As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-57684
[LOGO]
Charter Financial Corporation
Proposed Holding Company for CharterBank
Up to 6,083,500 Shares of Common Stock
Charter Financial Corporation 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
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 80% of the outstanding common stock of Charter Financial. The common
stock of Charter Financial will be quoted on the Nasdaq National Market under
the symbol "CHFN."
__________________________________________
TERMS OF THE OFFERING
Price: $10.00 per share
Minimum Maximum
----------- -----------
Number of shares............................. 3,910,000 5,290,000
Underwriting commissions and other expenses.. $ 1,495,000 $ 1,647,000
Net proceeds to Charter Financial............ $37,605,000 $51,253,000
Net proceeds per share to Charter Financial.. $ 9.62 $ 9.69
We may sell up to 6,083,500 shares because of regulatory considerations
or changes in market or economic conditions without the resolicitation of
subscribers.
__________________________________________
This investment involves a degree of risk, including the possible loss of
principal. Please read the Risk Factors beginning on page 12.
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.
Neither 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 September 17, 2001. We may extend this
expiration date without notice to you, until November 1, 2001, unless the Office
of Thrift Supervision approves a later date.
Sandler O'Neill & Partners, L.P.
August 10, 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...................................................... 12
Forward Looking Statements........................................ 19
Selected Consolidated Financial and Other Data.................... 20
Recent Developments............................................... 22
CharterBank....................................................... 29
Charter Financial................................................. 30
First Charter, MHC................................................ 30
Charter Insurance Company......................................... 30
How We Intend to Use the Proceeds From the Offering............... 31
Our Policy Regarding Dividends.................................... 32
Market for the Common Stock....................................... 33
Regulatory Capital Compliance..................................... 34
Capitalization.................................................... 36
Pro Forma Data.................................................... 37
CharterBank Condensed Consolidated Statements of
Income and Comprehensive Income.................................. 48
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 49
Business of CharterBank........................................... 85
Business of Charter Financial..................................... 119
Regulation of CharterBank and Charter Financial................... 120
Taxation.......................................................... 129
Management........................................................ 130
The Reorganization and the Offering............................... 143
Restrictions on Acquisition of Charter Financial And CharterBank.. 162
Description of Capital Stock of Charter Financial................. 165
Legal and Tax Opinions............................................ 167
Experts........................................................... 167
Registration Requirements......................................... 167
Where You Can Find Additional Information......................... 168
Index to Financial Statements..................................... F-1
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SUMMARY
You should read this entire document carefully, including the consolidated
financial statements and the notes to the consolidated 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 6,083,500 shares to the public, representing
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:
Public
First Charter, MHC Stockholders
80% of Charter 20% of Charter Financial's
Financial's common stock
common stock Charter Financial Corp.
100% Ownership 100% Ownership
Charter Insurance CharterBank
Company
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.
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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 March 31, 2001,
we had total assets of $934.8 million, including 5,055,000 shares of Freddie Mac
stock with a market value of $327.7 million, equity of $249.2 million and total
deposits of $185.2 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 30,
1998 to $934.8 million at March 31, 2001, an increase of over 28%.
Charter Financial Corporation
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.
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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
$327.7 million at March 31, 2001, which represents approximately 35.1% of our
total assets. The $197.0 million in after-tax unrealized gain on our Freddie Mac
stock represents 79.1% of our equity at March 31, 2001. The Freddie Mac stock is
held in our investment portfolio as available-for-sale under generally accepted
accounting principles. 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
March 31, 2001, our residential mortgage loans totaled $153.3 million, equal to
60.8% 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 six months ended March 31, 2001, we originated $38.0 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.
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. 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 March 31, 2001, we had $197.0 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.
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, during the six months ended March 31,
2001, CharterBank extended its interest rate reset on $102.0 million of Federal
Home Loan Bank borrowings from one month to seven or more years and reduced its
mortgage related investment securities by $66.9 million. The risk profile after
these actions is shown in the Net Portfolio Value table in the next section of
the prospectus.
