Total Value Cost Total Value Cost Total Value
---------- ---------- --------- ------------- ----------- -------- ---------- ----------- ---------
(Dollars in thousands)
Mortgage-backed
securities available
for sale:
Ginnie Mae............... $ 75,895 20.84% $ 75,015 $ 85,700 22.33% $ 82,171 $ 81,651 22.01% $ 77,919
Fannie Mae............... 52,035 14.28 51,502 52,832 13.77 50,783 64,839 17.49 62,536
Freddie Mac.............. 20,862 5.73 20,818 25,043 6.53 24,355 24,357 6.57 23,785
Other.................... - - - - - - - - -
Collateralized mortgage
obligations available
for sale:
Fannie Mae............... 75,024 20.59 74,626 78,831 20.55 77,777 61,621 16.62 60,528
Freddie Mac.............. 69,953 19.20 69,471 70,513 18.38 69,369 60,493 16.32 59,464
Non-agency............... 67,033 18.40 62,123 67,198 17.52 59,946 74,288 20.04 68,950
Ginnie Mae............... 3,517 0.96 3,412 3,518 0.92 3,306 3,504 0.95 3,316
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total.................. $364,319 100.00% $356,967 $383,635 100.00% $367,707 $370,753 100.00% $356,498
======== ====== ======== ======== ====== ======== ======== ====== ========
At September 30,
-------------------------------------
1998
-------------------------------------
Amortized Percent of Market
Cost Total Value
----------- ------------ ------------
Mortgage-backed
securities available
for sale:
Ginnie Mae......................... $ 10,564 4.24% $ 10,547
Fannie Mae......................... 45,591 18.30 45,602
Freddie Mac........................ 22,498 9.03 22,667
Other.............................. 1,970 0.79 1,905
Collateralized mortgage
obligations available
for sale:
Fannie Mae......................... 81,894 32.88 82,682
Freddie Mac........................ 42,180 16.93 42,660
Non-agency......................... 44,413 17.83 44,772
Ginnie Mae......................... - - -
-------- ------ --------
Total............................ $249,110 100.00% $250,835
======== ====== ========
At September 30,
--------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
Amortized Percent of Market Amortized Percent of Market
Cost Total Value Cost Total Value
--------- ---------- -------- --------- ---------- ---------
(Dollars in thousands)
Mortgage-backed
securities available
for sale:
Ginnie Mae..................... $ 5,074 3.94% $ 5,057 $ 2,997 3.39% $ 2,945
Fannie Mae..................... 23,280 18.10 23,247 6,323 7.16 6,281
Freddie Mac.................... 6,423 4.99 6,426 4,546 5.15 4,584
Collateralized mortgage
obligations available
for sale:
Fannie Mae..................... 45,672 35.51 45,805 28,481 32.23 28,027
Freddie Mac.................... 37,941 29.50 38,138 28,246 31.97 28,153
Non-agency..................... 10,240 7.96 10,324 17,758 20.10 17,716
Total................. $128,630 100.00% $128,997 $88,351 100.00% $87,706
======== ====== ======== ======= ====== =======
90
Federal Home Loan Bank Stock. Every federally insured financial
institution that borrows funds from a Federal Home Loan Bank as a source of
liquidity is required to invest in the stock of that Federal Home Loan Bank. The
institution's investment in Federal Home Loan Bank stock, along with other
assets of the institution, is then pledged as collateral for the advances. As of
December 31, 2000, we owned approximately $12.7 million of stock in the Federal
Home Loan Bank of Atlanta.
Sources of Funds
Deposits (both retail and wholesale), borrowings, securities under
agreements to repurchase, scheduled amortization and prepayments of loan
principal and mortgage-backed securities, maturities and calls of investments
securities and funds provided by operations are our primary sources of funds for
use in lending, investing and for other general purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Deposits. At December 31, 2000, our total deposits amounted to $211.2
million, of which $141.4 were retail deposits and $69.8 were wholesale deposits.
Wholesale deposits consist of brokered certificates of deposit and funds on
deposit from credit unions. At September 30, 2000, our retail deposits totaled
$144.5 million, or 52.7% of total deposits, and our wholesale deposits totaled
$129.9 million, or 47.3% of total deposits.
Retail Deposits. We offer a variety of deposit products to meet the
needs of retail and business customers. We currently offer non-interest bearing
demand accounts, interest bearing demand accounts (NOWs), savings passbook and
statement accounts, money market accounts and certificates of deposits. Deposit
products are developed to meet the needs of our targeted markets. At this point
no new deposit products are anticipated post reorganization.
Our deposit flows are influenced by a number of factors including:
. general and local economic conditions;
. the perceived strength of the stock and stock mutual fund
market;
. prevailing interest rates; and
. competition.
Our retail deposits are primarily obtained from areas surrounding our offices.
To attract and retain deposits, we utilize a strategy that incorporates
competitive pricing with high quality service and the development of long term
relationships. We determine our deposit rates by evaluating our competition's
pricing, the cost of Federal Home Loan Bank borrowings, rates on U.S. Treasury
securities and other related funds.
As of December 31, 2000 and September 30, 2000, demand deposits, NOW
deposits, savings, and money market accounts represented 20.1% and 15.3% of
total retail deposits respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Analysis of Net Interest Income"
for information relating to the average balances and
91
costs of our deposit accounts for the quarter ended December 31, 2000 and the
years ended September 30, 2000, 1999, and 1998. We expect that the composition
of our retail deposit base will expand to reflect the planned expansion of our
retail branch network and that our transaction accounts will increase as a
result of our increased marketing efforts related to such accounts within our
targeted market area.
Wholesale Deposits. Our wholesale deposits consist of brokered deposits
and funds on deposit from credit unions. CharterBank solicits brokered
certificates of deposit with terms of less than two years to increase liquidity
through deposit brokers. A deposit broker is broadly defined as any person
engaged in the business of placing deposits, or facilitating the placement of
deposits, of third parties with insured depository institutions. CharterBank
obtains brokered deposits through major securities brokers. The fees paid in
connection with the brokered deposits are amortized over the life of the deposit
and are included in interest expense. CharterBank obtains credit union deposits
by placing rates on a rate service. CharterBank pays to advertise its rates with
the third party. Credit unions with an interest in depositing funds with
CharterBank contact CharterBank directly.
Legal title to these brokered deposits is held in street name. These
certificates of deposit are actively traded based on prevailing interest rates,
and ownership changes hands on a daily basis and are held by a broker in "street
name." We estimate that at December 31, 2000, approximately 75 brokers have
customers with brokered deposits from CharterBank. At December 31, 2000, we had
brokered certificates of deposit totaling $32.0 million, or 15.2% of total
deposits with a weighted average interest rate of 6.6%. At September 30, 2000,
our brokered certificates of deposit totaled $89.3 million, or 32.5% of total
deposits, with a weighted average interest rate of 5.96%.
Wholesale deposits of approximately $69.8 million are scheduled to
mature during the next several quarters. The balances of our wholesale deposits
are more volatile than retail deposits. As wholesale deposits mature, these
deposits are less likely to remain with CharterBank, as compared to the
relatively stable balances of our core retail deposit base. While we expect our
retail deposit base to increase in the next several years, the maturities of our
brokered deposits will most likely outpace the growth of our retail deposit
base. Accordingly, we plan to utilize either borrowed funds or increase the
balances of our wholesale certificates of deposit to fund loans.
At December 31, 2000, our credit union certificates of deposit totaled
$37.8 million, or 17.9% of total deposits. At September 30, 2000, our credit
union certificates of deposit totaled $40.5 million, or 14.8% of total deposits.
92
Deposit Distribution Weighted Average. The following table sets forth the
distribution of our deposit accounts, by account type, at the dates indicated.
At September 30,
At December 31, -------------------------------------------------------
2000 2000 1999
---------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rates Amount Percent Rates Amount Percent Rates
-------- ------- ----- ------- ------- ----- -------- ------- -----
(Dollars in thousands)
Retail:
Non-certificated accounts:
Non-interest bearing demand
deposits (1)................. $ 8,629 4.10% -% $ 8,060 2.94% -% $ 8,704 3.08% -%
NOW deposits................... 14,558 6.89 2.00 13,962 5.09 1.95 14,495 5.12 2.00
Savings deposits............... 7,968 3.77 3.00 8,386 3.06 1.99 8,789 3.11 2.49
Money market deposits.......... 11,338 5.38 5.00 11,440 4.17 5.42 9,686 3.42 4.10
-------- ------ -------- ------ -------- ------
Total non-certificated accounts.. 42,493 20.13 2.58 41,848 15.25 2.53 41,674 14.73 2.17
Certificates of deposit:
Due within 1 year.............. 74,792 35.40 5.87 77,076 28.09 5.74 87,533 30.93 5.07
Over 1 year through 3 years.... 17,788 8.42 6.13 19,204 7.00 6.08 18,755 6.63 5.45
Over 3 years................... 6,337 3.00 6.38 6,418 2.34 6.32 5,769 2.04 5.43
-------- ------ -------- ------ -------- ------
Total retail certificates of
deposit............................ 98,917 46.82 5.95 102,698 37.43 5.76 112,057 39.60 5.09
-------- ------ -------- ------ -------- ------
Total retail deposits.......... 141,410 66.95 4.94 144,546 52.68 4.83 153,731 54.33 4.30
-------- ------ -------- ------ -------- ------
Wholesale:
Certificates of deposit
Due within 1 year................ 66,387 31.40 6.54 125,166 45.62 6.13 84,206 29.76 5.25
Over 1 year through 3 years...... 3,473 1.64 7.12 4,659 1.70 6.55 44,929 15.88 5.22
Over 3 years..................... - - - - - - 99 - 6.13
-------- ------ -------- ------ -------- ------
Total wholesale:................. 69,860 33.05 6.57 129,825 47.32 6.15 129,234 45.67 5.24
-------- ------ -------- ------ -------- ------
Total certificate accounts..... 168,777 79.87 6.21 232,523 84.75 5.98 241,291 85.27 5.17
-------- ------ -------- ------ -------- ------
Total deposit accounts......... $211,270 100.00% 5.36% $274,371 100.00% 5.37% $282,965 100.00% 4.70%
======== ====== ======== ====== ======== ======
-----------------------------
1998
-----------------------------
Weighted
Average
Amount Percent Rates
--------- ------- -----
(Dollars in thousands)
Retail:
Non-certificated accounts:
Non-interest bearing demand
deposits (1)................. $ 2,608 1.92% -%
NOW deposits................... 5,169 3.81 2.42
Savings deposits............... 7,345 5.42 2.68
Money market deposits.......... 6,160 4.54 4.08
--------- ------
Total non-certificated accounts.. 21,282 15.69 2.69
Certificates of deposit:
Due within 1 year.............. 63,435 46.78 5.73
Over 1 year through 3 years.... 12,363 9.12 5.69
Over 3 years................... 3,728 2.75 5.53
--------- ------
Total retail certificates of
deposit............................ 79,526 58.64 5.71
--------- ------
Total retail deposits.......... 100,808 74.34 5.08
--------- ------
Wholesale:
Certificates of deposit
Due within 1 year................ 26,782 19.75 5.94
Over 1 year through 3 years...... 7,922 5.84 5.99
Over 3 years..................... 99 - 6.13
--------- ------
Total wholesale:................. 34,803 25.66 5.95
--------- ------
Total certificate accounts..... 114,329 84.31 5.79
--------- ------
Total deposit accounts......... $ 135,611 100.00% 5.26%
========= ======
____________
(1) Includes mortgagors' escrow payments.
93
Deposit Flow. The following table summarizes the deposit activity of
CharterBank for the periods indicated.
Three Months Ended
December 31, For the Years Ended September 30,
---------------------------- ---------------------------------------------
2000 1999 2000 1999 1998
----------- ----------- ----------- ------------ -----------
(Dollars in thousands)
Balance at beginning of period...... $ 274,371 $ 282,965 $ 282,965 $ 135,611 $ 89,889
Net increase (decrease) before
interest credited(1)............ (65,799) (7,977) (17,679) 142,798 42,917
Interest credited................... 2,698 1,999 9,085 4,556 2,805
----------- ----------- ----------- ------------ -----------
Balance at end of period............ $ 211,270 $ 276,987 $ 274,371 $ 282,965 $ 135,611
=========== =========== =========== ============ ===========
Total increase (decrease) in
deposit accounts............... $ (63,101) $ (5,978) $ (8,594) $ 147,354 $ 45,722
=========== =========== =========== ============ ===========
Percentage increase (decrease)...... (23.00)% (2.11)% (3.04)% 108.66% 50.86%
___________
(1) Includes mortgagor escrow accounts.
C.D. Maturities. At December 31, 2000, we had $64.8 million in certificates
of deposits with balances of $100,000 and over maturing as follows:
Weighted
Average
Maturity Period Amount Rate
------------------------------------------------------ --------- ----
(In thousands)
Retail:
Three months or less.................................. $ 8,743 6.00%
Over three months through six months.................. 4,672 6.25
Over six months through 12 months..................... 5,500 6.27
Over 12 months........................................ 5,757 6.76
--------- ------
Total............................................ $ 24,672 6.29%
========= ======
Wholesale:
Three months or less.................................. $ 33,217 6.01%
Over three months through six months.................. 4,500 7.34
Over six months through 12 months..................... 1,600 6.80
Over 12 months........................................ 800 7.20
--------- ------
Total............................................ $ 40,117 6.21%
========= ======
Total................................................. $ 64,789 6.24%
========= ======
94
C.D. Balances by Rates. The following table sets forth, by interest rate
ranges, information concerning our certificates of deposit at the dates
indicates.
At December 31, 2000
-------------------------------------------------------------------------
Period to Maturity
-------------------------------------------------------------------------
Less than One to Two to More than Percent
One Year Two Years Three Years Three Years Total of Total
-------- --------- ----------- ----------- ------- --------
(Dollars in thousands)
Retail:
4.00% and below $ - $ - $ - $ - $ -- --
4.01% to 5.00%....... 4,679 1,225 58 669 6,631 6.70%
5.01% to 6.00%....... 32,972 3,979 2,572 1,061 40,584 41.03
6.01% to 7.00%....... 36,345 5,640 3,701 4,261 49,947 50.50
7.01% and above 796 181 432 346 1,755 1.77
------- ------- ------- ------- ------- -------
Total............. $74,792 $11,025 $ 6,763 $ 6,337 $98,917 100.00%
======= ======= ======= ======= ======= =======
Wholesale:
4.00% and below -- -- -- -- -- --
4.01% to 5.00%....... 2,126 -- -- -- 2,126 3.04%
5.01% to 6.00%....... 8,029 -- -- -- 8,029 11.50
6.01% to 7.00%....... 31,477 1,091 298 -- 32,866 47.07
7.01% and above 24,716 2,084 -- -- 26,800 38.38
------- ------- ------- ------- ------- -------
Total............. $66,348 $ 3,175 $ 298 $ -- $69,821 100.00%
======= ======= ======= ======= ======= =======
Borrowings. In addition to deposits, borrowings from the Federal Home Loan
Bank and securities sold under agreements to repurchase provide an additional
source of funds to finance our lending and investing activities. We also utilize
borrowings to leverage our capital position. At December 31, 2000, our total
borrowings totaled $398.5 million, as compared to $352.2 million at September
30, 2000. Our utilization of borrowings has contributed to our profitability and
we will continue to employ borrowings as a source of funds. At the same time, we
will consider whether to undertake future borrowings as a source of funds only
after a complete review of numerous relevant factors including:
. the potential interest spread and risks involved;
. analysis of the current and anticipated interest rate environment;
. the current and expected levels of our deposit base; and
. various other risk factors associated with using borrowings as a
source of funds.
Federal Home Loan Bank Advances. At December 31, 2000, our outstanding FHLB
advances totaled $240.5 million, as compared to $234.7 million at September 30,
2000. The majority of these advances are for short or variable-rate funds. At
December 31, 2000, CharterBank had pledged, under a specific collateral lien
with the Federal Home Loan Bank of Atlanta:
. all stock of the Federal Home Loan Bank of Atlanta held by
CharterBank;
95
. certain qualifying first mortgage loans with unpaid principal balances
totaling $109.0 million; and
. certain mortgage-backed securities, collateralized mortgage
obligations, corporate securities, and U.S. Government Agency
securities with an aggregate fair value of $154.6 million.
At December 31, 2000, CharterBank has available lines of credit commitments
with the FHLB totaling $303.1 million, of which $240.5 million was advanced and
$62.6 million was available at December 31, 2000.
Securities Sold Under Agreements to Repurchase. We had approximately $157.9
million and $117.5 million of securities sold under agreements to repurchase
outstanding at December 31, 2000 and September 30, 2000, respectively. The
securities sold under agreement to repurchase at December 31, 2000 are secured
by certain mortgage-backed securities, collateralized mortgage obligations, and
U.S. Government Agency securities with an aggregate fair market value, including
accrued interest of $168.4 million, as compared to $124.4 million at September
30, 2000. All securities sold under the agreements to repurchase are under our
control. The repurchase agreements at December 31, 2000 and September 30, 2000
have maturities of less than 90 days and provide for the purchase of identical
securities and specify delivery of the underlying securities to an approved
custodian.
96
The following table sets forth information concerning balances and interest
rates on CharterBank's Federal Home Loan Bank advances and securities sold under
agreement to repurchase at the dates and for the periods indicated.
At or for the Three
Months Ended At or for the Year
December 31, Ended September 30,
-------------------- --------------------------------
2000 1999 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in thousands)
Federal Home Loan Bank advances:
Average balance outstanding................................. $241,948 $221,174 $239,921 $189,030 $175,881
Maximum amount outstanding at any
month-end during the period........................ 254,000 255,650 260,500 206,900 197,000
Balance outstanding at end of
the period......................................... 240,500 255,650 234,750 205,650 197,000
Weighted average interest rate
during the period.................................. 6.48% 5.52% 6.25% 4.61% 5.07%
Weighted average interest rate at
end of period...................................... 6.32% 5.84% 6.32% 5.34% 4.80%
Securities sold under agreements to repurchase:
Average balance outstanding................................. $126,276 $110,117 $125,824 $ 58,884 $ 59,660
Maximum amount outstanding at any
month-end during the period........................ 157,963 117,101 153,308 111,320 127,765
Balance outstanding at end of
the period......................................... 157,963 100,136 117,469 107,217 91,638
Weighted average interest rate
during the period.................................. 6.92% 5.92% 6.64% 5.42% 5.82%
Weighted average interest rate at
end of period...................................... 6.81% 6.01% 6.76% 5.54% 5.67%
Current and Planned Sources of Funds. As discussed above, we expect to
continue to rely on a combination of both retail and wholesale deposits to fund
our operations. We will seek to grow the retail component of our funding
structure, while reducing our dependence on brokered deposits as a source of
funds. In this regard, the Auburn market, where we expect to open a branch in
October 2001, offers a larger, higher growth market, than our current market
area. In addition, our planned branch expansion within our targeted market area
and the on-going establishment of smaller retail facilities and ATMs should
enhance our ability to attract retail deposits.
While we will attempt to reduce our reliance on wholesale deposits in the
long term, the maturities of our brokered deposits and the growth of our loan
portfolio will most likely outpace the growth of our retail deposit base over
the next several years. Thus, wholesale deposits and borrowings will continue to
remain a significant source of funds for CharterBank in the near term. In
addition to deposits and borrowings, other significant sources of funds include
liquidity, loan repayments, maturing investments and retained earnings.
97
Investment in Limited Partnerships
In 1997, CharterBank purchased interests in two limited partnerships, which
were formed to acquire mortgage servicing rights for $7.0 million. CharterBank
was allocated approximately 12% and 21% of the respective earnings or losses of
these two partnerships. During 1998, CharterBank wrote off its entire limited
partnership investment of $2.0 million in the partnership for which it had a
previous 12% interest and recorded a $3.7 million valuation allowance relating
to its $5.0 million limited partnership investment for which it has a 21%
interest. For the three months ended December 31, 2000 and 1999, CharterBank
recognized no equity in the net earnings (loss) of the limited partnerships, and
$(29,000) and $448,000 for the years ended September 30, 2000 and 1999,
respectively. CharterBank's current equity investment in the limited partnership
is approximately $1.9 million. See Note 11 of the Notes to Financial Statements
for further discussion of the limited partnership interest.
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Properties
We currently conduct our business through four full-service banking offices
and three loan production offices. We are also in the process of building a new
facility located in Auburn, Alabama. We anticipate that occupancy of the
building will occur by October, 2001. The estimated cost is approximately $2.5
million. The Auburn loan production office is qualified to accept deposits but
is actively soliciting only loan customers for noncash deposits until the full-
service facility is open. As of December 31, 2000, the properties and leasehold
improvements owned by us had an aggregate net book value of $3.2 million.
Year of Lease
or License Deposits as of
Location Ownership Year Opened Expiration(1) December 31, 2000
----------------------------------- -------------- ------------- --------------- -------------------
(In thousands)
Administrative/Main Office:
600 Third Avenue Owned 1965 - 121,957
West Point, Georgia
Branch Offices:
300 Church Street Owned 1976 - 20,298
LaGrange, Georgia
3500 20/th/ Avenue(2) Leased 1963 7/31/08 63,837
Valley, Alabama
91 River Road(2) Owned 1989 - 5,178
Valley, Alabama
Auburn, Alabama(3) Owned 2001 - -
Loan Production Offices:
15 Ruth Drive, Suite C Leased 1993 Month-to Month -
Newnan, Georgia
118-C Enterprise Court Leased 1993 10/31/01 -
Columbus, Georgia
Airport Plaza Leased 1994 Month-to-Month -
Auburn, Alabama
_______________________
(1) Lease expiration dates assume all options to extend lease terms are
exercised.
(2) Includes time period operated by Citizens National Bank prior to the
Citizens acquisition.
(3) Target opening date of October 2001.
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Legal Proceedings
We are not involved in any pending legal proceeding other than routine
legal proceedings occurring in the ordinary course of business. We believe that
these routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operations.
Personnel
As of December 31, 2000, CharterBank had 124 full-time equivalent
employees. The employees are not represented by a collective bargaining unit,
and we consider our relationship with our employees to be excellent.
Subsidiary Activities
CharterBank has one subsidiary Charter Holdings, Inc. Charter Holdings is a
Georgia corporation whose sole purpose is to own all of the outstanding stock of
Charter Insurance Company, a Hawaiian corporation. Charter Insurance Company was
incorporated for the purpose of engaging in mortgage reinsurance activities and
commenced activities in December 2000. After the reorganization, Charter
Insurance Company will be a subsidiary of Charter Financial and Charter Holding
will be dissolved.
Charitable Activities
CharterBank has also created The Charter Foundation, Inc., an Alabama
non-stock tax qualified not-for-profit corporation incorporated in 1994. The
purpose of The Charter Foundation is to make grants to the local community to
improve the quality of life. CharterBank has donated $5.0 million of Freddie Mac
common stock and approximately $200,000 of real estate since The Charter
Foundation's formation in 1994. By contributing shares of Freddie Mac stock to
The Charter Foundation, CharterBank recognizes any gain, which is exempt from
income taxes, on the disposition of the stock, while receiving a tax benefit in
the way of a deduction as a contribution expense of the total fair market value
of any Freddie Mac stock donated to the foundation. CharterBank has charitable
contribution carryovers aggregating approximately in $1.7 million at September
30, 2000 for tax reporting purposes.
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BUSINESS OF CHARTER FINANCIAL
Charter Financial has not engaged in any business to date. Upon completion
of the reorganization, Charter Financial will own CharterBank. Charter Financial
will retain up to 50% of the net proceeds from the offering. We will invest our
initial capital as discussed in "How We Intend to Use the Proceeds from the
Offering."
Immediately after consummation of the reorganization, it is expected that
the only business activities of Charter Financial will include holding all of
the outstanding common stock of CharterBank, funding a loan to the ESOP from the
proceeds of capital raised in the offering, and contributing 50% of the net
proceeds from the offering to CharterBank as additional capital. Charter
Financial will also hold 1.7 million shares of Freddie Mac common stock and will
be the parent corporation to Charter Insurance Company (in addition to
CharterBank) following the reorganization. Charter Insurance Company will hold
400,000 shares of Freddie Mac common stock following the reorganization. Charter
Financial may use the net proceeds retained by it to pay dividends to
stockholders and to repurchase shares of its common stock. In the future,
however, Charter Financial as the holding company of CharterBank, will be
authorized to pursue other business activities permitted by applicable laws and
regulations for savings and loan companies, which may include the issuance of
additional shares of common stock to raise capital or to support mergers or
acquisitions and borrowing funds for reinvestment in CharterBank. There are no
plans for any additional capital issuance, merger or acquisition, or other
diversification of the activities of Charter Financial at the present time.
Our cash flow will depend upon earnings from the investment of the portion
of net proceeds we retain and any dividends Charter Financial receives from
CharterBank. Initially, Charter Financial will neither own nor lease any
property, but will instead use the premises, equipment and furniture of
CharterBank. At the present time, we intend to employ only persons who are
officers of CharterBank to serve as officers of Charter Financial. We will
however, use the support staff of CharterBank from time to time. These persons
will not be separately compensated by Charter Financial. Charter Financial will
hire additional employees, as appropriate, to the extent it expands its business
in the future. See "How We Intend to Use the Proceeds from the Offering."
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REGULATION OF CHARTERBANK AND CHARTER FINANCIAL
General
Charter Financial and First Charter, MHC, will be regulated as savings and
loan holding companies by the Office of Thrift Supervision. CharterBank, as a
federal stock savings bank, will continue to be subject to the regulation,
examination and supervision by the Office of Thrift Supervision. CharterBank
must file reports with the Office of Thrift Supervision concerning its
activities and financial condition. Charter Financial and First Charter, MHC
will also be required to file reports with, and otherwise comply with the rules
and regulations of the Office of Thrift Supervision. Charter Financial will also
be required to file reports with, and otherwise comply with, the rules and
regulations of the SEC under the federal securities laws.
On November 12, 1999, President Clinton signed into law landmark financial
services legislation, titled the Gramm-Leach-Bliley Act ("GLB Act"). The GLB Act
repeals depression-era laws restricting affiliations among banks, securities
firms, insurance companies and other financial services providers. The impact of
the GLB Act on Charter Financial, CharterBank and First Charter, MHC, where
relevant, is discussed throughout the regulation section below.
Any change in such laws and regulations, whether by the Office of Thrift
Supervision, the FDIC, or through legislation, could have a material adverse
impact on Charter Financial and CharterBank and their operations and
stockholders.
Federal Banking Regulation
Activity Powers. CharterBank derives its lending and investment powers from
the Home Owners' Loan Act, as amended, and the regulations of the Office of
Thrift Supervision. Under these laws and regulations, CharterBank may invest in
mortgage loans secured by residential and commercial real estate; commercial and
consumer loans; certain types of debt securities; and certain other assets.