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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 $162.1
million as of March 31, 2001 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.
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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 3,910,000 and 5,290,000 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 6,083,500 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 6,083,500 or decreased below 3,910,000, 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 June 30, 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.
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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 July 20, 2001
the market value of the common stock to be between $39,100,000 and $52,900,000.
This results in an offering of between 3,910,000 and 5,290,000 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 $500,000;
(3) in the direct community offering and in the syndicated community
offering, the maximum amount that an individual may purchase is
$500,000;
(4) in all categories of the offering combined, the total amount that an
individual may purchase, acting together with others, is $1,300,000;
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. In addition, in any
direct community offering or syndicated community offering, we must first fill
orders for our common stock up to a maximum of 2% of the shares issued in the
reorganization on a basis that will promote a widespread distribution of stock.
Thereafter, we must allocate any remaining shares on an equal number of shares
per order basis, until we fill all orders. The employee stock ownership plan
("ESOP") is authorized to purchase up to 8% of the shares sold in the offering
to persons other than First Charter, MHC without regard to these purchase
limitations. For example, the ESOP may purchase up to 312,800 and 423,200 shares
of common stock, respectively, at the minimum and maximum of the offering range.
The Office of Thrift Supervision has proposed regulations which, if adopted,
would permit the ESOP to purchase up to 8% of 49.9% of the outstanding shares of
Charter Financial common stock, including those shares issued to First Charter,
MHC. These proposed regulations have not yet been adopted and may not
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be adopted for the foreseeable future or at all, or if adopted, may permit ESOP
purchases in amounts lesser than permitted under the proposal. However, if the
Office of Thrift Supervision adopts these proposed regulations, the ESOP may
purchase up to 8% of 49.9% of the outstanding shares of Charter Financial common
stock, including those shares issued to First Charter, MHC, or up to 780,400 and
1,055,900 shares of common stock, respectively, at the minimum and maximum of
the offering range. If the proposed regulations are adopted prior to the close
of the offering, Charter Financial intends to fund the ESOP with 8% of 49.9% of
the outstanding shares of Charter Financial. For additional information on these
purchase limitations see "The Reorganization and The Offering -- Limitations on
Common Stock Purchases."
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 5:00 p.m., Eastern time, on September 17, 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 5:00 p.m., Eastern time, on
September 17, 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 November 1, 2001, unless regulators approve a later
date. If the subscription offering and/or community offerings are extended
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beyond November 1, 2001, we will be required to resolicit subscriptions before
proceeding with the offerings. All further extensions, in the aggregate, may not
last beyond September 27, 2003.
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 3,910,000 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 $500,000 and $1,300,000
purchase limitations to a maximum of $2,645,000, which is 5% of the maximum of
the offering range. In addition, we may seek regulatory approval to extend the
offering beyond the November 1, 2001 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 received conditional approval for the common stock of Charter
Financial to be quoted on the Nasdaq National Market under the symbol "CHFN"
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 5,290,000 shares in the offering, we intend to distribute
the net proceeds from the offering as follows:
. $25,626,500 will be contributed to CharterBank;
. $4,232,000 will be loaned to the ESOP to fund its purchase of common
stock; and
. $21,394,500 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."
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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.
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." In a
second-step conversion, depositors of First Charter, MHC would have subscription
rights to purchase shares of Charter Financial and the stockholders of Charter
Financial would be entitled to exchange their shares of common stock for shares
of the converted First Charter, MHC in a manner that is fair and reasonable to
the shareholders. This percentage may be adjusted to reflect the assets owned by
First Charter, MHC. Charter Financial's public stockholders would own
approximately the same percentage of the resulting entity as they owned prior to
the second-step conversion. The board of directors has no current plan to
undertake a "second-step conversion" transaction.
How You May Obtain Additional Information Regarding the Reorganization
If you have any questions regarding the reorganization, please call the
Conversion Center at (706) 645-3202, Monday through Friday between 10:00 a.m.
and 4:00 p.m., Eastern time.
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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 March 31, 2001, had an estimated fair market value of $327.7 million
including an after tax unrealized gain of $197.0 million, and represented
approximately 35.1% of its outstanding total assets. Our current revenue and
strong capital structure are due, in part, to dividend income from the Freddie
Mac stock and the appreciation of the stock investment. Because First Charter,
MHC will retain 400,000 shares of Freddie Mac stock in the reorganization,
Charter Financial's earnings will be reduced by the amount of dividends and
appreciation that we would have realized on the shares of Freddie Mac stock
retained by First Charter, MHC. Therefore, we will be more dependent on income
from our loan and investment portfolio to increase our future earnings. If we
cannot increase income from our loan and investment portfolio and the market
value of our Freddie Mac stock investment declines, our capital and
profitability may be adversely impacted.
In addition, the price of Freddie Mac stock tends to move inversely to long
term interest rates. Accordingly, recent declines in interest rates have caused
Freddie Mac stock to trade near its all time high. The following table shows
the per share high, low, ending and average daily trading price of Freddie Mac
stock for the period from March 31, 2001 to August 10, 2001, for the six months
ended March 31, 2001 and for each of the three years ended September 30,
2000.
Price Per Share($)
-----------------------------
Period Ended High Low End Average
---------------------------------------- ------- ------ ----- --------
August 10, 2001......................... 69.89 60.15 68.75 65.88
March 31, 2001.......................... 69.00 50.75 64.83 61.33
September 30, 2000...................... 55.75 37.69 54.06 45.99
September 30, 1999...................... 65.13 45.31 52.00 57.34
September 30, 1998...................... 51.38 35.13 49.63 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.
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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 March 31, 2001 we had deferred taxes of $121.6 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
March 31, 2001, this would add $320.8 million to taxable income which, assuming
a 38.6% effective tax rate, would require a combined tax payment of $123.8
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)
-----------------------------------------
1. Taxable income (loss) $4,000,000 $ 100,000 $ (100,000)
before dividend exclusion..... ---------- ---------- ----------
2. Dividend income.................. $3,500,000 $3,500,000 $3,500,000
3. Dividends received deduction -
lesser of 70% of line 1 or 2.. $2,450,000 $ 70,000 $2,450,000
4. 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)
12
its bad debt reserve, and the IRS will not issue private letter rulings in that
regard. Accordingly, 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. Credit union certificates of
deposits comprised approximately 22% of our total deposit base at March 31,
2001. The balances of our credit union deposits are more volatile than our
retail deposits. Wholesale deposits of approximately $40.9 million are
scheduled to mature during the next several quarters. As these deposits mature,
they are less likely to remain with CharterBank, as compared to the relatively
stable balance of our core retail deposit base. As a result, these maturities
will most likely outpace the growth of our retail deposit base. Accordingly,
we plan to continue 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. Further, the Federal Home Loan Bank may have
higher priority than other lenders from whom we have borrowed in times of
financial distress and demand significant collateral. At March 31, 2001,
CharterBank had available lines of credit commitments with the Federal Home Loan
Bank of Atlanta totaling $280.5 million, of which $236.8 million was advanced
and $43.7 million was available at March 31, 2001.
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
limit funds available for deposit and may negatively affect our borrowers'
ability to repay their loans on a timely basis, both of which could have an
impact on our profitability.
13
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 nearby markets, we cannot guarantee that a downturn in our local economy
will not have a negative impact on our earnings.
Our high market share in the Valley area may limit further growth and lower our
profitability.
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 originate loans.
Therefore, our profitability will depend, in part, on our ability to expand our
retail market area beyond the Valley region. If this growth strategy is not
successful, our earnings may be negatively impacted.
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 March 31,
2001 had a dividend yield of approximately 1.20%. These factors will reduce our
return on average equity to a level that will be lower than our peers.
For the six months ended March 31, 2001, our return on average equity was 2.25%.
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.
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. Further, Charter Financial will only be
issuing 20% of its outstanding common stock to the public. 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.