CharterBank may also establish service corporations that may engage in
activities not otherwise permissible for CharterBank, including certain real
estate equity investments and securities and insurance brokerage. CharterBank's
authority to invest in certain types of loans or other investments is limited by
federal law.
Loans-to-One-Borrower Limitations. CharterBank is generally subject to the
same limits on loans to one borrower as a national bank. With specified
exceptions, CharterBank's total loans or extensions of credit to a single
borrower cannot exceed 15% of CharterBank's unimpaired capital and surplus which
does not include accumulated other comprehensive income. CharterBank may lend
additional amounts up to 10% of its unimpaired capital and surplus, if the loans
or extensions of credit are fully-secured by readily-marketable collateral.
CharterBank currently complies with applicable loans-to-one-borrower
limitations.
QTL Test. Under federal law, CharterBank must comply with the qualified
thrift lender, or "QTL" test. Under the QTL test, CharterBank is required to
maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" in at least nine months of the most recent 12-month period.
"Portfolio assets" means, in general, CharterBank's total assets less the sum
of:
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. specified liquid assets up to 20% of total assets;
. goodwill and other intangible assets; and
. the value of property used to conduct CharterBank's business.
"Qualified thrift investments" includes various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
CharterBank's portfolio assets. Recent legislation broadened the scope of
"qualified thrift investments" to include 100% of an institution's credit card
loans, education loans and small business loans. CharterBank may also satisfy
the QTL test by qualifying as a "domestic building and loan association" as
defined in the Internal Revenue Code of 1986. CharterBank met the QTL test at
December 31, 2000, and in each of the prior 12 months, and, therefore, qualifies
as a thrift lender. For purposes of calculating compliance with the QTL test, we
use the cost basis of our investment of our Freddie Mac stock, rather than the
current market value of the stock.
If CharterBank fails the QTL test it must either operate under certain
restrictions on its activities or convert to a bank charter.
Capital Requirements. Office of Thrift Supervision regulations require
CharterBank to meet three minimum capital standards:
(1) a tangible capital ratio requirement of 1.5% of total assets, as
adjusted under the Office of Thrift Supervision regulations;
(2) a leverage ratio requirement of 3% of core capital to such adjusted
total assets, if a savings association bas been assigned the highest
composite rating of 1 under the Uniform Financial Institutions Ratings
System; and
(3) a risk-based capital ratio requirement of 8% of core and supplementary
capital to total risk-weighted assets.
The minimum leverage capital ratio for any other depository institution
that does not have a composite rating of 1 will be 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the depository institution. In determining compliance with the risk-based
capital requirement, CharterBank must compute its risk-weighted assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the Office of Thrift Supervision capital regulation based on the
risks that the Office of Thrift Supervision believes are inherent in the type of
asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital,
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but core capital also includes certain qualifying supervisory goodwill and
certain purchased credit card relationships. Supplementary capital currently
includes cumulative and other perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses. In addition, up to 45% of unrealized gains on
available-for-sale equity securities with a readily determinable fair value may
be included in supplementary capital. The allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of risk-
weighted assets, and the amount of supplementary capital that may be included as
total capital cannot exceed the amount of core capital.
At December 31, 2000, CharterBank met each of its capital requirements.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
as implemented by Office of Thrift Supervision regulations, CharterBank has a
continuing and affirmative obligation 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 CharterBank nor does
it limit its 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 Office of Thrift Supervision, in connection with its
examination of CharterBank, to assess CharterBank's record of meeting the credit
needs of its community and to take the record into account in its evaluation of
certain applications by CharterBank. The CRA also requires all institutions to
make public disclosure of their CRA ratings. CharterBank received a
"Satisfactory" CRA rating in its most recent examination.
CRA regulations rate an institution based on its actual performance in
meeting community needs. In particular, the system focuses on three tests:
. lending test, to evaluate the institution's record of making loans in
its assessment areas;
. an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and
. a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
Transactions with Related Parties. CharterBank's authority to engage in
transactions with its "affiliates" is limited by the Office of Thrift
Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act
(the "FRA"). In general, these transactions must be on terms which are as
favorable to CharterBank as comparable transactions with non-affiliates. In
addition, certain types of these transactions are restricted to an aggregate
percentage of CharterBank's capital. Collateral in specified amounts must
usually be provided by affiliates in order to receive loans from CharterBank. In
addition, the Office of Thrift Supervision regulations prohibit a savings
association from lending to any of its affiliates that is engaged in activities
that are not permissible for bank holding companies and from purchasing the
securities of any affiliate, other than a subsidiary.
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CharterBank's authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the Federal Reserve Board. Among other things,
these provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of CharterBank's capital. In addition, extensions of credit in excess of
certain limits must be approved by CharterBank's Board of Directors.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings associations, including CharterBank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and to unsafe or unsound practices.
Standards For Safety And Soundness. Under federal law, the Office of Thrift
Supervision has adopted, a set of guidelines prescribing safety and soundness
standards. These guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, asset quality,
earnings standards, and compensation, fees and benefits. In general, the
guidelines require appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines.
In addition, the Office of Thrift Supervision adopted regulations that
authorize, but do not require, the Office of Thrift Supervision to order an
institution that has been given notice that it is not satisfying these safety
and soundness standards to submit a compliance plan. If, after being notified,
an institution fails to submit an acceptable plan or fails in any material
respect to implement an accepted plan, the Office of Thrift Supervision must
issue an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" provisions of federal law. If an
institution fails to comply with such an order, the Office of Thrift Supervision
may seek to enforce such order in judicial proceedings and to impose civil money
penalties.
Limitation on Capital Distributions. The Office of Thrift Supervision
imposes various restrictions or requirements on CharterBank's ability to make
capital distributions, including cash dividends. A savings institution that is
the subsidiary of a savings and loan holding company must file an application or
a notice with the Office of Thrift Supervision at least 30 days before making a
capital distribution. CharterBank must file an application for prior approval
if:
. it is not eligible for expedited treatment;
. the total amount of its capital distributions, including the proposed
distribution, for the applicable calendar year would exceed an amount
equal to CharterBank's net income for that year plus CharterBank's
retained net income for the previous two years;
105
. it would not adequately be capitalized after the distribution; or
. the distribution would violate an agreement with the Office of Thrift
Supervision or applicable regulation.
CharterBank will be required to file a capital distribution notice or
application with the Office of Thrift Supervision before paying Charter
Financial a dividend. The Office of Thrift Supervision may disapprove of a
notice or application if:
. CharterBank would be undercapitalized following the distribution;
. the proposed capital distribution raises safety and soundness
concerns; or
. the capital distribution would violate a prohibition contained in any
statute, regulation or agreement.
Finally, CharterBank cannot distribute regulatory capital that is required
for its liquidation account.
Liquidity. CharterBank is required to maintain an average daily balance of
liquid assets in each calendar quarter of not less than 4% of:
. the amount of its liquidity base at the end of the preceding calendar
quarter; or
. the average daily balance of its liquidity base during the preceding
quarter.
On December 27, 2000, the statutory liquidity requirement was repealed. The
Office of Thrift Supervision is currently in the process of repealing the
regulation. Until such time as the regulation is repealed, CharterBank will be
required to meet the 4% liquidity requirement.
Prompt Corrective Action Regulations. Under the Office of Thrift
Supervision prompt corrective action regulations, the Office of Thrift
Supervision is required to take certain, and is authorized to take other,
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association would be placed in one of the following four
categories based on the association's capital:
. well capitalized;
. adequately capitalized;
. undercapitalized; and
. critically undercapitalized.
At December 31, 2000, CharterBank met the criteria for being considered
"well-capitalized."
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When appropriate, the Office of Thrift Supervision can require
corrective action by a savings association holding company under the "prompt
corrective action" provisions of federal law.
Insurance of Deposit Accounts. CharterBank is a member of the Savings
Association Insurance Fund, and CharterBank pays its deposit insurance
assessments to the SAIF. The FDIC also maintains another insurance fund, the
Bank Insurance Fund, which primarily insures the deposits of banks and state
chartered savings banks.
Under federal law, the FDIC established a risk based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information as of the quarter ending three months before the beginning
of the assessment period. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under the
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment rates
are applied. Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%.
In addition, all FDIC insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0212% of insured
deposits to fund interest payment on bonds issued by the Financing Corporation,
an agency of the federal government established to recapitalize the predecessor
to the SAIF. These assessments will continue until the Financing Corporation
bonds mature in 2017.
Federal Home Loan Bank System. CharterBank is a member of the Federal
Home Loan Bank of Atlanta, which is one of the regional Federal Home Loan Banks
making up the Federal Home Loan Bank System. Each Federal Home Loan Bank
provides a central credit facility primarily for its member institutions.
CharterBank is required to acquire and hold shares of capital stock in the
Federal Home Loan Bank of Atlanta in an amount equal to the greater of 1% of the
aggregate principal amount of its unpaid residential mortgage loans,
home-purchase contracts and similar obligations, but not less than $500 or 5% of
outstanding advances. CharterBank was in compliance with this requirement with
an investment in the capital stock of the Federal Home Loan Bank of Atlanta at
December 31, 2000, of $12.7 million. Any advances from a Federal Home Loan Bank
must be secured by specified types of collateral, and all long term advances may
be obtained only for the purpose of providing funds for residential housing
finance.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of earnings that the
Federal Home Loan Banks can pay as dividends to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, CharterBank's net interest income
would be affected.
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Under the GLB Act, membership in the Federal Home Loan Bank System is
now voluntary for all federally-chartered savings associations, such as
CharterBank. The GLB Act also replaces the existing redeemable stock structure
of the Federal Home Loan Bank System with a capital structure that requires each
Federal Home Loan Bank to meet a leverage limit and a risk-based permanent
capital requirement. Two classes of stock are authorized: Class A (redeemable on
6-months notice) and Class B (redeemable on 5-years notice).
Prohibitions Against Tying Arrangements. Federal savings banks are
subject to the prohibitions of 12 U.S.C. (S) 1972 on certain tying arrangements.
A depository institution is prohibited, subject to some exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or its affiliates
or not obtain services of a competitor of the institution.
Federal Reserve System
Under Federal Reserve Board regulations, CharterBank is required to
maintain non-interest-earning reserves against its transaction accounts. The
Federal Reserve Board regulations generally require that reserves of 3% must be
maintained against aggregate transaction accounts of $42.8 million or less,
subject to adjustment by the Federal Reserve Board, and an initial reserve of
$1.3 million plus 10%, subject to adjustment by the Federal Reserve Board
between 8% and 14%, against that portion of total transaction accounts in excess
of $42.8 million. The first $5.5 million of otherwise reservable balances,
subject to adjustments by the Federal Reserve Board, are exempted from the
reserve requirements. CharterBank is in compliance with these requirements.
Because required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce CharterBank's interest-earning assets, to the extent the
requirement exceeds vault cash.
Holding Company Regulation
Charter Financial and First Charter, MHC will be savings and loan
holding companies regulated by the Office of Thrift Supervision. As such,
Charter Financial and First Charter, MHC will register with and be subject to
Office of Thrift Supervision examination and supervision, as well as certain
reporting requirements. In addition, the Office of Thrift Supervision has
enforcement authority over Charter Financial and First Charter, MHC and any of
their non-savings institution subsidiaries. Among other things, this authority
permits the Office of Thrift Supervision to restrict or prohibit activities that
are determined to be a serious risk to the financial safety, soundness or
stability of a subsidiary savings institution. Unlike bank holding companies,
federal savings and loan holding companies are not subject to any regulatory
capital requirements or to supervision by the Federal Reserve System.
Restrictions Applicable to Charter Financial. Because Charter Financial
will be acquired after May 4, 1999, under the GLB Act it will be prohibited from
engaging in non- financial activities. Unitary savings and loan associations
acquired before this date are "grandfathered" under the GLB Act and generally
have no restrictions on their business activities. Charter Financial's
activities, however, will be restricted to:
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. furnishing or performing management services for a savings
institution subsidiary of such holding company;
. conducting an insurance agency or escrow business;
. holding, managing, or liquidating assets owned or acquired
from a savings institution subsidiary of such company;
. holding or managing properties used or occupied by a savings
institution subsidiary of such company;
. acting as trustee under a deed of trust;
. any other activity (a) that the Federal Reserve Bank ("FRB"),
by regulation, has determined to be permissible for bank
holding companies under Section 4(c) of the Bank Holding
Company Act of 1956 ("BHC"), unless the Director of the Office
of Thrift Supervision, by regulation, prohibits or limits any
such activity for savings and loan holding companies, or (b)
in which multiple savings and loan holding companies were
authorized by regulation to directly engage on March 5, 1987;
. purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of
such stock by such holding company is approved by the Director
of the Office of Thrift Supervision; and
. any activity permissible for financial holding companies under
section 4(k) of the BHC.
Permissible activities which are deemed to be financial in nature or
incidental thereto under section 4(k) of the Banking Holding Company Act
include:
. lending, exchanging, transferring, investing for others or
safeguarding money or securities;
. insurance activities or providing and issuing annuities, and
acting as principal, agent or broker;
. financial, investment or economic advisory services;
. issuing or selling instruments representing interests in pools
of assets that a bank is permitted to hold directly;
. underwriting, dealing in, or making a market in securities;
. activities previously determined by the Federal Reserve Board
to be closely related to banking;
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. activities that bank holding companies are permitted to engage
in outside of the U.S.; merchant banking activities; and
. portfolio investments made by an insurance company.
In addition, Charter Financial cannot be acquired or acquire a company
unless the company is engaged solely in financial activities.
Restrictions Applicable to Activities of Mutual Holding Companies.
Under federal law, a mutual holding company may engage only in the following
activities:
. investing in the stock of a savings institution;
. acquiring a mutual association through the merger of such
association into a savings institution subsidiary of such
holding company or an interim savings institution subsidiary
of such holding company;
. merging with or acquiring another holding company, one of
whose subsidiaries is a savings institution;
. investing in a corporation the capital stock of which is
available for purchase by a savings institution under federal
law or under the law of any state where the subsidiary savings
institution or association is located; and
. the permissible activities described above for non-
grandfathered savings and loan holding companies.
If a mutual holding company acquires or merges with another holding
company, the holding company acquired or the holding company resulting from such
merger or acquisition may only invest in assets and engage in activities listed
above, and it has a period of two years to cease any non-conforming activities
and divest any non-conforming investments.
Restrictions Applicable to All Savings and Loan Holding Companies.
Federal law prohibits a savings and loan holding company, including Charter
Financial and First Charter, MHC, directly or indirectly, from acquiring:
. control (as defined under HOLA) of another savings institution
(or a holding company parent) without prior Office of Thrift
Supervision approval;
. through merger, consolidation, or purchase of assets, another
savings institution or a holding company thereof, or acquiring
all or substantially all of the assets of such institution (or
a holding company) without prior Office of Thrift Supervision
approval; or
. control of any depository institution not insured by the FDIC
(except through a merger with and into the holding company's
savings institution subsidiary that is approved by the Office
of Thrift Supervision).
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A savings and loan holding company may not acquire as a separate
subsidiary an insured institution that has a principal office outside of the
state where the principal office of its subsidiary institution is located,
except:
. in the case of certain emergency acquisitions approved by the
FDIC;
. if such holding company controls a savings institution
subsidiary that operated a home or branch office in such
additional state as of March 5, 1987; or
. if the laws of the state in which the savings institution to
be acquired is located specifically authorize a savings
institution chartered by that state to be acquired by a
savings institution chartered by the state where the acquiring
savings institution or savings and loan holding company is
located or by a holding company that controls such a state
chartered association.
If the savings institution subsidiary of a federal mutual holding
company fails to meet the QTL test set forth in Section 10(m) of the HOLA and
regulations of the Office of Thrift Supervision, the holding company must
register with the FRB as a bank holding company under the BHC Act within one
year of the savings institution's failure to so qualify.
TAXATION
Federal
General. For federal income tax purposes, we report income on the basis
of a taxable year ending September 30, using the accrual method of accounting,
and we are generally subject to federal income taxation in the same manner as
other corporations. Following the reorganization, CharterBank and Charter
Financial will constitute an affiliated group of corporations and, therefore,
will be eligible to report their income on a consolidated basis. CharterBank is
not currently under audit by the IRS.
Distributions. To the extent that we (CharterBank) make "non-dividend
distributions" to stockholders, such distributions will be considered to result
in distributions from our unrecaptured tax bad debt reserve as of December 31,
1987 (our "base year reserve"), to the extent thereof and then from our
supplemental reserve for losses on loans, and an amount based on the amount
distributed will be included in our income. Non-dividend distributions include
distributions in excess of our current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. Dividends paid out of our current or accumulated earnings and
profits will not be included in our income.
The amount of additional income created from a non-dividend
distribution is equal to the lesser of our base year reserve and supplemental
reserve for losses on loans or an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus, in
some situations, approximately one and one-half times the non-dividend
distribution would be includible in gross income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. We do not intend to
pay dividends that would result in the recapture of any portion of our bad debt
reserves.
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Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code"), imposes a tax on alternative minimum taxable income at
a rate of 20%. Only 90% of alternative minimum taxable income can be offset by
alternative minimum tax net operating loss carryovers of which we currently have
none. Alternative minimum taxable income is also adjusted by determining the tax
treatment of certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. We have been subject to
a tax on alternative minimum taxable income during the past five years.
Elimination of Dividends. Charter Financial may exclude from its income
100% of dividends received from CharterBank as a member of the same affiliated
group of corporations.
State
CharterBank currently files and will continue to file Georgia and
Alabama income tax returns. Generally, the income of financial institutions in
Georgia and Alabama, which is calculated based on federal taxable income,
subject to certain adjustments, is subject to both Alabama and Georgia tax. We
are not currently under audit with respect to our Georgia or Alabama income tax
returns and our state tax returns have not been audited for the past five years.
Charter Financial will be required to file a Georgia income tax return
and will generally be subject to a state income tax rate that is the same tax
rate as the tax rate for financial institutions in Georgia.
MANAGEMENT
Shared Management Structure
Charter Financial's directors and executive officers will be the same
as CharterBank's. Although it has no current plans to do so, CharterBank may
choose to appoint additional directors in the future. We expect that Charter
Financial and CharterBank will continue to have common executive officers until
there is a business reason to establish separate management structures.
To date, CharterBank has compensated its directors and executive
officers for their services to the bank. Charter Financial and First Charter,
MHC will pay additional compensation to these directors for their services to
the holding company. To the extent that Charter Financial uses the services of
officers and employees of CharterBank and does not pay additional compensation
for those individuals, we expect Charter Financial and First Charter, MHC to
reimburse CharterBank for a part of the compensation paid to each executive
officer that is proportionate to the amount of time which he or she devotes to
performing services for Charter Financial.
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Directors
Composition of our Boards. We have seven directors. Each belongs to one
of three classes with staggered three-year terms of office. Classes One, Two and
Three have directors whose terms expire in 2001, 2002 and 2003, respectively. At
each of the annual shareholder meetings of Charter Financial, the shareholders
will elect directors to fill the seats of the directors whose terms are expiring
in that year and any vacant seats. Directors of CharterBank will be elected by
Charter Financial as its sole stockholder.
Who Our Directors Are. The following table states our directors' names,
their ages as of December 31, 2000, the years when they began serving as
directors and the years when their current terms of office as directors will
expire:
CharterBank Current
Director Term
Directors Age(1) Position Since Expires
-------------------------------------------------------------------------------------------------------------------------------
John W. Johnson, Jr. 80 Chairman of the Board, Director 1954 2001
Robert L. Johnson 47 President, Chief Executive Officer and Director 1986 2002
David Z. Cauble, III 48 Director 1996 2002
Jane W. Darden 50 Director 1988 2003
William B. Hudson 71 Director 1975 2001
Thomas M. Lane 46 Director 1996 2003
R. Terry Taunton 51 Director 1977 2002
__________________________
(1) At December 31, 2000.
Our Directors' Backgrounds. The business experience for the past five
years of each of our directors is as follows:
John W. Johnson, Jr. Mr. Johnson is the founder of CharterBank and has
served as Chairman of the Board since 1954. Mr. Johnson also served as the
President of CharterBank from 1954 to 1996. He practiced law in Lanett, Alabama,
for over 50 years and served in the Alabama State Senate from 1950 to 1954. Mr.
Johnson graduated from the University of Alabama and the University of Alabama
School of Law and also served as First Lieutenant in the U.S. Army during World
War II. Mr. Johnson is the father of Robert L. Johnson.
Robert L. Johnson. Mr. Johnson has been the President and Chief
Executive Officer of the Bank since 1996. Prior to that time, he served as
Financial Analyst, then Senior Vice President and Chief Financial Officer. He
began continuous service with CharterBank in 1984. Mr. Johnson has an
undergraduate degree from Vanderbilt University and a Master's Degree in
Business Administration with a concentration in Finance from the University of
Alabama. He is a graduate of the Graduate School of Community Bank Management.
He is also currently on the boards of Chattahoochee Valley Hospital Society and
is Chairman of The Charter Foundation. Mr. Johnson is also affiliated with the
West Point Rotary Club. Mr. Johnson is the son of John W. Johnson, Jr.
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David Z. Cauble, III. Mr. Cauble is self-employed as a food service
consultant and investor. He was the Owner and President of Vend-All Company in
LaGrange, Georgia, until its sale in 1996. Mr. Cauble graduated from Washington
& Lee University. Other affiliations of Mr. Cauble include: Chairman of Cobb
Foundation, Young Presidents' Organization and First United Methodist Church
Foundation.
Jane W. Darden. Mrs. Darden is a homemaker and part-time bookkeeper.
She was formerly employed in the banking field for 5 years. She has a B.A. in
Psychology from Converse College and she also serves on the Staff-Parish
Relations Committee at West Point Methodist Church.
William B. Hudson. Mr. Hudson is an Account Executive for the Robinson-
Humphrey Company, a division of Salomon Smith Barney. He has been employed in
the brokerage business for the past 37 years. Mr. Hudson graduated from the
University of Georgia with a degree in business with Postgraduate studies at
Auburn University.
Thomas M. Lane. Mr. Lane has been the Senior Vice President and
Treasurer of West Point Stevens, Inc. since March 2000 and previously served as
its Treasurer from 1997 to 1999. Prior to that time, he served as Controller of
Budgets and Analysis for West Point Pepperell, the predecessor of West Point
Stevens, Inc. He has been continuously employed in various financial and
accounting positions with West Point Pepperell since June 1976. Mr. Lane
received his B.S. in Business Administration from Auburn University in 1976.
Currently, he also serves on the board of directors for Junior Achievement.
R. Terry Taunton. Mr. Taunton is a self-employed owner of Taunton-
Emfinger, Inc., a paint, hardware and building supplies business. He is also the
President of Taunton-Johnson Corporation, a real estate development corporation
established in 1973. Mr. Taunton graduated from Auburn University with a degree
in Business Administration.
Meetings of the Board of Directors and Its Committees
Our Board of Directors meets on a monthly basis and may hold additional
special meetings. During 2000, the Board of Directors of CharterBank held 12
regular meetings and five special meetings. The Board of Directors of Charter
Financial did not meet in 2000.
The Board of Directors of CharterBank maintains an Executive, Audit,
and Personnel and Compensation Committee.
The Executive Committee consists of Director Taunton, as the Chair, and
two other board members (one of which must be an outside director) who serve on
a rotating basis. The Executive Committee meets as needed with the full power of
the Board of Directors. The Executive Committee, among other things, is
responsible for review, ratification and/or approval of loans that exceed
certain threshold amounts. The Executive Committee of CharterBank met 12 times
during 2000.
The Audit Committee consists of Directors Darden, Hudson, Taunton, Lane
and Cauble with Director Darden serving as Chair. The Committee reviews the
annual audit prepared by the independent accountants, recommends the appointment
of accountants and reviews the work of
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third parties who function as internal auditors. The Audit Committee of
CharterBank met twice during 2000.
The Personnel and Compensation Committee consists of Directors Hudson,
Darden, Taunton, Lane and Cauble with Director Hudson serving as Chair. The
committee provides advice and recommendations to the Board in the areas of
employee salaries and benefit programs. The Personnel and Compensation Committee
of CharterBank met four times during 2000.
Director Compensation
Meeting Fees. CharterBank's practice has been to provide each
non-employee director an annual retainer of $8,000. Each committee chairman has
been provided a $1,000 additional annual retainer for his or her service as
chairman. A fee of $500 has been provided to each director for attendance at
each board meeting. Non-employee directors have received a fee of $200 for each
stand alone committee meeting and $100 per committee meeting if it is held in
conjunction with a board meeting. CharterBank paid fees totaling $74,651 to its
non-employee directors for the year ended September 30, 2000.
CharterBank also provides a $8,000 annual retirement fee to Martha B.
Jones who serves as a director emeritus member of the board.
Effective as of the reorganization, directors of CharterBank will
continue to receive the director's fees discussed above and directors of Charter
Financial will receive an annual retainer of $2,000. Directors of Charter
Financial and First Charter, MHC will also receive a fee of $500 for each board
meeting attended.
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Executive Officers Who are Not Directors
Curtis R. Kollar, 48, is a Certified Public Accountant (CPA) and
Certified Management Accountant (CMA). He has been the Vice President &
Treasurer of CharterBank since 1991 and was named Chief Financial Officer of
CharterBank in January of 2001. He has an undergraduate degree from Ohio
Wesleyan and an MS in Accounting from Syracuse University. He is a graduate of
the Graduate School of Community Bank Management. Mr. Kollar has 16 years
experience in the banking field. Current affiliations of Mr. Kollar include:
West Point Rotary Club and Keep Troup Beautiful.
William C. Gladden, 48, has been the Vice President and Secretary of
the Bank since 1991. He was also a Director of Charter Federal Savings and Loan
from 1988 to 1990. He was the Manager of Telecommunications for West Point
Pepperell from 1984 to 1990. Mr. Gladden is a graduate of the National School of
Banking and has a B.S. in Management from Georgia Tech, 1976. Current
affiliations of Mr. Gladden include: Chambers County Library Board, Troup-
Chambers Habitat for Humanity and West Point Rotary Club.
Bonnie F. Bonner, 44, has been the Assistant secretary and Secretary to
the Board of Directors of the Bank since 1989. She has also served as an
Assistant Vice President of CharterBank since 1990. She is a graduate of the
National School of Banking. She received her B.S. from Auburn University in
1977. Ms. Bonner's current affiliations include: Historic Chattahoochee
Commission, City of Valley Historic Preservation Commission and Sheltering A
Vision.
Lee Washam, 39, has been a Vice President and Senior Credit Officer of
CharterBank since April 2000 and was named Executive Vice President in January
of 2001. Mr. Washam is the former Executive Vice President of First Flag Bank,
LaGrange, Georgia, and has over 17 years of banking experience. Mr. Washam
received his B.S. in Business Administration from LaGrange College in 1983 and
is a 1995 graduate of The Graduate School of Banking at Louisiana State
University. Mr. Washam's current affiliations include: LaGrange Noon Lions Club,
the Georgia Community Bankers Association, Highland Country Club and New
Community Church.