14
The price of your stock may be negatively affected by many factors, including
the price of Freddie Mac stock.
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. Therefore, we cannot assure you that,
following the reorganization, the trading price of our common stock will be at
or above the $10.00 per share initial offering price.
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.
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
15
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.
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.
The implementation of stock-based benefit plans will increase our future
compensation expense and reduce our earnings.
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 up to 8% of the shares issued in the offering to persons other than
First Charter, MHC, for allocation to employees as a retirement benefit. 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. These plans will increase our future costs
of compensating our directors and employees, thereby reducing our earnings.
Our compensation expenses will increase and our earnings will decrease
further if the Office of Thrift Supervision adopts proposed regulations that
would permit the ESOP and management recognition plan to purchase additional
stock because it is expected that such plans will increase purchases of stock
under these regulations.The Office of Thrift Supervision has proposed
regulations which, if adopted, would permit the ESOP to purchase up to 8% of
49.9% of the outstanding shares of Charter Financial common stock, including
those shares issued to First Charter, MHC. In addition, the proposed regulations
would permit Charter Financial to make restricted stock awards under the
management recognition plan of up to 4.0% of 49.9% of the outstanding shares of
Charter Financial common stock, including those shares issued to First Charter,
MHC, provided CharterBank has tangible capital in excess of 10% following the
reorganization. If the Office of Thrift Supervision adopts these regulations,
Charter Financial intends to implement the ESOP and management recognition to
the maximum extent permitted by the regulations, which would further increase
our compensation expense and decrease our earnings.
The implementation of stock-based benefit plans may dilute your ownership
interest in Charter Financial.
We intend to adopt a stock option plan and management recognition plan
following the reorganization. These stock benefit plans will be funded
through either open market purchases, if permitted, or from the issuance of
authorized but unissued shares. Stockholders will
16
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.
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.
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.
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 March 31, At September 30,
-----------------------------------------------
2001 2000(1) 1999 1998 1997 1996
---- ------ ---- ---- ---- ----
(Unaudited) (Restated) (In Thousands)
Selected Financial Data:
Total assets....................... $934,828 $942,687 $904,586 $729,286 $498,011 $352,082
Loans receivable, net(2)........... 246,999 253,467 208,456 166,360 135,256 98,105
Investment securities available for
sale(3)........................ 309,524 381,590 388,429 252,830 136,838 96,592
Freddie Mac common stock........... 327,716 273,286 262,860 280,877 199,515 139,566
Retail deposits.................... 144,289 144,546 153,731 100,808 89,889 84,778
Total deposits..................... 185,187 274,371 282,965 135,611 89,889 84,778
Deferred income taxes.............. 121,626 100,247 96,678 101,123 71,894 49,213
Total borrowings................... 352,305 352,219 312,867 288,638 186,925 109,000
Total retained earnings............ 54,347 51,699 50,826 23,797 23,322 20,267
Accumulated other
comprehensive income(4)........ 194,865 152,828 147,663 171,394 119,790 81,748
Total equity....................... 249,212 204,527 198,489 195,191 143,112 102,015
Allowance for loan losses.......... 5,375 6,346 5,710 2,054 1,846 1,627
Non-performing assets 2,429 3,461 2,211 436 1,443 1,709
For The Six Months For The Years Ended
Ended March 31, September 30,
------------------ -------------------------------------------------
2001 2000 2000(1) 1999 1998 1997 1996
---- ---- ------- ---- ----- ---- ----
(Unaudited) (Restated) (In Thousands)
Selected Operating Data:
Interest and dividend income............................. $26,167 $ 26,033 $54,213 $ 36,969 $29,175 $21,200 $15,387
Interest expense......................................... 17,884 16,939 36,647 23,341 19,409 12,757 8,989
------- -------- ------- -------- ------- ------- -------
Net interest income...................................... 8,283 9,094 17,566 13,628 9,766 8,443 6,398
Provision for loan losses................................ 300 180 1,410 240 180 300 171
------- -------- ------- -------- ------- ------- -------
Net interest and dividend income
after provision for loan losses......................... 7,983 8,914 16,156 13,388 9,586 8,143 6,227
------- -------- ------- -------- ------- ------- -------
Total noninterest income (loss).......................... 1,295 834 1,949 38,749 (3,307) 3,606 1,118
Total noninterest expenses............................... 5,774 6,120 15,943 10,749 6,622 8,326 6,324
------- -------- ------- -------- ------- ------- -------
Income (loss) before provision for
income taxes........................................... 3,504 3,628 2,162 41,388 (343) 3,423 1,021
------- -------- ------- -------- ------- ------- -------
Income tax expense (benefit)............................. 855 942 1,290 14,359 (818) 368 (136)
------- -------- ------- -------- ------- ------- -------
Net income............................................... $ 2,649 $ 2,686 $ 872 $ 27,029 $ 475 $ 3,055 $ 1,157
======= ======== ======= ======== ======= ======= =======
Other comprehensive income (loss), net of tax(5)......... $42,037 $(26,828) $ 5,165 $(23,731) $51,604 $38,042 $25,081
======= ======== ======= ======== ======= ======= =======
Comprehensive income (loss)(6)........................... $44,686 $(24,142) $ 6,037 $ 3,298 $52,079 $41,097 $26,238
======= ======== ======= ======== ======= ======= =======
_______________________________
(1) Certain balance sheet and income statement items for the year ended
September 30, 2000 have been restated. See note 22 on page F-44 of the
prospectus for a discussion of the restatement.
(2) Loans are shown net of deferred loan fees and allowance for loan losses and
excludes loans held for sale.
(3) Includes all CharterBank investment securities available for sale excluding
Freddie Mac common stock.
(4) Consists of unrealized holding gains and losses on Freddie Mac common
stock, investments, mortgage-backed securities and collateralized mortgage
obligations classified as available for sale, net of income taxes.
(5) Consists of the change in 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
Six
Months Ended
March 31, At or for the Years Ended September 30,
----------------- ------------------------------------------
2001 2000 2000(1) 1999 1998 1997 1996
---- ---- ------ ---- ---- ---- ----
(Unaudited) (Restated)
Selected Financial Ratios and Other
Data(7):
Performance:
Return on average assets........................ 0.55% 0.59% 0.10% 3.39% 0.08% 0.72% 0.37%
Comprehensive return on average assets(8)....... 9.33 (5.30) 0.66 0.41 8.39 9.67 8.46
Return on average equity........................ 2.25 2.83 0.48 11.98 0.27 2.49 1.30
Comprehensive return on average equity(9)....... 38.04 (25.45) 3.34 1.46 29.85 33.53 29.52
Average equity to average assets................ 24.52 20.81 19.84 28.26 28.11 28.84 28.68
Equity to total assets at end of period......... 26.66 20.13 21.70 21.94 26.76 28.74 28.97
Average interest rate spread.................... (0.54) 0.35 0.27 (0.54) (0.76) (0.33) (0.15)
Net interest margin(10)......................... 1.76% 2.05% 1.98% 1.73% 1.61% 2.03% 2.10%
Average interest-earning assets to average
interest-bearing liabilities.................. 1.60x 1.44x 1.41x 1.76x 1.74x 1.77x 1.76x
Total noninterest expense to average
assets........................................ 1.21% 1.34% 1.75% 1.35% 1.35% 1.96% 2.04%
Efficiency ratio(11)............................ 61.69 60.53 81.16 66.70 116.34 84.65 86.58
Regulatory Capital Ratios:
Tangible capital................................ 8.80 6.96 7.49 7.02 5.20 7.24 9.18
Core capital.................................... 8.80 6.96 7.49 7.02 5.20 7.24 9.18
Risk-based capital.............................. 28.37 25.30 26.45 36.66 11.86 15.42 23.15
Asset Quality Ratios:
Non-performing loans as a percent
of total loans.............................. 0.66 0.99 1.09 0.93 0.18 0.85 1.61
Non-performing assets as a percent
of total assets............................. 0.26 0.37 0.37 0.24 0.06 0.29 0.49
Allowance for loan losses as a percent
of total loans.............................. 2.13% 2.22% 2.44% 2.67% 1.22% 1.34% 1.63%
Allowance for loan losses as a ratio
of non-performing loans..................... 3.24x 2.12x 2.24x 2.87x 6.71x 1.57x 1.01x
Number of:
Full-time equivalent employees.................. 124 128 126 129 92 82 82
____________________________
(7) Asset quality ratios and regulatory capital ratios are end of period
ratios. Ratios for the period at or for the six months ended March 31,
2001 and 2000 are annualized.