Executive Officer Compensation
Summary Compensation Table. The following table provides information
about the compensation paid to CharterBank's Chief Executive Officer and to the
other most highly compensated executive officers whose annual salary and bonus
for fiscal year 2000 was at least $100,000.
Annual Compensation
------------------------------------------------------------------
Name and Other Annual LTIP All Other
Principal Position Year Salary ($) Bonus ($) Compensation-($)/(a)/ Payouts Compensation/(b)/
--------------------------- ----------- ------------- -------------- ---------------------- ---------- ------------------
John W. Johnson, Jr.
Chairman 2000 $120,000 $38,360 - $46,313 $5,868
Robert L. Johnson, President
and Chief Executive Officer 2000 $135,000 47,629 - 46,313 5,515
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___________________________
(a) CharterBank provides its executive officers with non-cash benefits and
perquisites, such as the use of employer- owned or leased automobiles.
Management of the Bank believes that the aggregate value of these
benefits for 2000 did not, in the case of any executive officer, exceed
$50,000 or 10% of the aggregate salary and annual bonus reported for
him or her in the Summary Compensation Table.
(b) Includes the following components: (1) employer matching contributions
to the CharterBank 401(k) Plan: Mr. John Johnson, $5,250; Mr. Robert
Johnson, $5,250 and (2) dollar value of premium payments for life
insurance coverage provided by CharterBank: Mr. John Johnson, $618; Mr.
Robert Johnson, $265.
Employment Agreements
Charter Financial and CharterBank have entered into an employment
agreement with Mr. Robert Johnson to secure his services as President and Chief
Executive Officer. The employment agreement has a fixed term of three years
beginning as of the effective date of the reorganization and may be renewed
annually after a review of the executive's performance. This agreement provides
for a minimum annual salary of $183,000, discretionary cash bonuses, and
participation on generally applicable terms and conditions in other compensation
and fringe benefit plans. The agreement also guarantees customary corporate
indemnification and errors and omissions insurance coverage throughout the
employment term and for six years after termination.
Charter Financial and CharterBank may terminate the executive's
employment, and the executive may resign, at any time with or without cause.
However, in the event of termination during the term without cause, they will
owe the executive severance benefits generally equal to the value of the cash
compensation and fringe benefits that the executive would have received if he
had continued working for an additional three years, but not to exceed three
times the executive's average annual compensation for the five years preceding
the year in which his employment terminates. The same severance benefits would
be payable if the executive resigns during the term following:
. a loss of title, office or membership on the board of
directors;
. material reduction in duties, functions or responsibilities;
involuntary relocation of the executive's principal place of
employment to a location over 25 miles in distance from
CharterBank's principal office in West Point, Georgia and over
25 miles from the executive's principal residence; or
. other material breach of contract by Charter Financial or
CharterBank which is not cured within 30 days.
For 60 days after a change in control, the executive may resign for any reason
and collect severance benefits as if he had been discharged without cause. The
employment agreement also provides uninsured death and disability benefits.
If Charter Financial or CharterBank experiences a change in ownership,
a change in effective ownership or control or a change in the ownership of a
substantial portion of their assets as contemplated by section 280G of the
Internal Revenue Code, a portion of any severance payments under the employment
agreements might constitute an "excess parachute payment"
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under current federal tax laws. Federal tax laws impose a 20% excise tax,
payable by the executive, on excess parachute payments. Neither Charter
Financial nor CharterBank could claim a federal income tax deduction for an
excess parachute payment, excise tax reimbursement payment or gross-up payment.
Change of Control Agreements
CharterBank and Charter Financial will jointly enter into two-year
change of control agreements with Bonnie F. Bonner and one-year change of
control agreements with Curtis R. Kollar, William C. Gladden, Linda Drummond and
Lee Washam. The term of these agreements is perpetual until CharterBank gives
notice of non-extension, at which time the term is fixed for two years in the
case of the two year agreements and one year in the case of the one-year
agreements.
Generally, CharterBank may terminate the employment of any officer
covered by these agreements, with or without cause, at any time prior to a
change of control without obligation for severance benefits. However, if
CharterBank or Charter Financial signs a merger or other business combination
agreement, or if a third party makes a tender offer or initiates a proxy
contest, it could not terminate an officer's employment without cause without
liability for severance benefits. The severance benefits would generally be
equal to the value of the cash compensation and fringe benefits that the officer
would have received if he or she had continued working for an additional two
years in the case of officers with a two-year agreement, and one year in the
case of officers with a one-year agreement. CharterBank would pay the same
severance benefits if the officer resigns after a change of control following a
loss of title, office or membership on the board of directors, material
reduction in duties, functions or responsibilities, involuntary relocation of
his or her principal place of employment to a location over 25 miles from
CharterBank's principal office on the day before the change of control and over
25 miles from the officer's principal residence or other material breach of
contract which is not cured within 30 days. These agreements also provide
uninsured death and disability benefits.
If CharterBank or Charter Financial experiences a change in ownership,
a change in effective ownership or control or a change in the ownership of a
substantial portion of their assets as contemplated by section 280G of the
Internal Revenue Code, a portion of any severance payments under the change of
control agreements might constitute an "excess parachute payment" under current
federal tax laws. Any excess parachute payment would be subject to a federal
excise tax payable by the officer and would be non-deductible by CharterBank and
Charter Financial for federal income tax purposes.
Benefit Plans
401 (k) Plan. CharterBank has adopted the 401(k) Plan, a tax-qualified
defined contribution plan, for substantially all employees of CharterBank who
have completed at least three months of service. Eligible employees may
contribute from 1% to 8% of annual compensation to the plan on a pre-tax basis
each year, subject to limitations of the Internal Revenue Code (for 2000 the
limit was $10,500). Under the 401(k) Plan, CharterBank will make a matching
contribution equal to 50% of the first 8% of compensation deferred by the
participant.
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The 401(k) plan has an individual account for each participant's
contributions and allows each participant to direct the investment of his or her
account. One permitted investment is Charter Financial common stock. The plan
itself is not an eligible account holder in this initial stock offering.
However, participants who are eligible account holders and supplemental eligible
account holders may use their subscription rights to purchase stock for their
plan accounts. This plan will purchase common stock for other participants in
the initial offering, to the extent that shares are available. After the
offering, the plan will purchase in open market transactions. Participants will
direct the voting of shares purchased for their plan accounts.
Employee Stock Ownership Plan. This plan is a tax-qualified plan that
covers substantially all employees who have at least one year of service and
will take effect at the completion of the reorganization.
Charter Financial intends to lend this plan enough money to purchase
3.96% of the outstanding common stock of Charter Financial. The plan may
purchase all or part of these shares from Charter Financial to the extent that
shares are available after filling the subscriptions of eligible account
holders. Alternatively, the plan may purchase all or part of these shares in
private transactions or on the open market after completion of the
reorganization to the extent that shares are available for purchase on
reasonable terms. We have not determined whether such funds would be available
to the plan or that such purchase would be made directly from Charter Financial
in the offering, or after completion of the reorganization. We expect to make
such determination immediately prior to the expiration date for submitting
orders in the offering. This determination would be made based on prevailing
market conditions. For this reason, we cannot assure you that the employee stock
ownership plan will purchase shares in the offering after the reorganization, or
that such purchases will occur during any particular time period or at any
particular price.
Although contributions to this plan will be discretionary, CharterBank
intends to contribute enough money each year to make the required principal and
interest payments on the loan from Charter Financial. It is expected that this
loan will be for a term of 30 years and will call for level annual payments of
principal and interest. The plan will initially pledge the shares it purchases
as collateral for the loan and hold them in a suspense account.
The plan will not distribute the pledged shares right away. Instead, it
will release a portion of the pledged shares annually. Assuming the plan repays
its loan as scheduled over a 30-year term, we expect that 1/30th of the shares
will be released annually in years 2001 through 2031. Although the repayment
period of the ESOP loan is scheduled over a 30-year term, we anticipate that we
may prepay a portion of the principal which would trigger the release of
additional ESOP shares. The plan will allocate the shares released each year
among the accounts of participants in proportion to their compensation for the
year. For example, if a participant's compensation for a year represents 1% of
the total compensation of all participants for the year, the plan would allocate
to that participant 1% of the shares released for the year. Participants direct
the voting of shares allocated to their accounts. Shares in the suspense account
will usually be voted in a way that mirrors the votes which participants cast
for shares in their individual accounts.
This plan may purchase additional shares in the future, and may do so
using borrowed funds, cash dividends, periodic employer contributions or other
cash flow.
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Benefit Restoration Plan. CharterBank has also established the Benefit
Restoration Plan in order to provide restorative payments to selected executives
who are prevented from receiving the full benefits contemplated by the ESOP's
benefit formula and the full matching contribution under the 401(k) Plan.
Currently, only the Chief Executive Officer has been selected for participation.
The restorative payments consist of payments in lieu of shares that cannot be
allocated to the participant's account under the ESOP and payments for employer
matching contributions that cannot be allocated under the 401(k) Plan due to the
legal limitations imposed on tax-qualified plans. Also, in the case of a
participant who retires before the repayment in full of the ESOP's loan, the
restorative payments include a payment in lieu of the shares that would have
been allocated if employment had continued through the full term of the loan.
Incentive Compensation Program. CharterBank maintains an incentive
compensation plan for employees to earn bonuses based on the achievement of
objective, pre-established performance goals. The first part of the plan
consists of a short term incentive program which rewards short term performance
based on the achievement of key operating goals. All exempt, non-commissioned
employees who are not covered under another incentive compensation plan are
eligible to participate. These short term incentive payments are made either
quarterly or annually depending on the employee's job description. The second
feature of the incentive compensation plan is a long- term incentive
compensation plan for certain officers of CharterBank. This long term incentive
plan grants "phantom stock" units to selected employees. Each unit represents a
dollar amount that will be paid under a formula at the end of a three year
period. In general, a participant whose employment terminates prior to the
payout of the units will forfeit his or her shares. In the case of normal or
early retirement, as defined under the plan, stock units will be valued at the
quarter end following retirement and paid out within 90 days, if the employee
has been employed with CharterBank for more than 5 years and is age 55 or older
or if the employee has become permanently disabled. In the event of death, stock
units will be valued at the quarter end following death and paid to the
employee's estate within 90 days. Finally, under a change in control, all
participants become fully vested.
Future Stock Benefit Plans
Stock Option Plan. We intend to implement a stock option plan for our
directors and officers as part of the reorganization. Applicable regulations
prohibit us from granting options under the stock option plan until 6 months
after the reorganization. Office of Thrift Supervision regulations also require
that we must give stockholders the opportunity to vote for or against the stock
option plan on the stock order form.
We expect to adopt a stock option plan that will authorize the
Compensation Committee to grant options to purchase up to 4.99% of Charter
Financial's outstanding shares over a period of 10 years. The Compensation
Committee will decide which directors and officers will receive options and what
the terms of those options will be. However, no stock option will permit its
recipient to purchase shares at a price that is less than the fair market value
of a share on the date the option is granted, and no option will have a term
that is longer than 10 years. If we implement a stock option plan before the
first anniversary of the reorganization, applicable regulations will require
that we observe the following restrictions:
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. We must limit the total number of options granted to
non-employee directors to 30% of the shares authorized for the
plan.
. We must also limit the number of options granted to any one
non-employee director to 5% of the shares authorized for the
plan and the number of options that are granted to any
executive officer to 25% of the shares that are authorized for
the plan.
. We must not permit the options to become vested at a rate more
rapid than 20% per year beginning on the first anniversary of
stockholder approval of the plan.
. We must not permit accelerated vesting for any reason other
than death, disability or change in control.
After the first anniversary of the reorganization, we may amend the plan to
change or remove these restrictions. In connection with removing this
restriction, we expect to amend the plan later to remove these restrictions and
to provide for accelerated vesting in cases of retirement.
We may obtain the shares needed for this plan by issuing additional
shares or through stock repurchases.
We expect the stock option plan will permit the Personnel and
Compensation Committee to grant either incentive stock options that qualify for
special federal income tax treatment or non-qualified stock options that do not
qualify for special treatment. Incentive stock options may be granted only to
employees and will not create federal income tax consequences when they are
granted. If they are exercised during employment or within three months after
termination of employment, the exercise will not create federal income tax
consequences either. When the shares acquired on exercise of an incentive stock
option are resold, the seller must pay federal income taxes on the amount by
which the sales price exceeds the purchase price. This amount will be taxed at
capital gains rates if the sale occurs at least two years after the option was
granted and at least one year after the option was exercised. Otherwise, it is
taxed as ordinary income.
Non-qualified stock options may be granted to either employees or
non-employees such as directors, consultants and other service providers.
Incentive stock options that are exercised more than three months after
termination of employment are treated as non-qualified stock options.
Non-qualified stock options will not create federal income tax consequences when
they are granted. When they are exercised, federal income taxes must be paid on
the amount by which the fair market value of the shares acquired by exercising
the option exceeds the exercise price. When the shares acquired on exercise of a
non-qualified stock option are resold, the seller must pay federal income taxes
on the amount by which the sales price exceeds the purchase price plus the
amount included in ordinary income when the option was exercised. This amount
will be taxed at capital gains rates, which will vary depending upon the time
that has elapsed since the exercise of the option.
When a non-qualified stock option is exercised, Charter Financial and
CharterBank may be allowed a federal income tax deduction for the same amount
that the option holder includes in his or her ordinary income. When an incentive
stock option is exercised, there is no tax
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deduction unless the shares acquired are resold sooner than two years after the
option was granted or one year after the option was exercised.
Management Recognition Plan. We intend to implement a management
recognition plan for our directors and officers as part of the reorganization.
Office of Thrift Supervision regulations state that we cannot make grants under
the management recognition plan until six months after the reorganization.
Office of Thrift Supervision regulations require us to obtain approval for the
management recognition plan by giving stockholders the opportunity to vote for
or against the plan on the stock order form.
We expect to adopt a management recognition plan that will authorize
the Personnel and Compensation Committee to make restricted stock awards of up
to 1.996% of Charter Financial's outstanding shares. The Personnel and
Compensation Committee will decide which directors and officers will receive
restricted stock and the terms of those awards. If we implement a management
recognition plan before the first anniversary of the reorganization, applicable
regulations will require that we observe the following restrictions:
. We must limit the total number of shares that are awarded to
outside directors to 30% of the shares authorized for the
plan.
. We must also limit the number of shares that are awarded to
any one outside director to 5% of the shares authorized for
the plan and the number of shares that are awarded to any
executive officer to 25% of the shares that are authorized for
the plan.
. We must not permit the awards to become vested at a more rapid
rate than 20% per year beginning on the first anniversary of
stockholder approval of the plan.
. We must not permit accelerated vesting for any reason other
than death, disability or change in control.
After the first anniversary of the reorganization, we may amend the plan to
change or remove these restrictions and to provide for accelerated vesting in
cases of retirement. We expect that any other amendment to this plan (whether
adopted before or after the first anniversary of the plan's initial effective
date) will be subject to stockholder approval if it would change the class of
people eligible to receive benefits, change the price they must pay for stock
which they acquire under the plan, or increase the number of shares available
under the plan or increase the maximum amount of stock that may be acquired by
any one person under the plan.
We may obtain the shares needed for this plan by issuing additional
shares or through stock repurchases.
Restricted stock awards under this plan may feature employment
restrictions that require continued employment for a period of time for the
award to be vested. They may feature restrictions that require the achievement
of specified corporate or individual performance goals for the award to be
vested. Or, they may feature a combination of employment and performance
restrictions. Awards are not vested unless the specified employment restrictions
and performance goals are met. However, pending vesting, the award recipient may
have voting and dividend
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rights. When an award becomes vested, the recipient must include the current
fair market value of the vested shares in his income for federal income tax
purposes. Charter Financial and CharterBank may be allowed a federal income tax
deduction in the same amount. Depending on the nature of the restrictions
attached to the restricted stock award, Charter Financial and CharterBank may
have to recognize a compensation expense for accounting purposes ratably over
the vesting period or in a single charge when the performance conditions are
satisfied.
Transactions with Directors and Executive Officers
We make loans to our directors and executive officers. We offer
discounted loans to all of our employees through an employee loan program. For
the year ended September 30, 2000, loans to executive officers, directors and
their associates totaled $771,190. These loans do not involve more than the
normal risk of collectability or present other unfavorable features.
CharterBank's general counsel is the law firm of Johnson, Caldwell &
McCoy. Curt M. Johnson, the brother of Robert L. Johnson and the son of John W.
Johnson, Jr., is a partner of this law firm. The firm represents the Bank in
real estate and commercial loan closings and other matters, wherein the Bank's
borrower typically pays the legal fees and expenses. CharterBank, paid the law
firm $136,465 for the year ended September 30, 2000.
CharterBank leases its Shawmut branch, which is located at 3500 20/th/
Avenue, Valley, Alabama, from the Taunton-Johnson Corporation which is owned by
Robert L. Johnson and Terry Taunton. Director Taunton also serves as the
President of the Taunton-Johnson Corporation. CharterBank paid Taunton-Johnson
Corporation $40,000 for the year ended September 30, 2000 for the lease of
Shawmut Branch.
Proposed Purchases of Common Stock by Management
The following table presents, for each of our directors and executive
officers, the amount of stock they wish to purchase in the offering. We have
assumed that a sufficient number of shares will be available to satisfy their
subscriptions. The amounts include shares that may be purchased through
individual retirement accounts and by associates of the directors and executive
officers. Collectively our directors and executive officers expect to purchase a
total of 278,000 shares, or approximately 6.2% of shares we sell in the offering
and 1.24% of our outstanding common stock (assuming the sale of 4,485,000 shares
of common stock). These shares do not include shares expected to be issued under
any stock benefit plans of Charter Financial. If all shares issuable under such
stock benefit plans were issued to directors and executive officers of Charter
Financial, directors and executive officers of Charter Financial would own
2,739,816 shares, or 61.1% of the shares sold in the offering and 12.2% of our
outstanding common stock (assuming the sale of 4,485,000 shares of the common
stock).
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Number Percent of
Name Amount of shares Shares Sold
--------------------------------- ----------- ----------- --------------
Directors and Executive Officers:
John W. Johnson, Jr. $ 750,000 75,000 1.67%
Robert L. Johnson 500,000 50,000 1.11
David Z. Cauble, III 100,000 10,000 0.22
Jane W. Darden 50,000 5,000 0.11
William B. Hudson 100,000 10,000 0.22
Thomas M. Lane 100,000 10,000 0.22
R. Terry Taunton 100,000 10,000 0.22
Curtis R. Kollar 500,000 50,000 1.11
William C. Gladden 30,000 3,000 0.07
Lee Washam 500,000 50,000 1.11
Bonnie F. Bonner 50,000 5,000 0.11
---------- -------
Total to be Purchased by Directors
and Executives Officers $2,780,000 278,000 6.20%
========== =======
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THE REORGANIZATION AND THE OFFERING
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The Board of Directors of CharterBank has adopted the plan of reorganization,
subject to the approval of the Office of Thrift Supervision and members of
CharterBank, as well as the satisfaction of certain conditions.
Office of Thrift Supervision approval does not constitute an endorsement or
recommendation of the plan of reorganization.
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General
On October 26, 2000, the Board of Directors of CharterBank unanimously
adopted the plan of reorganization pursuant to which CharterBank will reorganize
into a "two-tiered" mutual holding company. This structure is called a two-tier
structure because it will have two levels of holding companies. After the
reorganization, Charter Financial will be the mid-tier stock holding company and
First Charter, MHC will be the top-tier mutual holding company. Under the terms
of the plan of reorganization, Charter Financial will own all of the stock of
CharterBank and First Charter, MHC will own at least a majority of Charter
Financial. This reorganization to a mutual holding company structure also
includes the offering by Charter Financial of up to 49% of its outstanding
shares to qualifying depositors of CharterBank, tax qualified employee plans of
CharterBank and other members of CharterBank in a subscription offering and to
certain other persons in a direct community offering and/or syndicated community
offering. The reorganization will be effected as described under "--Tax Aspects"
or in any other manner that is permitted by the Office of Thrift Supervision and
is consistent with the intent of the plan of reorganization.
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The following is a brief summary of pertinent aspects of the reorganization. A
copy of the plan is available from CharterBank upon request and is available for
inspection at the offices of CharterBank and at the Office of Thrift
Supervision. The plan is also filed as an exhibit to the Registration Statement
of which this prospectus is a part, copies of which may be obtained from the
SEC. See "Where You Can Find Additional Information."
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Reasons for the Reorganization
The reorganization is intended to provide an additional source of capital
not available to us as a mutual institution. The reorganization will enable
CharterBank to achieve the benefits of a stock company without a loss of control
that often follows standard conversions from mutual to stock form. We are
committed to being an independent community-oriented institution, and the Board
of Directors believes that the mutual holding company structure is best suited
for this purpose.
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The reorganization is also intended to provide an additional source of
capital to Charter Financial in order to allow it:
. to fund new loans;
. to establish or acquire new branches in our targeted market areas
within the I-85 corridor;
. to diversify products that we offer;
. to increase delivery systems, including the expanded use of ATMs
and the introduction of Internet banking;
. to invest in securities; and
. funds for general corporate purposes.
CharterBank also wishes to reorganize into a mutual holding company
structure to separate the business of running a community-based savings bank
from decisions concerning its investment in Freddie Mac stock. As part of the
reorganization, Charter Financial and First Charter, MHC will retain
approximately 2,100,000 (including 400,000 shares held by Charter Insurance
Company) and 400,000 shares of Freddie Mac stock, respectively which will allow
CharterBank's management to refocus on core banking activities. The remaining
2,555,000 shares of Freddie Mac stock will be retained by CharterBank.
Additionally, after the reorganization, Charter Financial will have the
ability to issue additional shares of common stock to raise capital or to
support mergers or acquisitions, rather than assuming the risks of raising
capital through the sale of Freddie Mac stock. No additional capital issuance or
mergers or acquisitions are planned or contemplated at the present time. The
ability of Charter Financial to issue common stock will enable Charter Financial
to establish stock benefit plans for directors, management and employees,
including incentive stock option plans, management recognition plans and an
employee stock ownership plan. We also believe that the reorganization will
provide local customers and other residents with an opportunity to become equity
owners of Charter Financial, and thereby participate in possible stock price
appreciation and cash dividends. This is consistent with our objective of being
a locally-owned financial institution. We believe that, through expanded local
stock ownership, current customers and non-customers who purchase common stock
will seek to enhance the financial success of CharterBank through consolidation
of their banking business and increased referrals to CharterBank.
The proceeds from the sale of common stock of Charter Financial will be
invested in order to enhance our profitability and facilitate growth.
Additionally, our stronger capital position after the offering will enhance
operating flexibility, support desired expansion and provide a cushion for
absorbing unanticipated losses. CharterBank will receive approximately 50% of
the net proceeds of the reorganization as equity capital, to be used initially
to invest in short-term investments and adjustable rate mortgage-backed
securities, then later for making loans within our market area. Charter
Financial will also use a portion of the cash proceeds from
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the reorganization to extend a loan to the ESOP, for use in purchasing shares of
common stock issued as part of the reorganization. The remainder of the proceeds
will be retained by Charter Financial to repurchase common stock, pay dividends
to stockholders or for other general purposes.
After considering the advantages and risks of the reorganization, as well as
applicable fiduciary duties, the Board of Directors of CharterBank unanimously
approved the reorganization as being in the best interests of CharterBank, our
members and the communities that we serve.
Structure of the Reorganization
The reorganization will be structured as a "purchase and assumption"
transaction. As part of the reorganization, CharterBank will convert to a mutual
holding company, First Charter, MHC and will establish Charter Financial and
CharterBank as subsidiaries. The reorganization will be effected as follows:
1. CharterBank will establish a federal corporation, Charter Financial
as a wholly-owned subsidiary;
2. CharterBank will establish a federally chartered stock savings bank
as a wholly-owned subsidiary of Charter Financial;
3. CharterBank will exchange its charter for a federal mutual holding
company charter to become First Charter, MHC;
4. First Charter, MHC will transfer all of its assets and liabilities
to Charter Financial, including all of the stock of Charter
Insurance Company, but excluding 400,000 Freddie Mac shares and
approximately $100,000 cash;
5. Charter Financial will transfer 400,000 Freddie Mac shares to
Charter Insurance Company; and
6. Charter Financial will transfer the assets and liabilities received
from First Charter, MHC under step 4, other than the Charter
Insurance Company stock and 1,700,000 Freddie Mac shares, to a
newly formed stock bank to be named CharterBank.
In addition, as part of the reorganization, Charter Financial will sell up
to 20% of its common stock in a subscription and community offering.
Approximately 50% of the proceeds of the offering will be retained by Charter
Financial and the balance transferred to CharterBank. As a result of these
transactions:
. CharterBank will become First Charter, MHC, and will own 400,000
Freddie Mac shares, $100,000 cash and at least 80% of Charter
Financial;
. Charter Financial will own all of the stock of CharterBank and
Charter Insurance Company and 1,700,000 Freddie Mac shares;
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. CharterBank will own 2,555,000 Freddie Mac shares; and
. Charter Insurance Company will own 400,000 Freddie Mac shares.
Effects of the Reorganization
Continuity. While the reorganization is being accomplished, and after its
completion, the routine business of CharterBank of accepting deposits and making
loans will continue without interruption. CharterBank will continue to be
subject to regulation by the Office of Thrift Supervision and the FDIC. After
the reorganization, CharterBank will continue to provide services for depositors
and borrowers under current policies by its management and staff.
The Board of Directors of CharterBank currently consists of seven members.
After the reorganization, these seven directors will continue to serve on the
Board of Directors of CharterBank and will become the new Board of Directors of
Charter Financial and First Charter, MHC.
There will be no change in our offices or staff as part of the
reorganization. The officers of Charter Financial will be the current executive
officers of CharterBank. See "Management."
Deposit Accounts and Loans. The reorganization will not affect any deposit
accounts or borrower relationships with CharterBank. All deposit accounts in
CharterBank will continue to be insured up to the legal maximum by the FDIC the
same manner as such deposit accounts were insured immediately before the
reorganization. The reorganization will not change the interest rate or the
maturity of deposits at CharterBank.
Each depositor of CharterBank will have both a deposit account in
CharterBank and a pro rata ownership interest in the equity of First Charter,
MHC based upon the balance in the depositor's account. This interest may only be
realized in the event of a liquidation of First Charter, MHC. However, this
ownership interest is tied to the depositor's account and has no tangible market
value separate from the deposit account. Any depositor who opens a deposit
account obtains a pro rata ownership interest in the equity of First Charter,
MHC without any additional payment beyond the amount of the deposit. A depositor
who reduces or closes his or her account receives the balance in the account but
receives nothing for his or her ownership interest in the equity of First
Charter, MHC, which is lost to the extent that the balance in the account is
reduced. Consequently, depositors of First Charter, MHC have no way to realize
the value of their ownership interest in First Charter, MHC, except in the
unlikely event that First Charter, MHC is liquidated.
All loans of CharterBank will retain the same status that they had prior to
the reorganization. The amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the reorganization.
Voting Rights. After the reorganization, direction of CharterBank will
continue to be under the control of the Board of Directors of CharterBank.
Charter Financial, as the holder of all of the outstanding common stock of
CharterBank, will have exclusive voting rights with respect
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to any matters concerning CharterBank requiring stockholder approval, including
the election of directors of CharterBank.
After the reorganization, the holders of the common stock of Charter
Financial will have exclusive voting rights with respect to any matters
concerning Charter Financial. These voting rights will be exclusive except to
the extent Charter Financial in the future issues additional common stock or
preferred stock with voting rights. Each holder of common stock will be entitled
to vote on any matters to be considered by Charter Financial's stockholders,
including the election of directors of Charter Financial, subject to the
restrictions and limitations set forth in Charter Financial's federal stock
charter discussed below.
By virtue of its ownership of a majority of the outstanding shares of common
stock of Charter Financial, First Charter, MHC will be able to control the
outcome of most matters presented to the stockholders of Charter Financial for
resolution by vote. However, current regulations and regulatory policies require
that the adoption of a second-step conversion of First Charter, MHC be approved
by a majority of the vote of the shares held by the public stockholders (i.e.,
all stockholders except First Charter, MHC).
As a federally-chartered mutual holding company, First Charter, MHC will
have no authorized capital stock and, thus, no stockholders. Holders of deposit
accounts in and borrowers of CharterBank will become members of First Charter,
MHC entitled to vote on all questions requiring action by the members of First
Charter, MHC including, without limitation, election of directors of First
Charter, MHC. In addition, all persons who become depositors of CharterBank
following the reorganization will have membership rights with respect to First
Charter, MHC. Borrowers will not receive membership rights in connection with
any new borrowings made after the reorganization.
Liquidation Rights. In the unlikely event of a complete liquidation of
CharterBank prior to the completion of the reorganization, each depositor would
receive a pro rata share of any assets of CharterBank remaining after payment of
expenses and satisfaction of claims of all creditors. Each depositor's pro rata
share of such liquidating distribution would be in the same proportion as the
value of such depositor's deposit account was to the total value of all deposit
accounts in CharterBank at the time of liquidation.
At the completion of the reorganization, First Charter, MHC will establish
a liquidation account for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain deposit accounts
with CharterBank following the reorganization. The amount of the liquidation
account will be equal to the net worth of First Charter, MHC as of that date. In
the unlikely event of a complete liquidation of First Charter, MHC, and only in
such event, each such account holder will be entitled to receive a liquidating
distribution from the liquidation account in the amount of the then-adjusted
account balances for such person's deposit accounts then held following all
liquidation payments to creditors.
The initial account balance for each eligible account holder and
supplemental eligible account holder will be determined by multiplying the
opening balance in the liquidation account by a fraction, the number of which is
the amount of qualifying deposits held by such eligible account holder or
supplemental eligible account holder on the September 30, 1999 or the March
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31, 2001 qualifying date, respectively, and the denominator of which is the
aggregate amount of all qualifying deposits on such dates.
If, however, on any annual closing date of CharterBank, the amount in any
deposit account is less than the amount in such deposit account on September 30,
1999 (with respect to an eligible account holder) and March 31, 2001 (with
respect to a supplemental eligible account holder) or any other annual closing
date, then the interest in the liquidation account relating to such deposit
account would be reduced from time to time by the proportion of any such
reduction, and such interest will cease to exist if such deposit account is
closed. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related deposit account. In
addition, no interest in the liquidation account would ever be increased despite
any subsequent increase in the deposit balances of any eligible account holder
or supplemental eligible account holder.
We have no plans to liquidate CharterBank or First Charter, MHC in the
future.
Tax Aspects. Although the reorganization may be effected in any manner
approved by the Office of Thrift Supervision that is consistent with the
purposes of the plan of reorganization and applicable law, regulations and
policies, it is intended that the reorganization will be effected through the
purchase and assumption method. Under the plan of reorganization, consummation
of the reorganization is conditioned upon, among other things, the prior receipt
by CharterBank of either a private letter ruling from the IRS and from the
Georgia taxing authorities or an opinion of Thacher Proffitt & Wood as to the
federal income tax consequences and from Alston & Bird LLP as to the Georgia and
Alabama income tax consequences of the reorganization to CharterBank, First
Charter, MHC, Charter Financial, eligible account holders and supplemental
eligible account holders. Based in part upon representations of CharterBank,
Thacher Proffitt & Wood has issued its opinion regarding certain federal income
tax consequences of the reorganization. With regard to the reorganization,
Thacher Proffitt & Wood has opined that:
(1) The conversion of the present CharterBank to mutual holding company
form under the name First Charter, MHC will constitute a
reorganization under Code section 368(a)(1)(F);
(2) The transfer of assets by First Charter, MHC (the present
CharterBank) to Charter Financial solely in exchange for common
stock of Charter Financial and the assumption by Charter Financial
of liabilities of First Charter, MHC will be an exchange described
in Code section 351.
(3) The transfer of assets by Charter Financial to the new CharterBank
solely in exchange for common stock of the new CharterBank and the
assumption by the new CharterBank of the liabilities of Charter
Financial will be an exchange described in Code section 351.
(4) None of First Charter, MHC (the present CharterBank), Charter
Financial or the new CharterBank will recognize gain or loss as a
result of the reorganization; and
(3) Eligible account holders and supplemental eligible account holders
will not recognize gain or loss upon their receipt of
nontransferable subscription rights to
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purchase shares of Charter Financial, provided the amount to be
paid for such shares is equal to fair market value of such shares.
Thacher Proffitt & Wood will not opine as to whether the present CharterBank
will be required to include any amount of its bad debt reserve in income as a
result of the transfer of its loans to Charter Financial and to the new
CharterBank, or as to the effect of the reorganization on any bad debt reserve
of the new CharterBank. Unlike private rulings of the IRS, an opinion of counsel
is not binding on the IRS and the IRS could disagree with conclusions reached in
the opinion. If there is a disagreement, we can not guarantee that the IRS would
not prevail in a judicial or administrative proceeding.
Accounting Consequences. The reorganization will be accounted for in a
manner similar to a pooling-of-interests under generally accepted accounting
principles. Accordingly, the carrying value of our assets, liabilities, and
capital will be unaffected by the reorganization and will be reflected in
Charter Financial's, First Charter, MHC's and CharterBank's financial statements
based on their historical amounts.
How We Determined the Offering Range and the $10.00 Price Per Share
The plan of reorganization requires that the purchase price of the common
stock must be based on the appraised pro forma market value of the common stock,
as determined on the basis of an independent valuation. CharterBank has retained
RP Financial to make the independent valuation. RP Financial's fees for its
services in making such appraisal are estimated to be $100,000. CharterBank has
not had any prior business dealings with RP Financial, other than preparing
CharterBank's business plan for the reorganization and for its previous
non-stock mutual holding company reorganization (which was withdrawn from the
Office of Thrift Supervision). Charter Financial will indemnify RP Financial and
its employees and affiliates against losses (including any losses in connection
with claims under the federal securities laws) arising out of its services as
appraiser, except where RP Financial's liability results from its negligence or
bad faith.
An appraisal has been made by RP Financial in reliance upon the information
contained in this prospectus, including the financial statements. RP Financial
also considered the following factors, among others:
. the present and projected operating results and financial condition
of CharterBank, and the economic and demographic conditions in
CharterBank's existing market area;
. historical, financial and other information relating to
CharterBank;
. a comparative evaluation of the operating and financial statistics
of CharterBank with those of other similarly situated savings
associations and savings institutions located in the Southeast;
. the impact of the reorganization on CharterBank's equity and
earnings potential;
131
. dividends that may be paid by Charter Financial; and
. the trading market for securities of comparable institutions and
general conditions in the market for such securities.
On the basis of the foregoing, RP Financial has advised CharterBank that, in
its opinion, dated March 2, 2001, the estimated pro forma market value of the
common stock of Charter Financial Corp. being offered to persons other than
First Charter, MHC ranged from a minimum of $33.2 million to a maximum of $44.9
million with a midpoint of $39.0 million (the estimated valuation range).
The Board of Directors of CharterBank held a meeting to review and discuss
the appraisal report prepared by RP Financial. Representatives of RP Financial
participated in the meeting to explain the contents of the appraisal report. The
Board of Directors reviewed the methods that RP Financial used to determine the
pro forma market value of the common stock and the appropriateness of the
assumptions that RP Financial used in determining this value. The Board of
Directors determined that the common stock will be sold at $10.00 per share,
which is the price most commonly used in stock offerings involving converting
savings institutions.
The Board of Directors has approved the independent appraisal of RP
Financial which established an estimated valuation range of $33.2 million to
$44.9 million, with a midpoint of $39.0 million. Based on the independent
appraisal and taking into account that Charter Financial must be at least a
majority-owned subsidiary of First Charter, MHC, so long as First Charter, MHC
is in mutual form, Charter Financial expects to issue between 3,315,000 and
4,485,000 shares of common stock. The estimated valuation range and the offering
range may be amended with the approval of the Office of Thrift Supervision, due
to subsequent developments in the financial condition of CharterBank or market
conditions generally.
--------------------------------------------------------------------------------
The valuation prepared by RP Financial is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the financial statements
and other information provided by CharterBank, nor did RP Financial value
independently the assets or liabilities of CharterBank. The valuation considers
CharterBank as a going concern and should not be considered as an indication of
the liquidation value of CharterBank. Moreover, because such valuation is
necessarily based upon estimates and projections, all of which are subject to
change from time to time, no assurance can be given that persons purchasing such
shares in the reorganization will thereafter be able to sell such shares at
prices at or above the purchase price.
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The maximum of the estimated valuation range may be increased up to 15% and
the number of shares of common stock to be issued in the reorganization may be
increased to 5,157,750 shares due to regulatory considerations, changes in the
market and general financial and economic conditions without the resolicitation
of subscribers. See "- Limitations on Common Stock Purchases" as to the method
of distribution and allocation of additional shares that may be issued in the
event of an increase in the estimated valuation range.
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We may not sell any shares of common stock unless RP Financial confirms to
CharterBank and the Office of Thrift Supervision that, to the best of its
knowledge, nothing of a material nature has occurred which, taking into account
all relevant factors, would cause RP Financial to conclude that the appraisal
report is incompatible with its estimate of the pro forma market value of the
common stock upon the conclusion of the offering.
If RP Financial concludes that the pro forma market value of the common
stock is either more than 15% above the maximum of the estimated valuation range
or less than the minimum of the estimated valuation range, CharterBank and
Charter Financial, after consulting with the Office of Thrift Supervision may:
(1) terminate the plan of reorganization and return all subscription
funds promptly, paying interest at CharterBank's passbook savings
rate of interest and cancel all account withdrawal authorizations;
(2) establish a new estimated valuation range and either:
(a) hold new subscription and community offerings; or
(b) provide subscribers the opportunity to change or cancel
their orders (a "resolicitation"); or
(3) take such other actions as permitted by the Office of Thrift
Supervision in order to complete the reorganization.
If a resolicitation is commenced, unless an affirmative response is received
from a subscriber within a designated period of time, all funds will be promptly
returned to the subscriber and account withdrawal authorizations canceled as
described above.
A copy of the appraisal report of RP Financial, including any amendments
made to it, and the detailed memorandum of the appraiser setting forth the
method and assumptions for such appraisal are available for inspection at the
main office of CharterBank and at the Office of Thrift Supervision.
Subscription Offering and Subscription Rights
In accordance with the plan of reorganization, rights to subscribe for the
purchase of common stock have been granted to the following persons in the
following order of priority:
(1) Eligible accounts holders. Depositors with deposits in CharterBank
with balances aggregating $50 or more as of September 30, 1999.
(2) Tax-qualified employee stock benefit plans of CharterBank,
including the ESOP.
(3) Supplemental eligible account holders. Depositors with deposits in
CharterBank with balances aggregating $50 or more on March 31,
2001, other than those depositors who would otherwise qualify as
eligible account holders and except for officers, directors and
their associates; and
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(4) Other Members. Other depositors and borrowers of CharterBank on the
voting record date, who do not qualify in the preceding categories.
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all subscribers having prior rights
in the subscription offering and to the maximum and minimum purchase limitations
set forth in the plan of reorganization and as described below under "-
Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each eligible account holder will
receive, as first priority and without payment, non-transferable rights to
subscribe for common stock in an amount of up to $1,000,000 See "- Limitations
on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions by
eligible account holders, shares first will be allocated so as to permit each
subscribing eligible account holder to purchase a number of shares sufficient to
make such eligible account holder's total allocation equal to the lesser of 100
shares or the number of shares subscribed for. Thereafter, unallocated shares
will be allocated among the remaining eligible account holders whose
subscriptions remain unfilled in the proportion that the amount of their
respective qualifying deposit bears to the total amount of qualifying deposits
of all eligible account holders whose subscriptions remain unfilled. However, no
fractional shares shall be issued.
To ensure a proper allocation of stock, each eligible account holder must
list on his or her stock order form all deposit accounts in which such eligible
account holder had an ownership interest at September 30, 1999. Failure to list
an account or providing incorrect information could result in the loss of all or
part of an allocation. The subscription rights of eligible account holders who
are also directors or officers of CharterBank or their associates will be
subordinated to the subscription rights of other eligible account holders to the
extent attributable to increased deposits in the one-year period preceding
September 30, 1999.
Priority 2: The Tax-Qualified Employee Benefit Plans. On a second priority
basis, the tax-qualified employee benefit plans, including the ESOP, will
receive, as a second priority and without payment therefor, non-transferable
subscription rights to purchase up to 8% of 49.9% of the outstanding common
stock of Charter Financial. As a tax-qualified employee benefit plan, the ESOP
expects to purchase 8% of 49.9% of the outstanding common stock of Charter
Financial, or 661,700 shares, based on the issuance of 3,315,000 shares at the
minimum of the offering range or 895,200 shares based on the issuance of
4,485,000 at the maximum of the offering range. Subscriptions by the ESOP will
not be aggregated with shares of common stock purchased directly by or which are
otherwise attributable to any other participants in the subscription and
community offerings, including subscriptions of any of CharterBank's directors,
officers or employees. It has not been determined whether the ESOP will
subscribe for shares in the offering or purchase shares in private transactions
or on the open market after completion of the offering.
Priority 3: Supplemental Eligible Account Holders. To the extent that there
are shares remaining after satisfaction of the subscriptions by eligible account
holders and tax-qualified employee benefit plans, each supplemental eligible
account holder will receive, as a
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third priority and without payment, non-transferable rights to subscribe for
common stock in an amount of up to $1,000,000. See "- Limitations on Common
Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions by
supplemental eligible account holders, available shares first will be allocated
among subscribing supplemental eligible account holders so as to permit each
supplemental eligible account holder to purchase a number of shares sufficient
to make such supplemental eligible account holder's total allocation equal to
the lesser of 100 shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated among the remaining supplemental eligible
account holders whose subscriptions remain unfilled in the proportion that the
amount of their respective qualifying deposit bears to the total amount of
qualifying deposits of all supplemental eligible account holders whose
subscriptions remain unfilled. However, no fractional shares shall be issued.
To ensure proper allocation of stock, each supplemental eligible account
holder must list on his or her stock order form all deposit accounts in which
such supplemental eligible account holder had an ownership interest at [March
31, 2001]. Failure to list an account or providing incorrect information could
result in the loss of all or part of an allocation.
Priority 4: Other Members. On a fourth priority basis, each other member of
CharterBank who is not eligible in the preceding priority categories shall
receive non-transferable subscription rights to subscribe for common stock in an
amount up to $1,000,000. See "-Limitations on Common Stock Purchases."
Expiration Date for the Subscription Offering. The subscription offering
will expire at 4:00 p.m. Eastern time, on [ ], unless we extend this period to
[____].
Persons in Non-qualified States or Foreign Countries. We will make
reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
plan of reorganization reside. However, we are not required to offer stock in
the subscription offering to any person who resides in a foreign country.
Direct Community Offering and Syndicated Community Offering
Direct Community Offering. To the extent that shares remain available for
purchase after satisfaction of all subscriptions received in the subscription
offering, Charter Financial may offer shares for sale pursuant to the plan of
reorganization in a direct community offering to the public with preference
given to natural persons residing in our Community Reinvestment Act assessment
area, which is comprised of the entirety of Troup and Harris counties, Georgia,
and the entirety of Chambers and Lee counties, Alabama. Persons will be deemed
to reside in these counties if they occupy a dwelling within these counties and
establish an ongoing physical presence within it, together with an indication
that such presence is not merely transitory in nature. To the extent the person
is a corporation or other business entity, the principal place of business or
headquarters shall be in these counties. We may utilize depositor or loan
records or such other evidence provided to it to make a determination as to
whether a person is a resident. In all cases, the determination of resident
status will be made by us in our sole discretion. Stock sold in the direct
community offering will be offered and sold in a manner to achieve the widest
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distribution of the stock. No person may purchase more than $1,000,000 of common
stock in the direct community offering. Allocation of shares if an
oversubscription occurs will be allocated (to the extent shares remain
available) so that each person may receive 1,000 shares, and thereafter, on a
pro rata basis to such persons based on the amount of their subscriptions.
The direct community offering, if any, may commence concurrently with or
subsequent to the commencement of the subscription offering and shall terminate
no later than 45 days after the expiration of the subscription offering unless
extended by Charter Financial, with the approval of the Office of Thrift
Supervision, if necessary. We may terminate the direct community offering or the
syndicated community offering as soon as we have received orders for at least
the minimum number of shares available for purchase in the offering.
Syndicated Community Offering. If any stock remains unsold in the
subscription and direct community offerings, we may use the services of
broker-dealers to sell such shares on a best efforts basis in a syndicated
community offering to be managed by Sandler O'Neill & Partners, L.P. No person
may purchase more than $1,000,000 of common stock in the syndicated community
offering.
Sandler O'Neill & Partners, L.P. has not selected any particular broker-
dealers to participate in a syndicated community offering. Neither Sandler
O'Neill & Partners, L.P. nor any registered broker-dealer shall have any
obligation to take or purchase any shares of the common stock in the syndicated
community offering. However, Sandler O'Neill & Partners, L.P. has agreed to use
its best efforts in the sale of shares in any syndicated community offering.
The syndicated community offering may commence during the direct community
offering, if any, or after the direct community offering is terminated. The
syndicated community offering will terminate no more than 45 days following the
expiration of the subscription offering unless extended by Charter Financial
with the approval of the Office of Thrift Supervision. Such extensions may not
be beyond [____], 2002.
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The opportunity to subscribe for shares of common stock in the direct community
offering or syndicated community offering is subject to our right, in our sole
discretion, to accept or reject any order in whole or in part either at the time
of receipt of an order or as soon as practicable following the expiration date.
If we reject a subscription in part, the subscriber will not have the right to
cancel the remainder of the subscription.
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If for any reason a syndicated community offering of unsubscribed shares
cannot be effected or is not deemed advisable, we will seek to make other
arrangements, subject to the approval of the Office of Thrift Supervision and to
compliance with applicable state and federal securities laws.
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Marketing Arrangements
Sandler O'Neill & Partners, L.P. We have engaged Sandler O'Neill & Partners,
L.P. as financial and marketing agent in connection with the offering of the
common stock. Sandler O'Neill & Partners, L.P. has agreed to use its best
efforts to assist us with the solicitation of subscriptions for shares of common
stock in the offering. Sandler O'Neill & Partners, L.P. is not obligated to
purchase any shares of common stock.
Sandler O'Neill & Partners, L.P. will receive fees for services provided in
connection with the offering equal to 1.25% of the aggregate purchase price of
shares sold in the subscription offering and direct community offering,
excluding shares sold to the ESOP and any directors, officers or employees of
CharterBank. If there is a syndicated community offering, we will also pay
Sandler O'Neill & Partners, L.P. a management fee equal to 1.25% of the
aggregate purchase price of common stock sold in the syndicated community
offering, sales commissions payable to selected dealers and any sponsoring
dealer's fees, provided that fees payable by us to Sandler O'Neill & Partners,
L.P. for the shares they sell will not exceed 2.5% of the aggregate purchase
price of the common stock sold in the syndicated community offering. Aggregate
fees payable by us under a selected dealers agreement will not exceed 7.0% of
the aggregate purchase price of the common stock sold in the syndicated
community offering. Sandler O'Neill & Partners, L.P. will also be reimbursed for
its reasonable out-of-pocket expenses, including legal fees of up to $75,000. We
have agreed to indemnify Sandler O'Neill & Partners, L.P. to the extent allowed
by law, for reasonable costs and expenses in connection with certain claims and
liabilities, including liabilities under the Securities Act of 1933.
Directors, Officers and Employees. Directors and executive officers of
CharterBank may participate in the solicitation of offers to purchase common
stock. Other employees of CharterBank may participate in the offering in
ministerial capacities or provide clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers to
purchase common stock or provide advice regarding the purchase of common stock.
Charter Financial will rely on Rule 3a4-1 under the Exchange Act, and sales of
common stock will be conducted within the requirements of Rule 3a4-1, so as to
permit directors, officers and employees to participate in the sale of common
stock. No director, officer or employee of Charter Financial, First Charter, MHC
or CharterBank will be compensated in connection with his or her participation
by the payment of commissions or other remuneration based either directly or
indirectly on transactions in common stock.
Procedure for Purchasing Shares in Subscription and Direct Community Offerings
Use of Order Forms. To purchase shares in the subscription offering and the
direct community offering, an executed order form with the required payment for
each share subscribed for, or with appropriate authorization for withdrawal from
a subscriber's deposit accounts at CharterBank (which must be given by
completing the appropriate blanks on the stock order form), must be received by
CharterBank no later than 4:00 p.m., Eastern time, on the indicated expiration
date unless extended. You may submit your order form by mail using the return
envelope provided, by overnight courier to the indicated address on the order
form, or by
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bringing your order forms to one of our full service branch offices. Stock order
forms which are not received by such time or are executed defectively or are
received without full payment (or correct withdrawal instructions) are not
required to be accepted. In addition, we are not obligated to accept orders
submitted on photocopied or facsimiled order forms. We have the power to waive
or permit the correction of incomplete or improperly executed forms, but do not
represent that we will do so. Once received, an executed order form may not be
modified, amended or rescinded without our consent unless the reorganization has
not been completed within 45 days of the end of the subscription offering or we
conduct a resolicitation of subscribers for some other reason. If resolicitation
is commenced, subscribers will have an opportunity to change or cancel their
orders. Unless an affirmative response is received from a subscriber within a
designated timeframe, all funds will be promptly returned to the subscriber with
interest at CharterBank's passbook-savings rate and all account withdrawal
authorizations will be canceled.
In order to ensure that eligible account holders and supplemental eligible
account holders are properly identified as to their stock purchase eligibility,
depositors must list on the stock order form all deposit accounts as of the
applicable eligibility record date giving all names on each account and the
account numbers.
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the expiration date for the offering, in accordance with Rule 15c2-8 of the
Exchange Act, no prospectus will be mailed later than five days prior to such
date or hand delivered any later than two days prior to such date. Execution of
the stock order form will confirm receipt or delivery in accordance with Rule
15c2-8. Order forms will only be distributed when preceded or accompanied by a
prospectus.
Payment for Shares. Payment for subscriptions may be made by personal check,
bank check, money order or by authorization of withdrawal from your current
deposit accounts maintained at CharterBank. Interest will be paid on payments
made by check, bank check or money order at our passbook savings rate of
interest from the date payment is received until the completion or termination
of the reorganization. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn will remain in the
account and continue to accrue interest at the contractual rates until
completion or termination of the reorganization, but a hold immediately will be
placed on such funds, thereby making them unavailable to the depositor. We may
also authorize wire transfers as proper payment.
CharterBank will waive any applicable penalties for early withdrawal from
certificates of deposit. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time that the
funds are transferred under the authorization, the certificate will be canceled
at the time of the withdrawal, without penalty, and the remaining balance will
be converted into a statement savings account and will earn interest at the
passbook savings rate.
The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes. Rather, the ESOP may pay for such shares of common stock
subscribed for at the purchase price upon completion of the offering; provided,
that there is in force from the time of its subscription until such time, a loan
commitment acceptable to Charter Financial from an unrelated financial
institution or from Charter Financial to lend to the ESOP the aggregate
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purchase price of the shares for which it subscribed. Charter Financial intends
to provide such a loan to the ESOP.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of common stock in the subscription and community offerings, provided
that such IRAs are not maintained at CharterBank. Persons with IRAs maintained
at CharterBank must have their accounts transferred to an unaffiliated
institution or broker to purchase shares of common stock in the subscription and
community offerings. In addition, the provisions of ERISA and IRS regulations
require that officers, trustees and ten percent stockholders who use
self-directed IRA funds to purchase shares of common stock in the subscription
and community offerings make such purchases for the exclusive benefit of the
IRAs. Assistance on how to transfer IRAs maintained at CharterBank can be
obtained from the Conversion Center. Depositors interested in using funds in an
IRA to purchase common stock should contact the Conversion Center as soon as
possible.
Certificates representing shares of common stock purchased will be mailed to
purchasers to the addresses specified in properly completed order forms, as soon
as practicable following completion of the offering. Any certificates returned
as undeliverable will be disposed of in accordance with applicable law.
Conversion Center
If you have any questions regarding the offering or the reorganization,
please call the Conversion Center at [ ], from 10:00 a.m. to 4:00 p.m.,
Eastern time, Monday through Friday.
Restrictions on Transfer of Subscription Rights and Shares of Common Stock
Regulations prohibit any person with subscription rights from transferring
or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the subscription rights issued under the plan of
reorganization or the shares of common stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for such person's account. Each person exercising such subscription rights
will be required to certify that such person is purchasing shares solely for
such person's own account and that such person has no agreement or understanding
regarding the sale or transfer of such shares. The regulations also prohibit any
person from offering or making an announcement of an offer or an intent to make
an offer to purchase such subscription rights or shares of common stock prior to
the completion of the reorganization.
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We will pursue any and all legal and equitable remedies (including forfeiture)
in the event we become aware of the transfer of subscription rights and will not
honor orders known by us to involve the transfer of such rights.