(8) Comprehensive return on average assets represents annualized comprehensive
income divided by average assets. This is included because in contrast to
other financial institutions, a vast majority of CharterBank's
comprehensive income is in the form of other comprehensive income instead
of net income, comprehensive return on average assets provides useful
information. This information is relevant because of CharterBank's
significant investment in Freddie Mac common stock.
(9) Comprehensive return on average equity represents annualized comprehensive
income divided by average equity. This is included because in contrast to
other financial institutions, a vast majority of CharterBank's
comprehensive income is in the form of other comprehensive income instead
of net income, comprehensive return on average equity provides useful
information. This information is relevant because of CharterBank's
significant investment in Freddie Mac common stock.
(10) Net interest margin represents net interest income including dividend
income from Freddie Mac stock as a percentage of average interest-earning
assets including Freddie Mac stock.
(11) The efficiency ratio represents the ratio of operating expenses divided by
the sum of net interest income and noninterest income less gain on sales of
investments.
20
RECENT DEVELOPMENTS
The summary information presented below under "Selected Financial Data,"
"Selected Operating Data" and "Selected Financial Ratios and Other Data" at or
for each of the three and nine months ended June 30, 2001 and 2000 are derived
in part from the unaudited consolidated financial statements of CharterBank. In
our opinion, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial condition and results of
operations for the unaudited periods presented have been included. The results
of operations and other data presented for the three and nine months ended June
30, 2001 do not necessarily indicate the results that may be expected for the
fiscal year ending September 30, 2001.
At June 30, At September 30,
2001 2000(1)
------------- -----------------
(Unaudited) (Restated)
(In thousands)
SELECTED FINANCIAL DATA:
Total assets................................. $942,276 $942,687
Loans receivable, net(2)..................... 235,754 253,467
Investment securities available for sale(3).. 336,236 381,590
Freddie Mac common stock..................... 343,993 273,286
Retail deposits.............................. 151,994 144,546
Total deposits............................... 190,394 274,371
Deferred income taxes........................ 127,153 100,247
Total borrowings............................. 348,864 352,219
Total retained earnings...................... 55,850 51,699
Accumulated other comprehensive income(4).... 203,658 152,828
Total equity................................. 259,508 204,527
Allowance for loan losses.................... 5,492 6,346
Non-performing assets........................ 2,243 3,461
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- --------- --------- --------
(Unaudited)
(In thousands)
Selected Operating Data:
Interest and dividend income..................... $ 11,491 $ 14,178 $ 37,659 $ 40,210
Interest expense................................. 7,205 9,638 25,090 26,576
-------- --------- -------- --------
Net interest income.............................. 4,286 4,540 12,569 13,634
Provision for loan losses........................ 150 130 450 310
-------- --------- -------- --------
Net interest and dividend income after
provision for loan losses...................... 4,136 4,410 12,119 13,324
-------- --------- -------- --------
Total noninterest income......................... 435 422 1,730 1,255
Total noninterest expenses....................... 2,581 3,089 8,355 9,209
-------- --------- -------- --------
Income before income taxes....................... 1,990 1,743 5,494 5,370
-------- --------- -------- --------
Income tax expense............................... 487 430 1,342 1,371
-------- --------- -------- --------
Net income....................................... $ 1,503 $ 1,313 $ 4,152 $ 3,999
======== ========= ======== ========
Other comprehensive income (loss),
net of tax(5).................................. $ 8,793 $ (11,792) $ 50,830 $(38,621)
======== ========= ======== ========
Comprehensive income (loss)(6)................... $ 10,296 $ (10,749) $ 54,982 $(34,622)
======== ========= ======== ========
______________________
(1) Certain balance sheet and income statement items for the year ended
September 30, 2000 have been restated. See note 22 on page F-44 of the
prospectus for a discussion of the restatement.