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Limitations on Common Stock Purchases
The plan of reorganization includes the following limitations on the number
of shares of common stock which may be purchased during the reorganization:
(1) No subscription for fewer than 25 shares will be accepted;
(2) No fractional shares will be allocated or issued;
(3) Purchasers in the subscription offering may subscribe for and
purchase common stock in the subscription offering in an amount up
to $1,000,000;
(4) The tax-qualified employee benefit plans are permitted to purchase
up to 8% of 49.9% of the shares of common stock issued in the
offering, including those issued to First Charter, MHC, and, as a
tax-qualified employee benefit plan, the ESOP intends to purchase
8% of 49.9% of the shares of common stock issued in the offering
including those issued to First Charter, MHC;
(5) The officers and directors of CharterBank and their associates in
the aggregate, excluding purchases by the tax-qualified employee
benefit plans, may purchase up to 25% of the shares of stock issued
in the offering;
(6) The aggregate amount of outstanding common stock of Charter
Financial owned or controlled by persons other than First Charter,
MHC must be less than 50% of Charter Financial's total outstanding
stock following the reorganization;
(7) Persons purchasing shares of common stock in the direct community
offering or the syndicated community offering, may purchase common
stock in an amount up to $1,000,000, subject to increase as
described below; and
(8) Except for the tax-qualified employee benefit plans, the maximum
amount of shares of common stock purchased in all categories of the
offering by any person, together with associates of, and groups of
persons acting in concert with, such person, shall not exceed
$1,650,000 subject to increase as described below.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the $1,000,000 and $1,650,000 maximum amounts
may be altered by CharterBank, in its sole discretion and without further notice
to or solicitation of subscribers or other prospective purchasers, to the
following amounts: (i) increased to a maximum of 5% of the shares offered in the
offering, or (ii) decreased to not less than one-half of one percent (.5%) of
the number of shares of stock offered in the reorganization. If the purchase
limitations are increased, subscribers for the maximum amount in the
subscription offering will be given the opportunity to increase their
subscriptions up to the then applicable limit. Requests to purchase additional
shares of common stock under this provision will be determined by and in the
sole discretion of the Board of Directors of CharterBank and, if necessary,
allocated giving priority in accordance with the priorities set forth in the
plan of reorganization and described in this prospectus.
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If we sell more than 4,485,000 shares, the additional shares will be
allocated in accordance with the priorities and procedures described in
"-Subscription Offering and Subscription Rights" and "-Direct Community Offering
and Syndicated Community Offering."
The term "associate" of a person is defined to mean:
(1) any corporation or organization (other than First Charter, MHC,
Charter Financial, CharterBank or any majority-owned subsidiary
thereof) of which such person is an officer, director, or partner
or is, directly or indirectly, the beneficial owner of 10% or more
of any class of equity securities;
(2) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity (exclusive of any tax-qualified
employee stock benefit plan);
(3) any person who is related by blood or marriage to such person, and
(1) lives in the same home as such person; or (2) is a director or
senior officer of CharterBank or any affiliate thereof; and
(4) any person "acting in concert" with any of the persons or entities
specified in clauses (1) through (3) above; provided, however, that
any tax-qualified or non- tax-qualified employee stock benefit plan
shall not be deemed to be an associate of any director, or officer
of First Charter, MHC, Charter Financial or CharterBank, to the
extent provided in the plan of reorganization.
We have the sole discretion to determine whether prospective purchasers are
"associates" or "acting in concert." Directors and officers are not treated as
associates of each other solely by virtue of holding such positions.
We have the right in our sole discretion to reject any order submitted by a
person whose representations we believe to be false or who we otherwise believe,
either alone or acting in concert with others, is violating or circumventing, or
intends to violate or circumvent, the terms and conditions of the plan of
reorganization.
Restrictions on Purchase or Transfer of Shares After the Reorganization
All shares of common stock purchased in connection with the reorganization
by an officer or director of CharterBank, First Charter, MHC or Charter
Financial will be subject to a restriction that the shares not be sold for a
period of one year following the date of purchase, except in the event of the
death of such officer or director. Each certificate for restricted shares will
bear a legend giving notice of this restriction on transfer. The directors and
executive officers of Charter Financial and CharterBank will also be subject to
the federal insider trading rules and any other applicable requirements of the
federal securities laws.
Purchases of outstanding shares of common stock of Charter Financial by
directors or officers of Charter Financial, First Charter, MHC or CharterBank,
and their associates during the three-year period following reorganization may
be made only through a broker or dealer
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registered with the SEC, except with the prior written approval of the Office of
Thrift Supervision. This restriction does not apply, however, to negotiated
transactions involving more than 1% of the outstanding common stock or purchases
of common stock made and held by any tax-qualified or non-tax-qualified employee
plan of CharterBank.
Interpretation, Amendment and Termination
All interpretations of the plan of reorganization by the Board of Directors
will be final, subject to the authority of the Office of Thrift Supervision. The
plan of reorganization provides that, if deemed necessary or desirable by the
Board of Directors of CharterBank, the plan of reorganization may be
substantively amended by a majority vote of the Board of Directors as a result
of comments from regulatory authorities or otherwise, at any time prior to
submission of proxy materials to CharterBank's members. Amendment of the plan of
reorganization thereafter requires a majority vote of the Board of Directors,
with the concurrence of the Office of Thrift Supervision. The plan of
reorganization may be terminated by a majority vote of the Board of Directors of
CharterBank at any time prior to the earlier of approval of the plan by the
Office of Thrift Supervision and the date of the special meeting of members, and
may be terminated at any time thereafter with the concurrence of the Office of
Thrift Supervision. The plan of reorganization shall be terminated if the
reorganization is not completed within 24 months from the date on which the
members of CharterBank approve the plan of reorganization, and may not be
extended by CharterBank or the Office of Thrift Supervision.
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RESTRICTIONS ON ACQUISITION OF CHARTER FINANCIAL
AND CHARTERBANK
General
The plan of reorganization provides for the reorganization of CharterBank
into a mutual holding company structure. See "The Reorganization and The
Offering - General." The plan of reorganization provides for the adoption of a
new federal stock charter and bylaws for CharterBank, as well as for the
adoption of a federal stock charter and bylaws of Charter Financial and First
Charter, MHC. Certain provisions in CharterBank's and Charter Financial's
federal stock charter and bylaws as well as other regulatory restrictions on
CharterBank and Charter Financial may have certain anti-takeover effects.
Statutory and Regulatory Restrictions on Acquisition
Regulatory Restrictions Applicable for Three Years. For three years
following a savings association's conversion to stock form, Office of Thrift
Supervision regulations prohibit any person, without its prior approval from
acquiring or making an offer to acquire more than 10% of the stock of the
converted institution or of its holding company if such person is, or after
consummation of such acquisition would be, the beneficial owner of more than 10%
of such stock. In the event that any person, directly or indirectly, violates
this regulation, the shares beneficially owned by such person in excess of 10%
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matter submitted to a
vote of stockholders.
In the recent past, it has been the Office of Thrift Supervision's general
policy to routinely approve acquisitions in excess of 10% of the stock of
converted savings associations or their holding companies after the passage of
one year from the conversion, especially when such acquisitions are negotiated
with the target company. However, the Office of Thrift Supervision has recently
stated in the preamble to the proposed rulemaking for its new conversion
regulations that the Office of Thrift Supervision intends on taking a very close
look at applications to make sure all criteria are fully met before it will give
written approval of acquisitions within the first three years following
conversion. Therefore, this regulation and change in Office of Thrift
Supervision policy may prevent any acquisition of control of CharterBank,
whether "friendly" or hostile, for at least three years after the completion of
the reorganization.
Statutory and Regulatory Change in Control Restrictions. Federal law
provides that no person, acting directly or indirectly or through or in concert
with one or more other persons, may acquire control of a savings association
unless the Office of Thrift Supervision has been given 60 days prior written
notice. Federal law provides that no company may acquire control of a savings
association or a savings and loan holding company without the prior approval of
the Office of Thrift Supervision. Any company that acquires control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the Office of Thrift Supervision. Pursuant to federal regulations,
control is considered to have been acquired when an entity, among other things,
has acquired more than 25 percent of any class of voting stock of the
institution or the ability to control the election of a majority of the
directors
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of an institution. Moreover, control is presumed to have occurred, subject to
rebuttal, upon the acquisition of more than 10 percent of any class of voting
stock, or of more than 25 percent of any class of stock, of a savings
institution, where enumerated control factors are also present in the
acquisition. The Office of Thrift Supervision may prohibit an acquisition of
control if:
. it would result in a monopoly or substantially lessen competition;
. the financial condition of the acquiring person might jeopardize
the financial stability of the institution; or
. the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or
of the public to permit the acquisition of control by that person.
The foregoing restrictions do not apply to the acquisition of stock by one
or more tax-qualified employee stock benefit plans, provided that the plan or
plans do not have beneficial ownership in the aggregate of more than 25 percent
of any class of our equity securities.
Mutual Holding Company Structure
The mutual holding company structure could restrict the ability of
stockholders of Charter Financial to effect a change of control of management
because, as long as First Charter, MHC remains in mutual form, it will control
at least a majority of Charter Financial's voting stock. First Charter, MHC will
be controlled by its board of directors, which will initially consist of the
same persons who are members of the board of directors of CharterBank and
Charter Financial. First Charter, MHC will be able to elect all members of the
board of directors of Charter Financial, and, as a general matter, will be able
to control the outcome of all matters presented to Charter Financial's
stockholders for approval, except for matters that require a vote greater than a
majority. First Charter, MHC, acting through its board of directors, will be
able to prevent any challenge to the ownership or control of Charter Financial
by minority stockholders.
Charter Financial's Charter and Bylaws
Charter Financial's federal stock charter and bylaws contain a number of
provisions, relating to corporate governance and rights of stockholders, that
might discourage future takeover attempts. As a result, stockholders who might
desire to participate in such transactions may not have an opportunity to do so.
In addition, these provisions will also render the removal of the Board of
Directors or management of Charter Financial more difficult.
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The following description is a summary of the provisions of the charter and
bylaws. See "Where You Can Find Additional Information" as to how to review a
copy of these documents.
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Directors. Certain provisions of Charter Financial's bylaws will impede
changes in control of the board of directors. Charter Financial's bylaws provide
that the board of directors will be divided into three classes. The members of
each class will be elected for a term of three years and one class of directors
will be elected by ballot annually. Thus, it would take two annual elections to
replace a majority of Charter Financial's board. Finally, the bylaws impose
notice and information requirements in connection with the nomination by
stockholders of candidates for election to the board of directors or the
proposal by stockholders of business to be acted upon at an annual meeting of
stockholders.
Restrictions on Call of Special Meetings. Charter Financial's federal stock
charter provides that for a period of five years from the date of the
reorganization, special meetings of shareholders relating to changes in control
of Charter Financial or amendments to its charter shall be called only by the
board of directors.
Prohibition of Cumulative Voting. Charter Financial's federal stock charter
prohibits cumulative voting for the election of directors. This means that First
Charter, MHC will be able to elect all of the directors of Charter Financial and
thus prevent a minority stockholder from obtaining representation on the board
of directors.
Limitation of Voting Rights. Charter Financial's federal stock charter also
provides that for five years following the date of the reorganization, no
person, other than First Charter, MHC, shall own more than 10% of the
outstanding shares of Charter Financial. This limitation does not apply to a
transaction in which Charter Financial forms a holding company, the purchase of
shares by an underwriter in a public offering, or the purchase of shares by a
tax-qualified employee stock benefit plan. If a party acquires in excess of 10%
of Charter Financial's shares, those shares will be considered "excess shares"
and will not be counted as shares entitled to vote.
Authorized but Unissued Shares of Capital Stock. After the reorganization,
Charter Financial will have authorized but unissued shares of common and
preferred stock. See "Description of Capital Stock." The board of directors
could use these shares of common and preferred stock to render more difficult or
to discourage an attempt to obtain control of Charter Financial by means of a
merger, tender offer or proxy statement. We anticipate, however, that it is
unlikely that we will use the shares for this purpose, since First Charter, MHC
must always own at least a majority of our common stock.
Our federal stock charter also authorizes five million shares of serial
preferred stock, no par value per share. Charter Financial is authorized to
issue preferred stock from time to time in one or more series subject to
applicable provisions of law, and the Board of Directors is authorized to fix
the designations, and relative preferences, limitations, voting rights, if any,
including without limitation, offering rights of such shares (which could be
multiple or as a separate class). In the event of a proposed merger, tender
offer or other attempt to gain control of Charter Financial that the board of
directors does not approve, it might be possible for the board of directors to
authorize the issuance of a series of preferred stock with rights and
preferences that would impede that completion of the transaction. An effect of
the possible issuance of preferred stock, therefore may be to deter a future
attempt to gain control of Charter Financial. The board of directors has no
present plan or understanding to issue any preferred stock.
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Ownership of Common Stock by Management. We expect our directors and
officers to purchase up to 2,780,000 shares of common stock in the offering.
Directors and officers are expected to control the voting of 6.2% of the shares
of common stock sold in the offering (at the maximum of the offering range), and
may control the voting of approximately 19.96% of the shares of common stock
issued in the offering through the ESOP. Under the terms of the ESOP, the
unallocated shares will be voted by the independent trustees for the ESOP
generally in the same proportion as the instructions received by the trustee
from participants voting their allocated shares. In addition, the officers and
directors of Charter Financial will also be officers and directors of First
Charter, MHC which, after the reorganization, will own at least a majority of
Charter Financial's common stock.
Certain provisions of Charter Financial's stock option plan and other
benefit plans provide for benefits and cash payments in the event of a change in
control of Charter Financial. The plans provide for accelerated vesting in the
event of a change in control. These provisions may have the effect of increasing
the cost of, and thereby discouraging, a future attempt to take over Charter
Financial and thus generally may serve to perpetuate current management.
Indemnification. Charter Financial's bylaws provide that it shall indemnify
every person who acts on behalf of Charter Financial, or serves as a director or
officer of Charter Financial, provided that such person acted in good faith and
in a manner he or she reasonably believed to be in, and not opposed to, the best
interest of Charter Financial, and with respect to any criminal proceeding such
person had no reason to believe his or her conduct was unlawful. The bylaws also
provide that such indemnification shall be to the fullest extent permitted under
federal law.
DESCRIPTION OF CAPITAL STOCK OF CHARTER FINANCIAL
General
Charter Financial is authorized to issue sixty million (60,000,000) shares
of common stock having a par value of $.01 per share and ten million
(10,000,000) shares of preferred stock having no par value per share. Charter
Financial currently expects to sell up to 4,485,000 shares of common stock (or
5,157,750 shares of common stock in the event of an increase of 15% in the
estimated valuation range) to purchasers of common stock in the offering and to
issue up to 17,940,000 shares of common stock to First Charter, MHC (or
20,631,000 shares of common stock in the event of an increase of 15% in the
estimated valuation range). Charter Financial will not issue any shares of
preferred stock in the offering. Except as discussed above in "Restrictions on
Acquisition of Charter Financial and CharterBank," each share of Charter
Financial's common stock will have the same relative rights as, and will be
identical in all respects with, every other share of common stock. Upon payment
of the purchase price for the common stock in accordance with the plan of
reorganization, all such stock will be duly authorized, fully paid and
non-assessable. Under Office of Thrift Supervision regulations, a majority of
the issued and outstanding voting stock of Charter Financial must be held at all
times by First Charter, MHC.
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The shares of common stock:
. are not deposit accounts and are subject to investment risk;
. are not insured or guaranteed by the FDIC, or any other government
agency; and
. are not guaranteed by Charter Financial or CharterBank.
Common Stock
Dividends. The payment of dividends by Charter Financial is subject to
limitations which are imposed by law. See "Our Policy Regarding Dividends" and
"Regulation of CharterBank and Charter Financial." The owners of common stock of
Charter Financial will be entitled to receive and share equally in such
dividends as may be declared by the board of directors out of funds legally
available therefor. If Charter Financial issues preferred stock, the holders of
the preferred stock may have a priority over the holders of the common stock
with respect to dividends.
Voting Rights. Upon the effective date of the reorganization, the holders of
common stock of Charter Financial will possess exclusive voting rights in
Charter Financial. They will elect Charter Financial's board of directors and
act on such other matters as are required to be presented to them under law or
Charter Financial's Charter or as are otherwise presented to them by the board
of directors. Each holder of common stock will be entitled to one vote per share
and will not have any right to cumulate votes in the election of directors.
Under some circumstances, shares in excess of 10% of Charter Financial's common
stock may be considered "excess shares" and may therefore not be entitled to
vote. See "Restrictions on Acquisition of Charter Financial and CharterBank." If
Charter Financial issues preferred stock, holders of the preferred stock may
also possess voting rights. See "Restrictions on Acquisition of Charter
Financial and CharterBank."
Liquidation. In the event of any liquidation, dissolution or winding up of
CharterBank, Charter Financial, as owner of CharterBank's capital stock, would
be entitled to receive, after payment or provision for payment of all debts and
liabilities of CharterBank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to eligible account holders and the supplemental eligible account
holders (see "The Reorganization and The Offering - Effects of the
Reorganization - Liquidation Rights"), all assets of CharterBank available for
distribution. In the event of liquidation, dissolution or winding up of Charter
Financial, the holders of its common stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of Charter Financial available for distribution. If preferred stock is
issued, the holders thereof may have a priority over the holders of the common
stock in the event of the liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of Charter
Financial will not be entitled to preemptive rights with respect to any shares
which may be issued. The common stock is not subject to redemption. Therefore,
the board of directors may sell share of common stock without first offering
those shares to existing stockholders of Charter Financial.
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Preferred Stock
Charter Financial will not issue any shares of its authorized preferred
stock in the reorganization. We may issue preferred stock in the future with
such preferences and designations as the board of directors may from time to
time determine. The board of directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
LEGAL AND TAX OPINIONS
Thacher Proffitt & Wood, Washington, D.C., will issue its opinion to us of
the legality of the issuance of the common stock being offered and certain
matters relating to the reorganization and federal taxation. Certain matters
relating to state taxation will be passed upon for us by Alston & Bird LLP,
Atlanta, Georgia. Certain legal matters will be passed upon for Sandler, O'Neill
& Partners, L.P. by Malizia Spidi & Fisch, PC, Washington, D.C.
EXPERTS
The financial statements of CharterBank as of September 30, 2000 and 1999
and for each of the years in the three-year period ended September 30, 2000,
appearing elsewhere in this prospectus have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, which is included herein and upon the authority of
said firm as experts in accounting and auditing.
RP Financial has consented to the publication in this document of a summary
of its letter to CharterBank setting forth its opinion as to the estimated pro
forma market value of CharterBank after the reorganization and its opinion
setting forth the value of subscription rights and to the use of its name and
statements with respect to it appearing in this document.
REGISTRATION REQUIREMENTS
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the Exchange Act). We are subject to the
information, proxy solicitation, insider trading restrictions, tender offer
rules, periodic reporting and other requirements of the SEC under the Exchange
Act. We may not deregister the common stock under the Exchange Act for a period
of at least three years following the reorganization.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Exchange Act and
must file reports and other information with the SEC.
148
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933, as amended, with respect to the common stock offered in
this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. You may examine this information without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain copies of this material from the SEC at prescribed
rates. You may obtain information on the operations of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that
contains reports, proxy and information statements and other information
regarding registrants, including Charter Financial, that file electronically
with the SEC. The address for this web site is "http://www.sec.gov."
This document contains a description of the material features of certain
exhibits to the Form S-1. The statements as to the contents of such exhibits,
however, are, of necessity, brief descriptions and are not necessarily complete;
each such statement is qualified by reference to such contract or document.
A copy of Charter Financial's federal stock charter and bylaws, as well as a
copy of the Federal Stock Charter and Bylaws of CharterBank and First Charter,
MHC, are available for review at any of our offices. A copy of the plan of
reorganization is available from offices of CharterBank without charge. You may
also call the Conversion Center at [ ], Monday through Friday, 10:00 a.m. to
4:00 p.m., Eastern time, to request of a copy of the plan. A copy of the
appraisal report of RP Financial, including any amendments made to it, and the
detailed memorandum of the appraiser setting forth the method and assumptions
for such appraisal are available for inspection at the main office of
CharterBank.
CharterBank has filed with the Office of Thrift Supervision a Notice of
Mutual Holding Company Reorganization on Form MHC-1 and an Application for
Approval of a Minority Stock Issuance on Form MHC-2. This prospectus omits some
information contained in those applications. You may examine the Office of
Thrift Supervision applications at the main office of the Office of Thrift
Supervision, 1700 G Street, NW, Washington, DC 20552 and at the office of the
Regional Director of the Southeast Regional Office of the Office of Thrift
Supervision located at 1475 Peachtree Street, N.E. Atlanta, Georgia 30309.
149
CHARTERBANK
Financial Statements
September 30, 2000 and 1999
(With Independent Auditors' Report Thereon)
CHARTERBANK
Index to Financial Statements
Condensed Consolidated Statements of Financial Condition (unaudited) as of
December 31, 2000 and September 30, 2000 F-2
Condensed Consolidated Statements of Earnings (Unaudited) for the
Three Months ended December 31, 2000 and 1999 F-3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three Months ended December 31, 2000 and 1999 F-4
Notes to Unaudited Condensed Consolidated Financial Statements F-5
Statements of Financial Condition at September 30, 2000 and 1999 F-6
Statements of Income and Comprehensive Income for Each of the
Years in the Three-Year Period ended September 30, 2000 F-7
Statements of Equity for Each of the Years in the Three-Year Period
ended September 30, 2000 F-9
Statements of Cash Flows for Each of the Years in the Three-Year
Period ended September 30, 2000 F-11
Notes to Financial Statements F-12
Independent Auditors' Report F-44
Other schedules are omitted as they are not required or are not applicable or
the required information is shown in the financial statements or related
notes.
CHARTERBANK
Condensed Consolidated Statements of Financial Condition
Unaudited
December 31, September 30,
Assets 2000 2000
------------ -------------
Cash and amounts due from depository institutions $ 5,038,447 5,662,675
Interest-bearing deposits in other financial institutions 4,290,927 2,629,767
Loans held for sale, market value of $1,123,000 and $839,000
at December 31, 2000 and September 30, 2000, respectively 1,114,865 832,526
Freddie Mac common stock and other equity securities (note 3) 360,863,125 285,873,438
Mortgage-backed securities and collateralized mortgage
obligations available for sale 356,967,314 367,707,904
Other investment securities available for sale 14,832,789 13,882,374
Loans receivable 259,543,064 259,699,417
Less:
Unamortized loan origination fees, net 62,354 113,317
Allowance for loan losses (5,539,898) (6,346,001)
--------------- -----------
Loans receivable, net 254,065,520 253,466,733
--------------- -----------
Real estate owned 523,511 629,993
Accrued interest and dividends receivable 4,812,773 4,476,844
Premises and equipment, net 4,064,205 3,949,941
Other assets 3,903,669 3,574,623
--------------- -----------
Total assets $ 1,010,477,145 942,686,818
=============== ===========
Liabilities and Equity
Liabilities:
Deposits $ 211,270,278 274,370,643
Borrowings 398,462,636 352,218,500
Advance payments by borrowers for taxes and insurance 1,011,645 1,998,777
Deferred income taxes 134,847,507 100,247,176
Other liabilities 7,336,875 9,324,980
--------------- -----------
Total liabilities 752,928,941 738,160,076
--------------- -----------
Equity:
Retained earnings 52,898,039 51,698,621
Accumulated other comprehensive income - net
unrealized holding gains on securities available for sale 204,650,165 152,828,121
--------------- -----------
Total equity 257,548,204 204,526,742
--------------- -----------
Total liabilities and equity $ 1,010,477,145 942,686,818
=============== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
F-2
CHARTERBANK
Condensed Consolidated Statements of Earnings
For the Three Months ended December 31, 2000 and 1999
Unaudited
2000 1999
------------ -----------
Interest and dividend income:
Loans receivable $ 5,691,744 4,673,137
Investments and other 7,860,243 8,094,581
------------ -----------
Total interest and dividend income 13,551,987 12,767,718
------------ -----------
Interest expense:
Deposits 3,434,573 3,404,175
Borrowings 6,106,328 4,670,892
------------ -----------
Total interest expense 9,540,901 8,075,067
------------ -----------
Net interest income 4,011,086 4,692,651
Provision for loan losses 150,000 90,000
------------ -----------
Net interest income after provision for loan losses 3,861,086 4,602,651
------------ -----------
Other income:
Fees and services charges 287,444 295,966
Gain on sale of loans and servicing released loan fees 211,001 162,149
Loss on sale of mortgage-backed securities, collateralized
mortgage obligations and other investments (8,270) (103,801)
Other 11,518 43,652
------------ -----------
Total other income 501,693 397,966
------------ -----------
Other expenses:
Salaries and employee benefits 1,574,390 1,209,428
Occupancy and equipment expenses 504,618 585,391
Marketing 86,808 108,161
Legal and professional 183,418 426,888
Amortization and impairment of intangibles -- 242,000
Other 445,519 611,911
------------ -----------
Total other expenses 2,794,753 3,183,779
------------ -----------
Income before income taxes 1,568,026 1,816,838
Income tax expense 368,608 495,136
------------ -----------
Net income 1,199,418 1,321,702
Other compehensive income (loss), net of tax 51,822,044 (15,079,469)
------------ -----------
Comprehensive income (loss) $ 53,021,462 (13,757,767)
============ ===========
See accompanying notes to unaudited condensed consolidated financial statements.
F-3
CHARTERBANK
Condensed Consolidated Statements of Cash Flows
For the Three Months ended December 31, 2000 and 1999
Unaudited
2000 1999
------------ ----------
Operating activities:
Net income $ 1,199,418 1,321,702
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 150,000 90,000
Depreciation and amortization 119,604 126,957
Amortization of intangibles -- 242,000
Deferred income tax expense 2,021,652 495,136
(Accretion) amortization of premiums and discounts, net (2,961) 104,016
Loss on sale of investments 8,270 103,801
Increase in loans held for sale (282,339) (747,656)
Increase in accrued interest and dividends receivable (335,929) (119,561)
Decrease (increase) in REO, net 106,482 (657,086)
(Increase) decrease in other assets (329,046) 1,482,440
Decrease in other liabilities (1,988,105) (2,877,974)
------------ ----------
Net cash provided by (used in) operating activities 667,046 (436,225)
------------ ----------
Investing activities:
Purchases of equity securities and other investment securities available for sale (112,500) (2,375,000)
Proceeds from sales of equity securities and other investment securities
available for sale -- 10,000,000
Purchases of mortgage-backed securities and collateralized mortgage
obligations available for sale (4,005,930) (54,303,359)
Proceeds from sale, maturity, and repayment of mortgage-backed
securities and collateralized mortgage obligations available for sale 23,314,332 29,246,419
Loan originations, net of repayments and loan sales (748,787) (12,366,456)
Proceeds from sales of premises and equipment -- 4,030
Purchases of premises and equipment (233,868) (165,008)
------------ ----------
Net cash provided by (used in) investing activities 18,213,247 (29,959,374)
------------ ----------
Financing activities:
Net decrease in deposits (63,100,365) (5,978,346)
Net increase in borrowings 46,244,136 42,919,588
Net decrease in advance payments by borrowers for taxes and insurance (987,132) (1,022,637)
------------ ----------
Net cash (used in) provided by financing activities (17,843,361) 35,918,605
------------ ----------
Net increase in cash and cash equivalents 1,036,932 5,523,006
Cash and cash equivalents at beginning of period 8,292,442 10,242,480
------------ ----------
Cash and cash equivalents at end of period $ 9,329,374 15,765,486
============ ==========
Supplemental disclosure of cash flow information - cash
paid during the period for:
Interest $ 9,997,079 7,798,438
============ ==========
Taxes $ -- --
============ ==========
Supplemental disclosure of noncash information - additions
to investments in real estate acquired through foreclosure $ 54,132 118,590
============ ==========
See accompanying notes to unaudited condensed consolidated financial statements.
F-4
CHARTERBANK
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2000
(1) Basis of Presentation
The accompanying condensed consolidated financial statements were prepared
in accordance with interim reporting requirements and, therefore, do not
include all information necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. However, all adjustments,
consisting of normal recurring accruals, which, in the opinion of
management, are necessary for a fair presentation of the financial
statements have been included. The results of operations for the three-
month period ended December 31, 2000 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other future
period.
These statements should be read in conjunction with the consolidated
financial statements and related notes, which are contained in this
prospectus.
(2) Comprehensive Income
Other comprehensive income (loss) consists entirely of unrealized holding
gains and losses, net of income taxes, on available for sale securities and
reclassification adjustments for gains and losses included in net income,
net of income taxes.
(3) Freddie Mac Common Stock and Other Equity Securities
Freddie Mac common stock and other equity securities are summarized as
follows:
December 31, 2000
---------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------ ----------- ---------- -----------
Freddie Mac common stock $ 6,886,116 341,277,009 -- 348,163,125
Federal Home Loan Bank stock 12,700,000 -- -- 12,700,000
------------ ----------- ------ -----------
$ 19,586,116 341,277,009 -- 360,863,125
============ =========== ====== ===========
September 30, 2000
---------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------ ----------- ---------- -----------
Freddie Mac common stock $ 6,886,116 266,399,822 -- 273,285,938
Federal Home Loan Bank stock 12,587,500 -- -- 12,587,500
------------ ----------- ------ -----------
$ 19,473,616 266,399,822 -- 285,873,438
============ =========== ====== ===========
F-5
CHARTERBANK
Statements of Financial Condition
September 30, 2000 and 1999
Assets 2000 1999
----------------- -----------------
(As restated-note 22)
Cash and amounts due from depository institutions (note 18) $ 5,662,675 $ 5,033,121
Interest-bearing deposits in other financial institutions 2,629,767 5,209,359
Loans held for sale, market value of $839,000 and $2,897,000
at September 30, 2000 and 1999, respectively 832,526 2,896,798
Freddie Mac common stock and other equity securities (notes 4 and 13) 285,873,438 273,543,325
Mortgage-backed securities and collateralized mortgage
obligations available for sale (notes 5 and 13) 367,707,904 356,498,633
Other investment securities available for sale (note 4) 13,882,374 31,930,108
Loans receivable 259,699,417 214,216,827
Less:
Unamortized loan origination fees (costs), net 113,317 (50,838)
Allowance for loan losses (6,346,001) (5,709,802)
----------------- -----------------
Loans receivable, net (notes 6 and 13) 253,466,733 208,456,187
----------------- -----------------
Real estate owned (note 7) 629,993 222,210
Accrued interest and dividends receivable (note 8) 4,476,844 4,395,153
Premises and equipment, net (note 9) 3,949,941 3,452,429
Goodwill and other intangible assets, net (notes 2 and 3) -- 4,533,333
Income taxes receivable -- 3,145,376
Other assets (notes 10 and 11) 3,574,623 5,269,722
----------------- -----------------
Total assets $ 942,686,818 904,585,754
================= =================
Liabilities and Equity
Liabilities:
Deposits (note 12) $ 274,370,643 282,965,378
Borrowings (note 13) 352,218,500 312,866,769
Advance payments by borrowers for taxes and insurance 1,998,777 2,034,702
Deferred income taxes (note 14) 100,247,176 96,677,839
Other liabilities 9,324,980 11,551,783
----------------- -----------------
Total liabilities 738,160,076 706,096,471
----------------- -----------------
Equity (note 18):
Retained earnings 51,698,621 50,826,334
Accumulated other comprehensive income - net
unrealized holding gains on securities available
for sale 152,828,121 147,662,949
----------------- -----------------
Total equity 204,526,742 198,489,283
Commitments and contingencies (notes 6, 15, 16, and 19)
----------------- -----------------
Total liabilities and equity $ 942,686,818 904,585,754
================= =================
See accompanying notes to financial statements.
F-6
CHARTERBANK
Statements of Income and Comprehensive Income
Years ended September 30, 2000, 1999, and 1998
2000 1999 1998
-------------- -------------- --------------
(As restated-note 22)
Interest and dividend income:
Investment debt securities $ 1,194,033 1,524,095 479,973
Investment equity securities 4,307,513 3,689,704 3,276,080
Mortgage-backed securities and collateralized
mortgage obligations 27,476,406 16,592,249 12,162,877
Loans receivable 21,075,913 15,015,066 13,153,429
Interest-bearing deposits in other financial institutions 159,089 148,332 103,038
-------------- -------------- --------------
Total interest and dividend income 54,212,954 36,969,446 29,175,397
-------------- -------------- --------------
Interest expense:
Deposits (note 12) 13,932,849 10,423,679 5,978,373
Borrowings (note 13) 22,714,554 12,917,754 13,431,467
-------------- -------------- --------------
Total interest expense 36,647,403 23,341,433 19,409,840
-------------- -------------- --------------
Net interest income 17,565,551 13,628,013 9,765,557
Provision for loan losses (note 6) 1,410,000 240,000 180,000
-------------- -------------- --------------
Net interest income after provision for loan losses 16,155,551 13,388,013 9,585,557
-------------- -------------- --------------
Other income:
Loan servicing fees 410,468 290,615 227,997
Service charges on deposit accounts 700,568 377,717 327,299
Gain on sale of loans and servicing released loan fees 730,457 1,133,051 1,029,640
(Loss) gain on sale of mortgage-backed securities, collateralized
mortgage obligations, and other investments (notes 4 and 5) (127,636) 395,645 766,506
Gain on disposition of Freddie Mac common stock (note 4) -- 35,865,650 --
Equity in (loss) earnings of limited partnerships (note 11) (28,602) 448,000 (5,797,145)
Other 263,787 239,216 139,147
-------------- -------------- --------------
Total other income (loss) 1,949,042 38,749,894 (3,306,556)
-------------- -------------- --------------
Other expenses:
Salaries and employee benefits (notes 15 and 16) 4,956,345 4,193,329 3,498,530
Occupancy 1,942,041 1,252,843 1,046,983
Furniture and equipment 419,208 379,188 268,094
Net cost of operations of real estate owned 106,785 18,718 37,720
Federal insurance premiums and other regulatory fees 267,498 259,828 180,103
Marketing 375,787 315,327 247,764
Charitable contributions (note 4) 61,689 2,181,656 24,599
Legal and professional 1,455,120 752,677 373,166
Amortization and impairment of intangibles (note 3) 4,533,333 66,667 --
Other 1,824,538 1,328,991 945,045
-------------- -------------- --------------
Total other expenses 15,942,344 10,749,224 6,622,004
-------------- -------------- --------------
Income (loss) before income taxes,
carried forward $ 2,162,249 41,388,683 (343,003)
============== ============== ==============
F-7
CHARTERBANK
Statements of Income and Comprehensive Income
Years ended September 30, 2000, 1999, and 1998
2000 1999 1998
-------------- -------------- --------------
(As restated-note 22)
Income (loss) before income taxes,
brought forward $ 2,162,249 41,388,683 (343,003)
Income tax expense (benefit) - (note 14) 1,289,962 14,359,324 (817,916)
-------------- -------------- --------------
Net income 872,287 27,029,359 474,913
-------------- -------------- --------------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during the
year, net of income taxes of $3,197,892, $(899,027),
and $31,543,476 for 2000, 1999, and 1998 respectively 5,086,803 (1,466,834) 52,081,857
Less reclassification adjustment for losses (gains)
included in net income, net of income taxes
of $(49,268), $13,996,860, and $289,126, for 2000,
1999, and 1998, respectively 78,369 (22,264,435) (477,380)
-------------- -------------- --------------
Total other comprehensive income (loss) 5,165,172 (23,731,269) 51,604,477
-------------- -------------- --------------
Comprehensive income $ 6,037,459 3,298,090 52,079,390
============== ============== ==============
See accompanying notes to financial statements.
F-8
CHARTERBANK
Statements of Equity
Years ended September 30, 2000, 1999, and 1998
Accumulated other
comprehensive income -
net unrealized holding
Retained gains on securities Total
earnings available for sale equity
-------------- ---------------------- --------------
Balance at September 30, 1997 $ 23,322,062 119,789,741 143,111,803
Net income 474,913 -- 474,913
Change in net unrealized holding gains
on securities, net of income taxes of
$31,254,350 -- 51,604,477 51,604,477
-------------- -------------- --------------
Balance at September 30, 1998 23,796,975 171,394,218 195,191,193
Net income 27,029,359 -- 27,029,359
Change in net unrealized holding gains
on securities, net of income taxes of
$10,974,781 -- (23,731,269) (23,731,269)
-------------- -------------- --------------
Balance at September 30, 1999 50,826,334 147,662,949 198,489,283
Net income (as restated-note 22) 872,287 -- 872,287
Change in net unrealized holding gains on
securities, net of income taxes of $3,247,160 -- 5,165,172 5,165,172
-------------- -------------- --------------
Balance at September 30, 2000 (as restated-note 22) $ 51,698,621 152,828,121 204,526,742
============== ============== ==============
See accompanying notes to financial statements.
F-9
CHARTERBANK
Statements of Cash Flows
Years ended September 30, 2000, 1999, and 1998
2000 1999 1998
------------- -------------- --------------
(As restated-note 22)
Cash flows from operating activities:
Net income $ 872,287 27,029,359 474,913
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 1,410,000 240,000 180,000
Depreciation and amortization 1,378,240 731,851 587,496
Provision for asset impairment 3,803,333 -- --
Deferred income tax expense (benefit) 322,177 7,831,928 (2,025,709)
Equity in (earnings) loss of limited partnerships 28,602 (448,000) 5,797,145
(Accretion) amortization of premiums and discounts, net (454,812) 136,024 133,539
Gain on sale of loans (44,874) (153,346) (620,970)
(Gain) loss on sales of mortgage-backed securities, collateralized
mortgage obligations, and other investments 127,636 (395,645) (766,506)
Donation of FNMA stock 25,633 -- --
Gain on disposition of stock -- (35,865,650) --
Loss on sales of real estate owned 69,353 15,248 24,584
Donation of real estate owned 17,000 -- --
Freddie Mac common stock contributed to charitable organization -- 2,152,500 --
Changes in assets and liabilities:
Decrease (increase) in loans held for sale 2,064,272 693,381 (2,523,453)
Increase in accrued interest and dividends receivable (81,691) (1,096,608) (1,275,740)
Decrease (increase) in income tax refunds receivable 3,145,376 (3,145,376) --
Decrease (increase) in other assets 1,666,497 (223,465) (2,274,747)
(Decrease) increase in other liabilities (2,226,803) 2,872,043 2,030,882
------------- -------------- --------------
Net cash provided by (used in) operating activities 12,122,226 374,244 (258,566)
------------- -------------- --------------
Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities and
collateralized mortgage obligations available for sale 67,269,563 260,278,302 224,913,926
Principal collections on mortgage-backed securities and
collateralized mortgage obligations available for sale 40,206,702 41,812,636 24,734,025
Purchases of mortgage-backed securities and collateralized
mortgage obligations available for sale (120,209,208) (422,174,802) (369,569,242)
Purchases of equity securities and other investment
securities available for sale (3,892,500) (52,103,423) (17,644,339)
Principal collections on other investment securities available for sale 16,712,500 -- 176,284
Proceeds from sale of other investment securities available for sale 3,135,170 28,149,121 22,352,291
Proceeds from sale of Freddie Mac stock -- 34,468,568 --
Net increase in loans receivable, exclusive of loan sales (83,884,115) (32,823,546) (94,618,318)
Proceeds from sale of loans 36,230,650 23,282,129 63,825,430
Proceeds from sale of real estate owned 783,655 303,487 245,054
Purchases of premises and equipment, net of dispositions (1,145,752) (459,310) (182,151)
Purchase of loans -- (8,271,001) --
Acquisition of Citizens Bancgroup, Inc., net of cash paid -- 1,404,425 --
------------- -------------- --------------
Net cash used in investing activities (44,793,335) (126,133,414) (145,767,040)
------------- -------------- --------------
(Continued)
F-10
CHARTERBANK
Statements of Cash Flows
Years ended September 30, 2000, 1999, and 1998
2000 1999 1998
--------------- -------------- --------------
(As restated --
note 22)
Cash flows from financing activities:
Net increase in savings and demand
deposit accounts $ 175,114 4,521,548 1,782,387
Net (decrease) increase in time deposits (8,769,849) 100,791,763 43,939,755
Proceeds from Federal Home Loan Bank advances 676,853,978 367,600,000 140,865,000
Principal payments on advances from Federal Home
Loan Bank (647,753,978) (358,950,000) (113,865,000)
Proceeds from other borrowings 1,505,184,509 862,308,219 642,549,985
Principal payments on other borrowings (1,494,932,778) (846,729,450) (567,836,985)
Net (decrease) increase in advance payments by borrowers
for taxes and insurance (35,925) 292,410 500,664
--------------- -------------- --------------
Net cash provided by financing activities 30,721,071 129,834,490 147,935,806
--------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents (1,950,038) 4,075,320 1,910,200
Cash and cash equivalents at beginning of year 10,242,480 6,167,160 4,256,960
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 8,292,442 10,242,480 6,167,160
=============== ============== ==============
Supplemental disclosures of cash flow information:
Interest paid $ 36,872,174 25,104,646 18,892,759
=============== ============== ==============
Income taxes paid $ -- 11,192,000 1,020,307
=============== ============== ==============
Detail of acquisitions:
Fair value of assets acquired $ -- 41,033,492 --
Liabilities assumed -- (42,437,917) --
--------------- -------------- --------------
Net cash acquired in acquisition $ -- (1,404,425) --
=============== ============== ==============
Financing activities:
Real estate acquired through foreclosure of the
loans receivable $ 1,277,793 351,305 129,640
=============== ============== ==============
Contribution of real estate acquired for sale to charity $ 17,002 -- --
=============== ============== ==============
See accompanying notes to financial statements
F-11
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(1) Summary of Significant Accounting Policies
CharterBank (the "Company") was organized as a federally chartered mutual
savings and loan association in 1954. The Company is primarily regulated by
the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC"), and undergoes periodic examinations by those
regulatory authorities.
The Company primarily provides mortgage loans and a full range of deposit
products to individual customers through its main office in West Point,
Georgia and four full-service branch offices located in LaGrange, Georgia,
and Valley, Alabama (three). In addition, the Company operates four loan
production offices located in various Georgia and Alabama locations. The
Company primarily competes with other financial institutions in its market
area within west central Georgia and east central Alabama. The Company
considers its primary lending market to be the states of Georgia and
Alabama.
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to
prevailing practices within the financial institutions industry. The
following is a summary of the significant accounting policies that the
Company follows in presenting its financial statements.
(a) Basis of Presentation
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the statement of financial condition
and revenue and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan losses, the valuation
of real estate acquired in connection with foreclosures or in
satisfaction of loans, and mortgage loan prepayment assumptions used
to determine the amount of revenue recognition on mortgage-backed
securities and collateralized mortgage obligations. In connection with
the determination of the allowance for loan losses and the value of
real estate owned, management obtains independent appraisals for
significant properties. In connection with the determination of
revenue recognition on mortgage-backed securities and collateralized
mortgage obligations, management obtains independent estimates of
mortgage loan prepayment assumptions, which are based partly on
historical prepayments and current interest rates.
A substantial portion of the Company's loans are secured by real
estate located in its market area. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan
portfolio is susceptible to changes in the real estate market
conditions of this market area.
(Continued)
F-12
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(b) Cash Equivalents
Cash equivalents, as presented in the financial statements, include
amounts due from other depository institutions and interest-bearing
deposits in other financial institutions. Generally, interest-bearing
deposits in other financial institutions are for one-day periods.
(c) Investments, Mortgage-Backed Securities, and Collateralized Mortgage
Obligations
Investments, mortgage-backed securities, and collateralized mortgage
obligations available for sale are reported at fair value, as
determined by independent quotations. Investment in stock of a Federal
Home Loan Bank is required of every federally insured financial
institution who utilizes its services. Generally, the Federal Home
Loan Bank will repurchase excess stock at cost; accordingly, the
investment in Federal Home Loan Bank stock is carried at cost which
approximates its fair value.
Purchase premiums and discounts on investment securities are amortized
and accreted to interest income using a method which approximates a
level yield over the period to maturity of the related securities.
Purchase premiums and discounts on mortgage-backed securities and
collateralized mortgage obligations are amortized and accreted to
interest income using a method which approximates a level yield over
the remaining lives of the securities, taking into consideration
assumed prepayment patterns.
Gains and losses on sales of investments, mortgage-backed securities,
and collateralized mortgage obligations are recognized on the trade
date, based on the net proceeds received and the adjusted carrying
amount of the specific security sold.
(d) Loans and Interest Income
Loans are reported at the principal amounts outstanding, net of
unearned income, deferred loan fees/origination costs, and the
allowance for loan losses. Loans held for sale are carried at the
lower of aggregate cost or market, with market determined on the basis
of open commitments for committed loans. For uncommitted loans, market
is determined on the basis of current delivery prices in the secondary
mortgage market.
Interest income is recognized using the simple interest method on the
balance of the principal amount outstanding. Unearned income,
primarily arising from deferred loan fees, net of certain origination
costs, and deferred gains on the sale of the guaranteed portion of
Small Business Administration (SBA) loans, is amortized over the lives
of the underlying loans using a method which approximates a level
yield over the contractual life of the loans.
(Continued)
F-13
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
The accrual of interest income is discontinued on loans which become
contractually past due by 90 days or when reasonable doubt exists as
to the full timely collection of interest or principal. Interest
previously accrued but not collected is reversed against current
period interest income when such loans are placed on nonaccrual
status. Interest on nonaccrual loans which is ultimately collected is
credited to income in the period received.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 114, Accounting by
Creditors for Impairment of a Loan. SFAS 114 requires impaired loans
to be measured based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, or at the
loan's observable market price, or the fair value of the collateral if
the loan is collateral dependent, beginning in fiscal 1996. In October
1994, the FASB issued SFAS 118, Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures, which amends the
requirements of SFAS 114 regarding interest income recognition and
related disclosure requirements. Under the provisions of SFAS 114 and
SFAS 118, a loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the
note agreement. The provisions of SFAS 114 do not apply to large pools
of smaller balance homogeneous loans, such as consumer and installment
loans, which are collectively evaluated for impairment. Impairment
losses are included in the allowance for loan losses through a charge
to the provision for loan losses. Cash receipts on impaired loans
which are accruing interest are applied to principal and interest
under the contractual terms of the loan agreement. Cash receipts on
impaired loans for which the accrual of interest has been discontinued
are applied to reduce the principal amount of such loans until the
principal has been recovered and are recognized as interest income
thereafter.
Gains or losses on the sale of mortgage loans are recognized at
settlement dates and are computed as the difference between the sales
proceeds received and the net book value of the mortgage loans sold.
At the time of sale, a servicing asset is recorded if expected
servicing revenues exceed an amount approximating adequate servicing
compensation. For sales of the SBA guaranteed portion of loans, the
basis in the portion of the loan sold is determined by allocating the
loan carrying value to the portion sold, portion retained, and
servicing asset, if any, based on their relative fair values. The
servicing asset, included in other assets, is amortized on a method
which approximates a level yield over the estimated life of the
serviced loans considering assumed prepayment patterns.
(Continued)
F-14
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(e) Allowance for Loan Losses
The allowance for loan losses is adjusted through provisions for loan
losses charged or credited to operations. Loans are charged off
against the allowance for loan losses when management believes that
the collection of the principal is unlikely. Subsequent recoveries are
added to the allowance. The allowance is an amount that management has
determined to be adequate through its allowance for loan losses
methodology to absorb losses inherent in existing loans and
commitments to extend credit. The allowance is determined through
consideration of such factors as changes in the nature and volume of
the portfolio, overall portfolio quality, delinquency trends, adequacy
of collateral, loan concentrations, specific problem loans, and
economic conditions that may affect the borrowers' ability to pay.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such
agencies may require the Company to adjust the allowance based on
their judgment about information available to them at the time of
their examination.
(f) Real Estate Owned
Real estate acquired through foreclosure, consisting of properties
obtained through foreclosure proceedings or acceptance of a deed in
lieu of foreclosure, is reported on an individual asset basis at the
lower of cost or fair value, less disposal costs. Fair value is
determined on the basis of current appraisals, comparable sales, and
other estimates of value obtained principally from independent
sources. When properties are acquired through foreclosure, any excess
of the loan balance at the time of foreclosure over the fair value of
the real estate held as collateral is recognized and charged to the
allowance for loan losses. Subsequent write-downs are charged to a
separate allowance for losses pertaining to real estate owned,
established through provisions for estimated losses on real estate
owned charged to operations. Based upon management's evaluation of the
real estate acquired through foreclosure, additional expense is
recorded when necessary in an amount sufficient to restore the
allowance to an adequate level. Gains recognized on the disposition of
the properties are recorded in other income.
Costs of improvements to real estate are capitalized, while costs
associated with holding the real estate are charged to operations.
(g) Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation which is computed using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives of
the assets range from 20 to 50 years for buildings and improvements
and three to 15 years for furniture, fixtures, and equipment.
(Continued)
F-15
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(h) Mortgage Banking Activities
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 was amended by SFAS No.
127, which deferred the effective date of certain provisions of SFAS
No. 125 until January 1, 1998. SFAS No. 125 is to be applied
prospectively to transfers and servicing of financial assets and
extinguishments of liabilities after December 31, 1996. This statement
provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based
on consistent application of a financial-components approach that
focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities
when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 amends FASB
Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities, to clarify that a debt security may not be
classified as held to maturity if it can be prepaid or otherwise
settled in such a way that the holder of the security would not
recover substantially all of its recorded investment. SFAS No. 125
also amends and extends to all servicing assets and liabilities the
accounting standards for mortgage servicing rights in SFAS No. 65,
Accounting for Certain Mortgage Banking Activities, and supersedes
SFAS No. 122, Accounting for Mortgage Servicing Rights.
Mortgage loan servicing rights are included in other assets. Mortgage
servicing rights are stated at cost, less accumulated amortization and
impairment valuation allowance. Under SFAS No. 125, the Company
recognizes, as separate assets, rights to service mortgage loans for
others, either purchased or through Company originations. Prior to the
adoption of SFAS No. 125, separate mortgage servicing rights were
recognized only when purchased. Mortgage servicing rights which are
acquired through either the purchase or origination of mortgage loans
are recognized as separate assets when the Company sells or
securitizes those loans with servicing rights retained. For originated
mortgage loans, the amount of the mortgage servicing rights to be
recognized is determined based upon an allocation of the total cost of
the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair
values. Fair value is determined by discounted cash flow analyses
using appropriate assumptions for servicing fee income, servicing fee
costs, prepayment rates, and discount rates. For mortgage servicing
rights acquired separate from the mortgage loans, the Company
capitalizes the amount paid.
The cost of the mortgage servicing rights is amortized in proportion
to and over the period of net servicing income which is estimated to
be generated by the underlying mortgage servicing rights.
(Continued)
F-16
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
In accordance with SFAS No. 125, the Company periodically assesses its
capitalized mortgage servicing rights for impairment based upon the
fair value of those rights, including those rights purchased before
the adoption of SFAS No. 125. To measure the fair value of its
mortgage servicing rights, the Company uses discounted cash flow
analyses taking into consideration appropriate assumptions for
servicing fee income, servicing fee costs, prepayment rates, and
discount rates. The Company stratifies its capitalized mortgage
servicing rights for the purpose of evaluating impairment, taking into
consideration relevant risk characteristics, including loan type, note
rate, and note term. If the recorded amount of the mortgage servicing
rights exceeds the fair value, the amount of the impairment is
recognized through a valuation allowance, with a corresponding charge
to operations. Additionally, the Company will prospectively accelerate
future amortization if a reduction in expected future net servicing
income is estimated.
Fees for servicing loans for investors are based on the outstanding
principal balance of the loans serviced and are recognized as income
when earned.
(i) Insurance
At September 30, 2000, the Company was covered under a $5,000,000
banker's blanket bond policy and a $1,000,000 errors and omissions
policy. The Company is also covered with a $10,000,000 umbrella
policy.
(j) Investment in Limited Partnerships
The carrying value of the Company's share (based on its underlying
ownership interest) of limited partnerships is based on the Company's
original investment adjusted for its pro rata share of the
partnerships' net income or losses.
(k) Income Taxes
The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes. Under the asset and liability method
of SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(Continued)
F-17
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(l) Comprehensive Income
Comprehensive income for the Company consists of net income for the
period and unrealized holding gains on investments, mortgage-backed
securities, and collateralized mortgage obligations classified as
available for sale, net of income taxes.
(m) Goodwill and Other Intangible Assets
Goodwill and other intangible assets include costs in excess of net
assets acquired and deposit premiums recorded in connection with the
acquisition of Citizens Bancgroup, Inc. These intangible assets are
being amortized using the straight-line method over five years.
The Company examines the carrying value of its intangible assets to
determine whether there are any impairment losses. If indicators of
impairment were present in intangible assets used in operations and
undiscounted future cash flows were not expected to be sufficient to
recover the assets' carrying amount, an impairment loss would be
charged to expense in the period identified.
(n) Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain instruments embedded in
other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that entities recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those financial instruments at fair
value. The effective date of SFAS No. 133 was delayed until fiscal
years beginning after June 15, 2000 with the issuance of SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133. In June
2000, the Financial Accounting Standards Board issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging
Activities an amendment of FASB Statement No. 133. SFAS No. 138 amends
the accounting and reporting standards of Statement No. 133 for
certain derivative instruments and certain hedging activities. Based
on the Company's assessment of the nature of its derivative
instruments including an assessment of its embedded derivatives, which
have been determined to be clearly and closely related to its
investment and debt instruments, SFAS No. 133 and its related
amendments are not expected to have a material impact on the Company's
financial statement presentations.
In September 2000, the Financial Accounting Standards Board issued
SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS
No. 125 issued in June 1996 and is effective for fiscal years ending
after December 15, 2000. SFAS No. 140 addresses implementation issues
that were identified in applying SFAS No. 125. SFAS No. 140 is not
expected to have a material impact on the Company.
(Continued)
F-18
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(o) Reclassifications
Certain reclassifications have been made to the 1999 and 1998
financial statements to conform to the presentation adopted in 2000.
(2) Business Combinations
Effective August 18, 1999, the Company acquired all of the issued and
outstanding shares of Citizens Bancgroup, Inc. ("CNB"), Valley, Alabama,
and its wholly owned banking subsidiary, Citizens National Bank, for a
purchase price of approximately $2,250,000 in cash. The acquisition has
been accounted for using the purchase method of accounting and, hence, the
results of operations of CNB have been included in the consolidated
financial statements from the aforementioned effective date. The assets and
liabilities of CNB, including purchase accounting adjustments, as of the
date of the acquisition, were as follows:
Loans, net $ 24,722,000
Other earning assets 10,458,000
Other assets 4,908,000
Goodwill and other intangibles 4,600,000
------------
44,688,000
Deposits 42,041,000
Other liabilities 397,000
------------
Purchase price $ 2,250,000
============
The following summarizes the unaudited pro forma consolidated results of
operations assuming CNB was acquired in a purchase accounting transaction
on October 1, 1997:
1999 1998
------------------ ---------------
Interest income $ 41,787,000 34,408,000
================== ==============
Net interest income 16,150,000 12,714,000
================== ==============
Noninterest income (loss) 39,404,000 (2,865,000)
================== ==============
Net income 23,807,000 118,000
================== ==============
(Continued)
F-19
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(3) Goodwill and Other Intangible Assets
Goodwill and other intangible assets at September 30, 2000 and 1999
consists of the following:
2000 1999
---------------- -----------------
Goodwill $ 3,125,000 3,125,000
Deposit premium 1,475,000 1,475,000
---------------- -----------------
4,600,000 4,600,000
Accumulated amortization and allowance for
impairment (4,600,000) (66,667)
---------------- -----------------
Goodwill and other intangible assets, net $ -- 4,533,333
================ =================
The Company examines the carrying amount of its intangible assets to
determine whether there are any impairment losses. The analysis for the
year ended September 30, 2000 indicated that undiscounted future cash flows
associated with the purchase of assets and assumption of liabilities of CNB
would be negative and therefore insufficient to recover the carrying amount
of the related intangible assets primarily due to charge-offs of loans
purchased. Accordingly, the Company recorded an impairment loss of
$3,603,333 in addition to scheduled amortization of $930,000 for the year
ended September 30, 2000.
(4) Investment Securities
Investment securities available for sale are summarized as follows:
September 30, 2000
-----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
--------------- ------------------ ---------------- -------------------
Freddie Mac common stock $ 6,886,116 266,399,822 -- 273,285,938
Federal Home Loan Bank stock 12,587,500 -- -- 12,587,500
--------------- ------------------ ---------------- -------------------
19,473,616 266,399,822 -- 285,873,438
--------------- ------------------ ---------------- -------------------
Other:
U.S. Government agencies 14,448,989 -- 1,569,115 12,879,874
Corporate debt 1,000,000 2,500 -- 1,002,500
--------------- ------------------ ---------------- -------------------
15,448,989 2,500 1,569,115 13,882,374
--------------- ------------------ ---------------- -------------------
$ 34,922,605 266,402,322 1,569,115 299,755,812
=============== ================== ================ ===================
(Continued)
F-20
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
September 30, 1999
--------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------ ------------- -------------- -------------
Freddie Mac common stock $ 6,886,116 255,973,884 -- 262,860,000
Federal Home Loan Bank stock 10,407,500 -- -- 10,407,500
Other equity securities 92,541 183,284 -- 275,825
------------ ------------- ------------- -------------
17,386,157 256,157,168 -- 273,543,325
------------ ------------- ------------- -------------
Other:
U.S. Government agencies 31,388,055 -- 1,438,102 29,949,953
Corporate debt 1,951,435 28,720 -- 1,980,155
------------ ------------- ------------- -------------
33,339,490 28,720 1,438,102 31,930,108
------------ ------------- ------------- -------------
$ 50,725,647 256,185,888 1,438,102 305,473,433
============ ============= ============= =============
The amortized cost and fair value of investments in debt securities available
for sale at September 30, 2000, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
cost fair value
------------ -----------
Due less than one year $ 1,000,000 1,002,500
Due after one year through five years -- --
Due after five years through ten years -- --
Due after ten years 14,448,989 12,879,874
------------ -----------
$ 15,448,989 13,882,374
============ ===========
Proceeds from sales of investment securities during 2000, 1999, and 1998 were
$3,135,170, $28,149,121, and $22,352,291, respectively. Gross gains of $185,337,
$148,097, and $46,388 were realized on those sales for 2000, 1999, and 1998,
respectively, and gross realized losses on sales of investment securities for
2000, 1999, and 1998 were $22,072, $12,968, and $8,689, respectively.
During 2000, the Company donated 425 shares of Fannie Mae stock with a fair
value of $25,633 to LaGrange College. The Company recognized a gain on the
disposition of the stock of $16,694 and recorded contribution expense for the
total fair value in 2000.
During 1999, the Company donated 35,000 shares of Freddie Mac common stock with
a fair value of $2,152,500 to a charitable foundation formed by the Company. The
Company recognized a gain on the disposition of the stock of $2,117,365 and
recorded contribution expense for the total fair value in 1999.
During the year ended September 30, 1999, the Company sold 570,000 shares of
Freddie Mac common stock with a fair value of $34,468,568. The Company
recognized a gain on the disposition of the stock of $33,748,285.
Investment securities with an aggregate carrying amount of $13,882,374 and
$26,841,596 at September 30, 2000 and 1999, respectively, were pledged to secure
Federal Home Loan Bank advances and to collateralize securities sold under
agreements to repurchase.
(Continued)
F-21
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(5) Mortgage-Backed Securities and Collateralized Mortgage Obligations
Mortgage-backed securities and collateralized mortgage obligations
available for sale are summarized as follows:
September 30, 2000
-----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------- ------------ ------------ ---------------
Mortgage-backed securities:
FNMA certificates $ 52,832,211 -- 2,049,108 50,783,103
GNMA certificates 85,700,103 -- 3,529,073 82,171,030
FHLMC certificates 25,043,175 8,313 696,083 24,355,405
Collateralized mortgage obligations:
FNMA 78,831,227 107,091 1,160,820 77,777,498
GNMA 3,517,509 -- 211,955 3,305,554
FHLMC 70,512,731 160,124 1,303,632 69,369,223
Other 67,198,421 -- 7,252,330 59,946,091
------------ --------- ---------- -------------
$383,635,377 275,528 16,203,001 367,707,904
============ ========= ========== =============
September 30, 1999
-----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------- ------------ ------------ ---------------
Mortgage-backed securities:
FNMA certificates $ 64,839,039 767 2,303,384 62,536,422
GNMA certificates 81,650,700 -- 3,731,214 77,919,486
FHLMC certificates 24,357,067 -- 572,560 23,784,507
Collateralized mortgage obligations:
FNMA 61,620,667 13,081 1,105,945 60,527,803
FHLMC 60,493,323 39,976 1,069,519 59,463,780
GNMA 3,504,249 -- 188,360 3,315,889
Other 74,287,972 -- 5,337,226 68,950,746
------------ --------- ---------- -------------
$370,753,017 53,824 14,308,208 356,498,633
============ ========= ========== =============
Proceeds from sales of mortgage-backed securities and collateralized mortgage
obligations during 2000, 1999, and 1998 were $67,269,563, $260,278,302, and
$224,913,926, respectively. Gross gains of $38,957, $757,275, and $995,413 and
gross losses of $346,552, $496,759, and $266,606 were realized on those sales
for 2000, 1999, and 1998, respectively.
Mortgage-backed securities and collateralized mortgage obligations with an
aggregate carrying amount of $284,469,404 and $236,913,212 at September 30, 2000
and 1999, respectively, were pledged to secure Federal Home Loan Bank advances
and to collateralize securities sold under agreements to repurchase.
The FASB has issued SFAS No. 119, Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments, which requires improved
disclosures about derivative financial instruments; futures, forward, swap, or
option contracts; or other financial instruments with similar characteristics.
It also amends existing requirements of SFAS No. 105, Disclosure of Information
About Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentration of Credit Risk, and SFAS No. 107, Disclosures
About Fair Value of Financial
(Continued)
F-22
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
Instruments. It requires that a distinction be made between financial
instruments held or issued for the purposes of trading or for purposes other
than trading. For derivative financial instruments held or issued for trading,
disclosure of average fair values and of net trading gains or losses is
required. At September 30, 2000 and 1999, the Company did not hold any
derivative financial instruments for trading purposes. For derivative
financial instruments held or issued for purposes other than trading, it
requires disclosure about those purposes, about how the instruments are
reported in the financial statements, and, if the purpose is hedging
anticipated transactions, about the anticipated transactions, the classes of
derivative financial instruments used to hedge those transactions, the amounts
of hedging gains and losses deferred, and the transactions or other events
that result in recognition of the deferred gains or losses in income. At
September 30, 2000 and 1999, the Company did not hold any derivative financial
instruments with the purpose of hedging transactions. The Company held
collateralized mortgage obligations at September 30, 2000 and 1999. These
investments are classified as available for sale and are carried at fair value
in the Company's financial statements.
The following table shows additional information related to the collateralized
mortgage obligations held by the Company:
September 30, 2000
--------------------------------------------------------------------------
Weighted- Net
Fair average unrealized
value life Yield gain (loss)
------------- ------------ ------- ---------------
Fixed rate $ 94,888,626 14.86 years 6.937% $ (8,417,676)
Variable rate 115,509,740 16.62 years 7.852 (1,243,846)
------------- ------------
Total $ 210,398,366 $ (9,661,522)
============= ============
September 30, 1999
-------------------------------------------------------------------------
Weighted- Net
Fair Average unrealized
value Life Yield gain (loss)
------------- -------------- -------- -------------
Fixed rate $ 83,961,705 15.80 years 7.16% $ (5,780,071)
Variable rate 108,296,513 17.82 years 6.50 (1,867,922)
------------- ------------
Total $ 192,258,218 $ (7,647,993)
============= ============
(Continued)
F-23
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(6) Loans Receivable
Loans receivable are summarized as follows:
September 30,
-------------------------------------
2000 1999
------------ ------------
1-4 family residential real estate mortgage $152,821,962 132,035,747
Commercial real estate 60,837,874 46,544,858
Commercial 8,986,583 3,244,785
Real estate construction 7,138,418 8,038,651
Consumer and other 29,914,580 24,352,786
------------ ------------
Total loans 259,699,417 214,216,827
Less:
Unamortized loan origination fees (costs), net (113,317) 50,838
Allowance for loan losses 6,346,001 5,709,802
------------ ------------
$253,466,733 208,456,187
============ ============
In addition to the above, the Company was servicing loans for the Federal
Home Loan Mortgage Corporation with aggregate principal balances of
$152,777,116, $155,200,029, and $127,862,071, at September 30, 2000, 1999,
and 1998, respectively.
Loans to certain executive officers, directors, and their associates
totaled $883,886 and $758,245 at September 30, 2000 and 1999, respectively.
Such loans were made in the ordinary course of business on substantially
the same terms, including interest rate and collateral, as those prevailing
at the time for comparable transactions with other persons, and did not
involve more than the normal credit risk nor present other unfavorable
features. The following is a summary of activity during 2000 with respect
to such aggregate loans to these individuals and their associates and
affiliated companies:
Balance at September 30, 1999 $ 758,245
New loans 378,624
Repayments 252,983
---------
Balance at September 30, 2000 $ 883,886
=========
At September 30, 2000 and 1999, the Company had $2,830,774 and $1,989,006,
respectively, of nonperforming loans. The following is a summary of
interest income relating to nonperforming loans for the years ended
September 30, 2000, 1999, and 1998.
2000 1999 1998
--------- ------- -------
Interest income at contractual rate $ 303,990 44,937 35,414
Interest income actually recorded (127,679) (16,195) (22,975)
--------- ------- -------
Reduction of interest income $ 176,311 28,742 12,439
========= ======= =======
(Continued)
F-24
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
The following is a summary of transactions in the allowance for loan
losses:
2000 1999 1998
------------ ----------- -----------
Balance at beginning of year $ 5,709,802 2,054,288 1,845,613
Loan loss reserve of acquired
company -- 3,751,796 --
Loans charged off (1,137,938) (420,101) (256,166)
Recoveries on loans previously
charged off 364,137 83,819 284,841
Provision for loan losses charged
to operations 1,410,000 240,000 180,000
------------ ---------- ----------
Balance at end of year $ 6,346,001 5,709,802 2,054,288
============ ========== ==========
At September 30, 2000 and 1999, pursuant to the definition within SFAS 114,
the Company had impaired loans of approximately $1,200,000 and $2,000,000
with related amounts included in the allowance for loan losses of
approximately $715,000 and $560,000, respectively.
The average recorded investment in impaired loans for the years ended
September 30, 2000, 1999, and 1998 was approximately $740,000, $500,000 and
$600,000, respectively. Interest income recognized on impaired loans for
the years ended September 30, 2000, 1999, and 1998, was not significant.
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. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the financial
statements. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss, in the event of nonperformance by
the customer for commitments to extend credit is represented by the
contractual or notional amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as
it does for recorded loans.
A summary of the Company's financial instruments with off-balance sheet
risk at September 30, 2000 and 1999 is as follows:
2000 1999
------------- ------------
Financial instruments whose contract amounts
represent credit risk - commitments:
Mortgage loans $ 5,109,000 7,444,548
Open-end consumer loans 6,953,873 6,553,796
Open-end commercial loans 456,254 460,000
Construction loans 8,879,948 5,471,856
------------- ------------
Total commitments $ 21,399,075 19,930,200
============= ============
The Company was also committed to sell loans of approximately $1,349,000 at
September 30, 2000.
(Continued)
F-25
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the agreement.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many 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 customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but consists primarily of residential
real estate.
In the origination of mortgage loans, the Company enters into adjustable
interest rate contracts with caps and floors written with the intent of
managing its interest rate exposure. Interest rate caps and floors enable
customers and the Company to transfer, modify, or reduce their interest
rate risk. At September 30, 2000 and 1999, adjustable rate mortgage loans
with interest rate caps and floors amounted to approximately $117,758,166
and $89,475,956, respectively.
(7) Real Estate Owned
At September 30, 2000 and 1999, real estate owned is summarized as follows:
2000 1999
-------- -------
Real estate acquired through foreclosure $629,993 222,210
======== =======
(8) Accrued Interest and Dividends Receivable
At September 30, 2000 and 1999, accrued interest and dividends receivable
are summarized as follows:
2000 1999
----------- ----------
Loans $ 1,791,634 1,585,415
Mortgage-backed securities and collateralized
mortgage obligations 2,265,767 2,230,487
Investment securities 170,011 382,523
Other 249,432 196,728
----------- ----------
$ 4,476,844 4,395,153
=========== ==========
(Continued)
F-26
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(9) Premises and Equipment
Premises and equipment at September 30, 2000 and 1999 is summarized as
follows:
2000 1999
------------- -----------
Land $ 1,281,380 671,868
Buildings and improvements 3,998,400 3,957,224
Furniture, fixtures, and equipment 2,519,319 2,125,290
Construction in progress 101,035 --
------------ -----------
7,900,134 6,754,382
Less impairment allowance 200,000 --
Less accumulated depreciation 3,750,193 3,301,953
------------- -----------
$ 3,949,941 3,452,429
============= ===========
The Company recorded an impairment allowance of $200,000 during 2000
relating to certain buildings and improvements which represent current
and former branch sites to be sold. The aggregate fair value of such
properties was estimated at $400,000.
(10) Mortgage Servicing Rights
Activity in mortgage servicing rights (which are included in other
assets) for the years ended September 30, 2000 and 1999 consists of the
following:
2000 1999
------------- ---------
Balance at beginning of year $ 1,320,840 1,021,995
Capitalized during the year 107,877 626,797
Amortization expense (331,433) (327,952)
------------- ---------
Balance at end of year $ 1,097,284 1,320,840
============= =========
There was no valuation allowance at September 30, 2000 and 1999.
(11) Investment in Limited Partnerships
During 1997, the Company purchased interests in two limited partnerships,
which were formed to acquire mortgage servicing rights, for $7,000,000.
The Company has allocated approximately 12% and 21% of the respective
earnings or losses of these two partnerships. As discussed in note 1, the
Company uses the equity method of accounting for its investment in both
of these limited partnerships because it exercises significant influence
over the partnerships. Accordingly, the Company recognized equity in the
net (loss) earnings of the limited partnerships of $(28,602) during 2000,
$448,000 during 1999 and $(5,797,145) during 1998. An independent
valuation of the mortgage servicing rights of the limited partnerships is
performed quarterly. During 1998, the Company wrote off its entire
limited partnership investment of $2 million in the partnership for which
it had a previous 12% interest
F-27 (Continued)
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
because limited partner equity had been permanently impaired as a result of
the declining fair value of mortgage servicing rights owned by the
partnership. The Company also recorded a $3.7 million valuation allowance in
1998 relating to its $5 million limited partnership investment in the
partnership for which it has a 21% interest because of the declining fair
value of mortgage servicing rights owned by the partnership.
Financial information (unaudited), including balance sheets as of September
30, 2000 and 1999 for the 21% partnership and income statements for the years
ended September 30, 2000, 1999, and 1998 for both partnerships, is as
follows:
2000 1999
------------- -----------
Cash $ 683,534 259,120
Mortgage servicing rights, net 19,324,955 23,001,851
Other assets, primarily current 491,911 1,342,528
------------- -----------
$ 20,500,400 24,603,499
============= ===========
Long-term debt $ 10,950,000 14,580,000
Other liabilities 479,076 813,499
Partners' capital:
CharterBank 1,871,398 1,900,000
Other partners 7,199,926 7,310,000
------------- -----------
$ 20,500,400 24,603,499
============= ===========
Years ended September 30,
---------------------------------------------
2000 1999 1998
------------- ----------- -----------
Revenues $ 6,211,819 7,627,343 21,626,742
Expenses 6,350,495 5,466,224 58,241,077
------------- ----------- -----------
Net (loss) income $ (138,676) 2,161,119 (36,614,335)
============= =========== ===========
CharterBank's equity in net (loss) income $ (28,602) 448,000 (5,797,145)
============= =========== ===========
F-28 (Continued)
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(12) Deposits
At September 30, 2000 and 1999, deposits are summarized as follows:
2000 1999
------------------------------------------- ------------------------------------------
Weighted- Weighted-
Range of average Range of average
interest interest interest interest
Amount rates rate Amount rates rate
-------------- ----------- ------------ ------------ ------------ ------------
Demand, NOW, and money
market accounts $ 33,462,598 0.00-5.73% 2.66 $ 32,885,036 0.00-4.89% 1.98
Savings deposits 8,386,160 1.99 1.99 8,788,608 0.00-2.50 2.49
Time deposits by original term:
Time deposits over $100,000 20,282,757 4.57-8.25 6.09 19,179,956 4.15-7.25 5.13
Other time deposits:
12 months or less 132,630,681 4.15-7.60 6.31 91,773,350 4.04-6.45 4.95
13-36 months 57,547,631 4.23-7.55 5.40 117,991,218 4.35-6.70 5.50
37 months or more 22,060,816 4.15-8.00 5.78 12,347,210 4.55-8.00 5.67
-------------- -------- -------------- --------
Total deposits 274,370,643 6.01 282,965,378 4.80
======== ========
Accrued interest payable 1,710,488 2,053,237
-------------- --------------
$ 276,081,131 $ 285,018,615
============== ==============
During 2000 and 1999, the Company actively pursued out of market time
deposits from various credit unions and brokers as a source of funds. The
balance of the credit union deposits was $40,533,563 and $41,239,710 and of
broker deposits was $89,355,215 and $87,994,000 at September 30, 2000 and
1999, respectively.
At September 30, 2000, scheduled maturities of time deposits are as follows:
Year ending September 30,
------------------------
2001 $ 202,240,459
2002 16,777,909
2003 7,085,118
2004 2,041,837
2005 and thereafter 4,376,562
----------------
$ 232,521,885
================
Interest expense on deposits for the years ended September 30, 2000, 1999,
and 1998 is summarized as follows:
2000 1999 1998
-------------- ------------ ------------
Demand, NOW, and money
market accounts $ 765,137 449,325 400,305
Savings deposits 274,959 291,947 167,868
Time deposits 12,892,753 9,682,407 5,410,200
-------------- ------------ -------------
$ 13,932,849 10,423,679 5,978,373
============== ============ =============
F-29 (Continued)
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
Deposits of certain officers, directors, and their associates totaled
$1,123,378 and $916,501 at September 30, 2000 and 1999, respectively. Such
deposits have substantially the same terms as those for comparable
transactions with other persons.
(13) Borrowings
At September 30, 2000 and 1999, borrowings are summarized as follows:
2000 1999
---------------- --------------
Federal Home Loan Bank advances $ 234,750,000 205,650,000
Securities sold under agreements to repurchase 117,468,500 107,216,769
---------------- --------------
$ 352,218,500 312,866,769
================ ==============
Federal Home Loan Bank advances at September 30, 2000 and 1999 are
summarized by year of maturity in the table below:
2000 1999
--------------------------------------------------------------------------------------
Weighted- Weighted-
Interest average Interest average
Due Amount rates rate Amount rates rate
------------------------ -------------- ------------ ------------ -------------- ----------- -------------
Less than one year $ 125,000,000 6.53-6.94% 6.60 $ 125,900,000 5.21-5.75% 5.47
One to two years -- -- -- 25,000,000 5.28 5.28
Two to three years 31,000,000 6.46-6.49 6.46 -- -- --
Thereafter 78,750,000 4.85-6.48 5.83 54,750,000 4.85-6.49 5.09
-------------- --------- -------------- -------
$ 234,750,000 6.32 $ 205,650,000 5.34
============== ========= ============== =======
The interest rates on $155,000,000 of the Federal Home Loan Bank ("FHLB")
advances at September 30, 2000 are adjusted periodically, based on short-
term interest rate indices.
At September 30, 2000, the Company has pledged, under a specific collateral
lien with the FHLB, all stock of the FHLB, certain qualifying first
mortgage loans with unpaid principal balances totaling $135,227,055 and
certain mortgage-backed securities, collateralized mortgage obligations,
corporate securities, and U.S. government agency securities with an
aggregate fair value of $174,758,100.
At September 30, 2000, the Company had available line of credit commitments
with the FHLB totaling $283,896,000 of which $234,750,000 was advanced and
$49,146,000 was available at September 30, 2000.
As of September 30, 2000, the Company's fixed rate FHLB advances include
$53,750,000 of advances that are callable by the FHLB under certain
circumstances. Of these advances, $25,000,000 are callable prior to
September 30, 2001. If called by the FHLB, such advances could be
refinanced at prevailing market rates on the date of the call.
The securities sold under agreements to repurchase at September 30, 2000
are secured by certain mortgage-backed securities, collateralized mortgage
obligations, and U.S. government agency securities with an aggregate fair
value, including accrued interest, of $124,395,137. All securities sold
under the agreements to repurchase are under the Company's control. The
repurchase agreements at September 30, 2000 and 1999 have maturities of
less than 45 days, and provide for the purchase of
F-30 (Continued)
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
identical securities and specify delivery of the underlying securities to
an approved custodian. The aggregate carrying amount of such securities
sold under the agreements to repurchase exceeded the amount of repurchase
liabilities by approximately $6,900,000 at September 30, 2000.
The following summarizes pertinent data related to securities sold under
the agreements to repurchase for the years ended September 30, 2000, 1999,
and 1998:
2000 1999 1998
---------------- ------------- -------------
Weighted-average borrowing rate
at year-end 6.76% 5.54 5.67
================ ============ ============
Weighted-average borrowing rate
during the year 6.64% 5.42 5.82
================ ============ ============
Average daily balance during year $ 122,725,585 60,134,537 59,660,408
================ ============ ============
Maximum month-end balance
during the year $ 153,308,116 111,320,019 127,764,875
================ ============ ============
Interest expense on borrowings for the years ended September 30, 2000,
1999, and 1998 is summarized as follows:
2000 1999 1998
----------------- ------------ -----------
Securities sold under agreements
to repurchase $ 8,149,449 3,260,558 3,473,310
Federal Home Loan Bank advances 14,565,105 9,657,196 9,958,157
---------------- ------------ ------------
$ 22,714,554 12,917,754 13,431,467
================ ============ ============
(14) Income Taxes
Income tax expense (benefit) attributable to income from continuing
operations for the years ended September 30, 2000, 1999, and 1998 consists
of:
2000 1999 1998
----------- ----------- -----------
Federal:
Current $ 926,667 5,594,643 1,107,751
Deferred 273,850 6,657,139 (1,814,696)
State:
Current 41,118 932,753 100,042
Deferred 48,327 1,174,789 (211,013)
----------- ----------- -----------
$ 1,289,962 14,359,324 (817,916)
=========== =========== ===========
F-31 (Continued)
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
The difference between the actual total provision for Federal and state
income taxes and Federal income taxes computed at the statutory rate of 34%
in 2000, 35% in 1999, and 34% in 1998 is summarized as follows:
2000 1999 1998
-------------- ------------ -----------
Computed "expected" tax expense (benefit) $ 735,165 14,486,039 (116,621)
Increase (decrease) in tax expense resulting from:
Dividends received deduction (796,176) (725,117) (621,063)
Gain on disposition of stock (5,676) (741,078) --
State income taxes, net of Federal tax effect 59,034 1,369,902 (73,241)
Change in the deferred tax asset valuation
allowance (266,554) (35,518) --
Goodwill amortization and impairment 1,541,333 -- --
Other, net 22,836 5,096 (6,991)
-------------- ------------ -----------
$ 1,289,962 14,359,324 (817,916)
============== ============ ===========
F-32 (Continued)
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
September 30, 2000 and 1999 are presented below:
2000 1999
------------ ------------
Deferred tax assets:
Georgia business credit carryforward $ 180,483 --
Allowance for loan losses 1,436,582 1,144,257
Deferred compensation 195,054 223,430
Alternative minimum tax credit carryforward 175,848 96,058
Self-insurance reserve 55,099 23,846
Charitable contributions carryforward 652,225 828,569
Investment in limited partnership 603,957 580,925
Pension expenses -- 195,327
Real estate acquired through foreclosure 119,525 200,752
Net operating loss carryforward 899,684 1,157,628
Other 148,659 230,798
------------ ------------
Total gross deferred tax assets 4,467,116 4,681,590
Less valuation allowance 941,000 1,207,554
------------ ------------
Net deferred tax assets 3,526,116 3,474,036
------------ ------------
Deferred tax liabilities:
Deferred loan fees, net 539,482 282,454
Mortgage servicing rights 413,896 498,221
Net unrealized holding gains on securities
available for sale 96,077,613 92,830,453
Investment securities market adjustment
for tax reporting 6,598,770 6,108,444
Federal Home Loan Bank stock dividends 45,862 52,553
Other 97,669 379,750
------------ ------------
Total gross deferred tax liabilities 103,773,292 100,151,875
------------ ------------
Net deferred tax liabilities $100,247,176 96,677,839
============ ============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at September 30,
2000. The Company has net operating loss carryforwards of approximately
$2,400,000 which begin to expire in 2018. The valuation allowance of
$941,000 at September 30, 2000 relates to a portion of the charitable
contributions, net operating loss, and business credit carryforwards. The
charitable contribution carryforward begins to expire in 2002.
(Continued)
F-33
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
Prior to January 1, 1996, the Company was permitted under the Internal
Revenue Code ("Code") a special bad debt deduction related to additions to
tax bad debt reserves established for the purpose of absorbing losses. The
provisions of the Code permitted the Company to deduct from taxable income
an allowance for bad debts based on the greater of a percentage of taxable
income before such deduction or actual loss experience. Retained earnings
at September 30, 2000 include approximately $2,137,000 for which no
deferred Federal income tax liability has been recognized. The amounts
represent an allocation of income for bad debt deductions for tax purposes
only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses
would create income for tax purposes only, which would be subject to the
then current corporate income tax rate.
On August 20, 1996, President Clinton signed legislation which has
eliminated the percentage of taxable income bad debt deduction for thrift
institutions for tax years beginning after December 31, 1995. This new
legislation also requires a thrift to generally recapture the excess of
its current tax reserves over its 1987 base year reserves whereas, the
base year reserves are frozen from taxation. As the Company had previously
provided deferred taxes on this amount, no additional financial statement
tax expense resulted from this legislation.
(15) Employee Benefits
Prior to December 31, 1999, the Company had a qualified noncontributory
defined benefit retirement plan covering substantially all of its
employees. Employees covered under the plan were eligible to participate
after completion of one year of service. The benefits were based on each
employee's years of service up to a maximum of 25 years, and the average
of the highest five consecutive annual salaries. An employee became fully
vested upon completion of five years of qualifying service. Normal
retirement age was 65, but provision was made for earlier retirement. It
was the policy of the Company to fund the maximum amount that could be
deducted for Federal income tax purposes. Plan assets consisted primarily
of listed common stocks and cash. The plan was frozen effective December
31, 1999 and the termination process initiated with disbursements being
made to eligible participants following completion of the termination.
(Continued)
F-34
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
The following table sets forth the funded status of the plan at September
30, 2000 and 1999:
September 30,
---------------------------------
2000 1999
------------ ------------
Change in benefit obligation:
Projected benefit obligation at beginning of period $ 1,557,877 1,743,882
Service cost 51,322 255,682
Interest cost 76,493 109,215
Amendments 576,498 (123,712)
Actuarial loss (gain) 493,970 (375,078)
Benefits paid -- (52,112)
Curtailment (1,028,063) --
Settlement (1,151,599) --
------------ ------------
Projected benefit obligation at end of period 576,498 1,557,877
------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of period 1,493,849 1,240,560
Actual return on plan assets 234,248 305,401
Benefits paid -- (52,112)
Settlement (1,151,599) --
------------ ------------
Fair value of plan assets at end of period 576,498 1,493,849
------------ ------------
Funded status
Unrecognized net actuarial loss -- (457,692)
Unrecognized prior service cost -- (3,944)
Unrecognized transition obligation -- (12,310)
------------ ------------
Prepaid (accrued) pension cost $ -- (537,974)
============ ============
The components of net pension expense (recovery) for the years ended
September 30, 2000, 1999, and 1998 are as follows:
2000 1999 1998
---------- --------- ----------
Service cost for benefits earned during the year $ 51,322 255,682 222,526
Interest cost on projected benefit obligations 76,493 109,215 97,105
Actual return on plan assets (114,439) (99,071) (234,326)
Net amortization and deferral (4,610) (1,164) 157,793
Curtailment and settlement (546,740) -- --
---------- --------- ----------
Net pension expense (recovery) $ (537,974) 264,662 243,098
========== ========= ==========
Assumptions used to determine the actuarial
present value of the accumulated and
projected benefit obligations were:
Discount rate 7.75% 7.75 7.75
Expected long-term rate of return on assets 8.00 8.00 8.00
Rate of increase in future compensation levels N/A 4.50 4.50
(Continued)
F-35
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
The Company has a 401(k) Profit Sharing Plan and Trust (Plan) which covers
substantially all of its employees. CharterBank matches 50% of employee
contributions to the Plan, up to 8% of employee compensation, and may make
additional discretionary contributions. The Company made contributions to
the Plan of $96,934, $27,040, and $33,298 in 2000, 1999, and 1998,
respectively.
During 1996, the Company implemented a short-term incentive plan which
covers substantially all employees. The Company also implemented a long-
term incentive plan which covers key employees and is based on the
Company's comprehensive earnings, as defined. For the years ended
September 30, 2000, 1999, and 1998, the Company expensed approximately
$946,027 (as restated -- note 22), $830,325, and $654,000, respectively,
related to the incentive plans.
(16) Commitments and Contingent Liabilities
In the normal course of business, the Company is party (both as plaintiff
and defendant) to certain matters of litigation. In the opinion of
management and counsel, none of these matters should have a material
adverse effect on the Company's financial position.
The Company is self-insured for employee medical and health care claims up
to a maximum of $10,000 per year per employee. Claims above the self-
insured maximum amounts are covered under an insurance policy up to a
maximum of $990,000. Total employee medical and health care claims paid by
the Company during 2000, 1999, and 1998 were $226,276, $192,956, and
$199,438, respectively. At September 30, 2000 and 1999, the Company has
accrued $146,074 and $63,219, respectively, for future employee medical
and health care claims.
(17) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments, requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Company's financial
instruments.
(a) Cash and Cash Equivalents
The carrying amount approximates fair value because of the short
maturity of these instruments.
(b) Investment and Mortgage-Backed Securities and Collateralized Mortgage
Obligations Available for Sale
The fair value of investment and mortgage-backed securities and
collateralized mortgage obligations available for sale is estimated
based on bid quotations received from securities dealers. In
aggregate, the fair value of investment and mortgage-backed securities
and collateralized mortgage obligations available for sale at
September 30, 2000 and 1999 was $667,463,716 and $661,972,066,
respectively (see notes 4 and 5).
(continued)
F-36
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(c) Loans Receivable
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type. The fair
value of performing loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount
rates that reflect the credit risk inherent in the loan. The estimate
of maturity is based on the Company's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of the current economic and lending
conditions.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower
information.
The following table presents information for loans at September 30,
2000 and 1999:
2000 1999
---------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------------- -------------- -------------- --------------
1-4 family residential real estate $ 152,821,962 150,438,834 132,035,747 125,433,959
Commercial real estate 60,837,874 59,889,168 46,544,858 44,217,615
Commercial other 8,986,583 8,698,016 3,244,785 3,082,546
Real estate construction loans 7,138,418 7,027,102 8,038,651 8,038,651
Other loans 29,914,580 30,169,131 24,352,786 24,509,000
Unamortized loan origination
costs (fees), net 113,317 113,317 (50,838) (50,838)
Allowance for loan losses (6,346,001) (6,346,001) (5,709,802) (5,709,802)
-------------- -------------- -------------- --------------
$ 253,466,733 249,989,567 208,456,187 199,521,131
============== ============== ============== ==============
Loans held for sale $ 832,526 839,000 2,896,798 2,897,000
============== ============== ============== ==============
(d) Mortgage Servicing Rights
The fair value of mortgage servicing rights approximates its carrying
value due to the Company's evaluation of the underlying loan
portfolio and subsequent adjustment for loan prepayments and other
market conditions.
(Continued)
F-37
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(e) Deposits
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, savings, NOW
accounts, and money market and checking accounts, is equal to the
amount payable on demand as of September 30, 2000 and 1999. The fair
value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining maturities.
The following table presents information for deposits at September
30, 2000 and 1999:
2000 1999
------------------------------ --------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------- ------------ ------------- -------------
Demand, NOW, and money
market accounts $ 33,462,598 33,462,598 32,885,036 32,885,036
Savings deposits 8,386,160 8,386,160 8,788,608 8,788,608
Time deposits 232,521,885 233,066,063 241,291,734 240,053,000
------------- ------------ ------------- -------------
$ 274,370,643 274,914,821 282,965,378 281,726,644
============= ============ ============= =============
(f) Borrowings
The fair value of the Company's borrowings is estimated based on the
discounted value of contractual cash flows. The discount rate is
estimated using rates quoted for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining
maturities. The following presents information for borrowings at
September 30, 2000 and 1999:
2000 1999
------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------- ------------ ------------- -------------
Federal Home Loan Bank
advances $ 234,750,000 233,557,186 205,650,000 204,022,000
Securities sold under
agreements to repurchase 117,468,500 117,466,938 107,216,769 107,216,769
------------- ------------ ------------- -------------
$ 352,218,500 351,024,124 312,866,769 311,238,769
============= ============ ============= =============
(g) Accrued Interest and Dividends Receivable and Payable
The carrying amount of accrued interest and dividends receivable and
payable approximate their fair values (see notes 8 and 12).
(h) Commitments
The fair value of commitments to extend credit to fund home equity,
real estate construction, and real estate mortgage loans is
immaterial because the underlying interest rates on such commitments
approximate market rates.
(Continued)
F-38
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(i) Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no
market exists for a portion of the Company's financial instruments,
fair value estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. In cases where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. 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.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or
liabilities include deferred tax liabilities and premises and
equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of
the estimates.
(18) Regulatory Matters
The Company is required to maintain noninterest-bearing cash reserve
balances. The aggregate average cash reserve balances maintained at
September 30, 2000 and 1999 to satisfy the regulatory requirement were
$512,634 and $549,796, respectively.
Under Office of Thrift Supervision regulations, the Company is required to
measure its interest rate risk and maintain the interest rate risk within
limits the Company establishes. Based on its asset/liability structure at
September 30, 2000, the Company's earnings may be negatively impacted if
interest rates rise significantly.
Under provisions of the Financial Institutions Reform, Recovery, and
Enforcement Act ("FIRREA") of 1989, the Company is required to meet
certain core, tangible, and risk-based capital ratios. The regulations
require institutions to have a minimum regulatory tangible capital ratio
equal to 1.5% of total assets, a minimum 3% core capital ratio, and 8%
risk-based capital ratio.
(Continued)
F-39
CHARETRBANK
Notes to Financial Statements
September 30, 2000 and 1999
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") was signed
into law on December 19, 1991. Regulations implementing the prompt corrective
action provisions of FDICIA became effective on December 19, 1992. In addition
to the prompt corrective action requirements, FDICIA includes significant
changes to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the Federal regulatory agencies, increased
reporting requirements for insured institutions, and new regulations concerning
internal controls, accounting, and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with its primary
Federal regulator, prohibitions on the payment of dividends and management fees,
restrictions on executive compensation, and increased supervisory monitoring,
among other things. Other restrictions may be imposed on the institution either
by its primary Federal regulator or by the FDIC, including requirements to raise
additional capital, sell assets, or sell the entire institution. Once an
institution becomes "critically undercapitalized," it must generally be placed
in receivership or conservatorship within 90 days.
To be considered "adequately capitalized," an institution must generally have a
leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at least 4%,
and a total risk-based capital ratio of at least 8%. An institution is deemed to
be "critically undercapitalized" if it has a tangible equity ratio of 2% or
less.
(Continued)
F-40
CHARETRBANK
Notes to Financial Statements
September 30, 2000 and 1999
The table of compliance with minimum capital requirements is presented below at
September 30, 2000 and 1999 (in thousands):
2000
------------------------------------------------------------
Tier I Total
Core/ risk- risk-
Tangible leverage based based
capital capital capital capital
---------- ---------- ---------- ----------
Total equity $ 204,527 204,527 204,527 204,527
General valuation allowances -- -- -- 4,905
Allowable unrealized gains -- -- -- 46,794
Disallowed mortgage servicing -- -- -- --
Accumulated comprehensive income (152,828) (152,828) (152,828) (152,828)
---------- ---------- ---------- ----------
Regulatory capital $ 51,699 51,699 51,699 103,398
========== ========== ========== ==========
Total assets $ 942,687 942,687 942,687 942,687
========== ========== ========== ==========
Regulatory total assets $ 690,412 690,412
========== ==========
Risk-weighted assets $ 390,982 390,982
========== ==========
Capital ratio 7.49% 7.49 13.22 26.45
Regulatory capital category:
Adequately capitalized or minimum FIRREA
requirement equal to or greater than 1.50 3.00 N/A 8.00
Capital exceeding requirement $ 41,343 30,987 N/A 72,119
========== ========== ========== ==========
Adequately capitalized or minimum FDICIA
requirement equal to or greater than 4.00% 4.00 8.00
Capital exceeding requirement $ 24,083 36,060 72,119
========== ========== ==========
Well capitalized, equal to or greater than 5.00% 6.00 10.00
Capital exceeding requirement $ 17,178 28,240 64,300
========== ========== ==========
(Continued)
F-41
CHARETRBANK
Notes to Financial Statements
September 30, 2000 and 1999
1999
------------------------------------------------------------
Tier I Total
Core/ risk- risk-
Tangible leverage based based
capital capital capital capital
---------- ---------- ---------- ----------
Total equity $ 198,489 198,489 198,489 198,489
General valuation allowances -- -- -- 3,178
Allowable unrealized gains -- -- -- 42,961
Disallowed mortgage servicing -- -- -- --
Accumulated comprehensive income (147,662) (147,662) (147,662) (147,662)
Goodwill (4,533) (4,533) (4,533) (4,533)
---------- ---------- ---------- ----------
Regulatory capital $ 46,294 46,294 46,294 92,433
========== ========== ========== ==========
Total assets $ 904,586 904,586 904,586 904,586
========== ========== ========== ==========
Regulatory total assets $ 659,666 659,666
========== ==========
Risk-weighted assets $ 252,144 252,144
========== ==========
Capital ratio 7.02% 7.02 18.36 36.66
Regulatory capital category:
Adequately capitalized or minimum FIRREA
requirement equal to or greater than 1.50% 3.00 N/A 8.00
Capital exceeding requirement $ 36,399 26,504 N/A 72,261
========== ========== ========== ==========
Adequately capitalized or minimum FDICIA
requirement equal to or greater than 4.0% 4.00 8.00
Capital exceeding requirement $ 19,907 36,208 72,261
========== ========== ==========
Well capitalized, equal to or greater than 5.00% 6.00 10.00
Capital exceeding requirement $ 13,311 31,165 67,219
========== ========== ==========
(19) Lease Commitments
The Company assumed leases of a branch facility and parking lot in
connection with the Citizens National Bank acquisition. The leases are from
a partnership in which a Company executive, a Board Member, and other
related parties are partners. The facility lease expires July 31, 2008 and
the parking lot lease expired as of January 31, 1998. The parking lot lease
is presently being paid month-to-month and is in the process of being
renewed. During 2000, lease expense relating to these leases was $40,000.
Future minimum lease payments for the branch facility lease are as follows:
2001 $ 42,000
2002 42,000
2003 42,000
2004 42,000
2005 42,000
Thereafter 119,000
----------
$ 329,000
==========
(Continued)
F-42
CHARTERBANK
Notes to Financial Statements
September 30, 2000 and 1999
(20) Formation of Insurance Subsidiary
On November 18, 1999, the Company submitted an application to the Office of
Thrift Supervision ("OTS") to obtain approval for the proposed formation of
a service corporation subsidiary to engage in the reinsurance of mortgage
guaranty insurance. On September 1, 2000, the Company received approval
from the OTS to invest in a service corporation established to form the
chartered reinsurance company. On November 30, 2000, the Company
capitalized this wholly owned subsidiary with a capital contribution of
$450,000. Operations are expected to commence in December 2000.
(21) Subsequent Event
On October 26, 2000, the Company announced that its Board of Directors had
approved a Plan of Reorganization from Mutual Savings Bank to Mutual
Holding Company and Stock Issuance (the "Plan"). As part of the
reorganization, the bank will organize a mid-tier stock holding company to
be known as Charter Financial Corp. that will own 100% of the bank's common
stock. Charter Financial Corp. will issue a majority of its shares to a
mutual holding company to be known as First Charter, MHC. The remaining
shares of Charter Financial Corp.'s common stock, which will be no more
than 49% of the total shares, will be offered in a subscription offering to
certain current and former members of the bank. The amount and pricing of
the stock will be based on an independent appraisal of the organization.
The transaction is subject to approval by the Office of Thrift Supervision,
the bank's Federal banking regulator. If approved by the Office of Thrift
Supervision, the Plan will also be submitted to the bank's eligible members
for approval. Although it is not possible to predict when such approvals
will be received, the bank presently expects to commence the stock offering
during the second quarter of 2001. The common stock will be offered on a
priority basis in a Subscription Offering to eligible customers of the
bank. Shares not sold in the Subscription Offering may be offered to the
general public in a Community Offering.
(22) Restatement of Previously Reported Financial Statements
For the year ended September 30, 2000, the Company's Board of Directors
approved a special management incentive bonus accrual of $1,200,000 to
compensate management of past performance. Prior to approval by the Board
of Directors, the Chairman of the Board of Directors discussed the matter
with the Office of Thrift Supervision and, based on that discussion, the
Board of Directors and Company did not anticipate regulatory objection to
payment of this bonus. In March 2001, the Company was informed by the
Office of Thrift Supervision that further review by it and additional
actions by the Company would be required before payment of the bonus would
be permitted. In light of these circumstances, on March 22, 2001, the Board
of Directors rescinded its approval of such special management incentive
bonus accrual. Accordingly, the Board of Directors of the Company has
determined to restate its financial statements at and for the year ended
September 30, 2000 for the effects of the clarification regarding the
Office of Thrift Supervision's position.
The effects of the adjustments to the 2000 Financial statements are as follows:
. Reductions in both salaries and benefits expense and other liabilities of
$1,200,000; and
. Increases in both income tax expense and deferred income tax liability of
$450,000 to reflect the income tax effect of the above adjustment.
The aggregate effect of such adjustments was to increase previously reported
income before income taxes by $1,200,000, net income by $750,000, comprehensive
income by $750,000, and retained earnings by $750,000.
F-43
Independent Auditors' Report
The Board of Directors
CharterBank:
We have audited the accompanying statements of financial condition of
CharterBank (the "Company") as of September 30, 2000 and 1999, and the related
statements of income and comprehensive income, equity, and cash flows for each
of the years in the three-year period ended September 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of CharterBank as of September 30,
2000 and 1999, and the results of its operations and its cash flows for each of
the years in the three-year period ended September 30, 2000 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 22, the statement of financial condition as of September
30, 2000, and the related statements of income and comprehensive income, equity
and cash flows for the year ended September 30, 2000 have been restated.
December 1, 2000, except as to note 22,
as to which the date is March 22, 2001
F-44
--------------------------------------------------------------------------------
You should rely only on the information contained in this document or that to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of CharterBank or Charter Financial may change
after the date of this prospectus. Delivery of this document and the sales of
shares made hereunder does not mean otherwise.
[Logo]
(Proposed Stock Holding Company for CharterBank)
Up to 5,157,750 Shares of Common Stock
------
PROSPECTUS
Sandler O'Neill & Partners, L.P.
[ ]
Until the later of [ ] or 25 days after commencement of the offering, all
dealers effecting transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
SEC Registration Fee (1).......................................... $ 12,895
OTS application fee and registration.............................. 14,400
NASD filing fee................................................... 5,000
Nasdaq National Market Listing Fee (2)............................ 90,000
Printing, postage and mailing..................................... 100,000
Legal fees and expenses........................................... 400,000
Placement Agent's fees and commissions (3)........................ 450,000
Placement Agent's expenses (excluding counsel fees)............... 50,000
Placement Agent's counsel fees and expenses....................... 75,000
Accounting fees and expenses...................................... 200,000
Appraiser's fees and expenses (including preparing business plan). 100,000
Conversion agent fees and expenses................................ 15,000
Certificate printing.............................................. 10,000
Blue Sky fees and expenses (including fees of counsel)............ 10,000
Miscellaneous..................................................... 17,705
----------
TOTAL............................................................. $1,550,000
==========
_______________
(1) Expenses based upon the registration and sale of 5,157,750 shares each at
$10.00 per share.
(2) Based total shares outstanding of 19,500,000.
(3) Assumes 1.25% commission paid on sale of 3,900,000 shares and excluding
ESOP shares and shares purchased by management.
Item 14. Indemnification of Directors and Officers.
12 C.F.R. Section 545.121 of OTS Regulations sets forth the ability of a
federal savings & loan association to indemnify its officers and directors. This
section provides that a savings association shall indemnify any person against
whom an action is brought or threatened because that person is or was a
director, officer or employee of the association for: (1) any amount for which
that person become liable under a judgment if such action; and (2) reasonable
costs and expenses, including reasonable attorney's fees paid or incurred by
that person in defending or settling such action, or in enforcing his or her
rights under such section if he or she attains a favorable judgment in such
enforcement action.
Indemnification shall be made to such individuals if (1) final judgements
on the merits is in the individual's favor; or (2) in case of (i) settlement;
(ii) Final judgement against the individual, or (iii) final judgement in the
individual's favor, other than on the merits, if a majority of the disinterested
directors determine that the individual was acting in good faith within the
scope of his or her employment or authority as he or she could have reasonable
perceived it under the circumstances and for a purpose her or she could
reasonably have believed under the circumstances was in the best interests of
the savings association or its members.
The section also provides that no indemnification may be made unless the
association gives the OTS 60 days notice of its intention to make such
indemnification.
In addition to providing indemnification, under OTS Regulations, a savings
association may obtain insurance to protect in and its officers, directors and
employees from potential losses arising from claims against any of them for
alleged wrongful acts, or wrongful acts, committed in their capacity as
directors, officers or employees. However, the savings association may not
obtain insurance which provides for payment of losses of any person incurred as
a consequence of his or her willful or criminal misconduct.
Section 545.121 of OTS regulations is subject to and qualified by 12 U.S.C
(S) 1821(k) which provides in general that a director or officer of an insured
depository institution may be held personally liable for monetary damages by,
on behalf of, or at the request or direction of the Federal Deposit Insurance
Corporation in certain circumstances.
Article XII of both the Charter Financial Corp.'s and CharterBank's Bylaws
provide that it shall indemnify any person against whom an action is brought or
threatened because that person is or was a director, officer or employee of the
Charter Financial Corp. or CharterBank for: (a) any amount for which that person
becomes liable under a judgment in such action; and (b) reasonable costs and
expenses, including reasonable attorneys' fees, actually paid or incurred by
that person in defending or settling such action, or in enforcing his or her
rights under the indemnification section of the bylaws if he or she attains a
favorable judgment in such enforcement action. These bylaw sections mirror OTS
regulations as set forth above.
Section 19 of the Bylaws of the First Charter, MHC provide that the mutual
holding company shall indemnify its officers, directors and employees to the
fullest extent permitted by the rules and regulations of the OTS at 12 C.F.R.
(S) 545.121.
CharterBank and Charter Financial Corp. are also parties to an Employment
Agreement with Robert L. Johnson. The Agreement provides for Charter Financial
Corp. to indemnify Mr. Johnson to the fullest extent permitted under federal
law. CharterBank and Charter Financial Corp. are also parties to Change Control
Agreements with certain officers of CharterBank which provide for
indemnification for attorneys' fees in some instances.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable.
Item 16. Exhibits and Financial Statement Schedules.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits.
1.1 Engagement Letter dated March 1, 2001 between CharterBank and
Sandler O'Neill & Partners, L.P.
1.2 Form of Agency Agreement, between CharterBank and Sandler O'Neill &
Partners, L.P.
2.1 CharterBank Amended Plan of Reorganization from Mutual Savings Bank to
Mutual Holding Company and Stock Issuance
3.1 Federal Stock Charter of Charter Financial Corp.
3.2 Bylaws of Charter Financial Corp.
3.3 Federal Stock Charter of CharterBank
3.4 Bylaws of CharterBank
3.5 Federal Stock Charter of First Charter, MHC
3.6 Bylaws of First Charter, MHC
4.1 Federal Stock Charter of Charter Financial Corp. (See Exhibit 3.1)
4.2 Bylaws of Charter Financial Corp. (See Exhibit 3.2)
4.3 Form of Stock Certificate of Charter Financial Corp.
5.1 Form of Opinion of Thacher Proffitt & Wood regarding legality of
securities to be registered
8.1 Form of Opinion of Thacher Proffitt & Wood regarding federal tax
matters*
8.2 Form of Opinion of Alston & Bird regarding state and local tax
matters*
8.3 Letter from RP Financial, LC. regarding subscription rights
10.1 Form of Employee Stock Ownership Plan of Charter Financial Corp.
10.2 Form of Benefit Restoration Plan of Charter Financial Corp.
10.3 Form of Employment Agreement by and among Robert L. Johnson, Charter
Financial Corp. and CharterBank
10.4 Form of One Year Change in Control Agreement by and among certain
officers, Charter Financial Corp. and CharterBank
10.5 Form of Two Year Change in Control Agreement by and among certain
officers, Charter Financial Corp. and CharterBank
10.6 Form of Charter Financial Corp. 2001 Recognition and Retention Plan
10.7 Form of Charter Financial Corp. 2001 Stock Option Plan
21.1 Form of Subsidiaries of the Registrant
23.1 Consent of Thacher Proffitt & Wood (included in Exhibits 5.1 and 8.1
to this Registration Statement)
23.2 Consent of KPMG LLP
23.3 Consent of RP Financial, LC.
23.4 Consent of Alston & Bird*
24.1 Powers of Attorney (included in Signature Page of this Registration
Statement)
99.1 Appraisal Report of RP Financial, LC. (filed in paper format only)
99.2 Form of marketing materials to be used in connection with the
offering*
* To be filed by amendment.
(b) Financial Statement Schedules.
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
The undersigned Registrant hereby undertakes to furnish stock certificates
to or in accordance with the instructions of the respective purchasers of the
Common Stock, so as to make delivery to each purchaser promptly following the
closing under the Plan of Reorganization.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of West Point, Georgia on
March 22, 2001.
Charter Financial Corp.
/s/ Robert L. Johnson
-------------------------------------
By: Robert L. Johnson
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert L. Johnson, as their true and lawful
attorney-in-fact in any and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities to sign the Form S-1 Registration Statement and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or either one of his or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, and
any rules and regulations promulgated thereunder, this Registration Statement,
has been signed by the following persons in the capacities and on the dates
indicated.
Name Title Date
---- ----- ----
/s/ John W. Johnson, Jr. Chairman of the Board March 22, 2001
--------------------------
John W. Johnson, Jr.
/s/ Robert L. Johnson President, Chief Executive Officer March 22, 2001
-------------------------- and Director (principal executive
Robert L. Johnson officer)
/s/ David Z. Cauble, III Director March 22, 2001
--------------------------
David Z. Cauble, III
/s/ Jane W. Darden Director March 22, 2001
--------------------------
Jane W. Darden
/s/ William B. Hudson Director March 22, 2001
--------------------------
William B. Hudson
/s/ Thomas M. Lane Director March 22, 2001
--------------------------
Thomas M. Lane
/s/ R. Terry Taunton Director March 22, 2001
--------------------------
R. Terry Taunton
/s/ Curtis R. Kollar Chief Financial Officer, Vice March 22, 2001
-------------------------- President and Treasurer (principal
Curtis R. Kollar accounting officer)