(2) Loans are shown net of deferred loan fees and allowance for loan losses and
excludes loans held for sale.
(3) Includes all CharterBank investment securities available for sale excluding
Freddie Mac common stock.
(4) Consists of unrealized holding gains and losses on Freddie Mac common
stock, investments, mortgage-backed securities and collateralized mortgage
obligations classified as available for sale, net of income taxes.
(5) Consists of the change in 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).
21
At or for the Three At or for the Nine Months Ended
Months Ended June 30, June 30,
--------------------------- -------------------------------
2001 2000 2001 2000
---------- ----------- ----------- -----------
(Unaudited)
Selected Financial Ratios and Other Data(7):
Performance:
Return on average assets........................... 0.65% 0.57% 0.58% 0.58%
Comprehensive return on average assets(8).......... 4.44 (4.66) 7.73 (5.04)
Return on average equity........................... 2.39 2.97 2.30 2.88
Comprehensive return on average equity(9).......... 16.34 (24.32) 30.47 (24.90)
Average equity to average assets................... 27.15 19.17 25.38 20.26
Equity to total assets at end of period............ 27.54 17.97 27.54 17.97
Average interest rate spread....................... (0.30) 0.41 (0.50) 0.34
Net interest margin(10)............................ 1.98% 2.01% 1.80% 2.04%
Average interest-earning assets to
average interest-bearing liabilities.............. 1.72x 1.37x 1.64x 1.43x
Total noninterest expense to average assets........ 1.11% 1.34% 1.18% 1.34%
Efficiency ratio(11)............................... 54.99% 61.96% 59.46% 61.01%
Regulatory Capital Ratios:
Tangible capital................................... 9.15 6.98 9.15 6.98
Core capital....................................... 9.15 6.98 9.15 6.98
Risk-based capital................................. 29.63 25.52 29.63 25.52
Asset Quality Ratios:
Non-performing loans as a percent
of total loans................................. 0.62 0.89 0.62 0.89
Non-performing assets as a percent
of total assets................................... 0.24 0.30 0.24 0.30
Allowance for loan losses as a
percent of total loans............................ 2.28% 2.04% 2.28% 2.04%
Allowance for loan losses as a ratio
of non-performing loans........................... 3.67x 2.30x 3.67x 2.30x
Number of:
Full-time equivalent employees..................... 120 134 125 134
_______________________
(7) Asset quality ratios and regulatory capital ratios are end of period
ratios. Ratios for the period at or for the three and nine months ended
June 30, 2001 and 2000 are annualized.
(8) Comprehensive return on average assets represents annualized comprehensive
income divided by average assets. This is included because in contrast to
other financial institutions, a vast majority of CharterBank's
comprehensive income is in the form of other comprehensive income instead
of net income, comprehensive return on average assets provides useful
information. This information is relevant because of CharterBank's
significant investment in Freddie Mac common stock.
(9) Comprehensive return on average equity represents annualized comprehensive
income divided by average equity. This is included because in contrast to
other financial institutions, a vast majority of CharterBank's
comprehensive income is in the form of other comprehensive income instead
of net income, comprehensive return on average equity provides useful
information. This information is relevant because of CharterBank's
significant investment in Freddie Mac common stock.
(10) Net interest margin represents net interest income including dividend
income from Freddie Mac stock as a percentage of average interest-earning
assets including Freddie Mac stock.
(11) The efficiency ratio represents the ratio of operating expenses divided by
the sum of net interest income and noninterest income less gain on sales of
investments.
22
Comparison of Financial Condition at June 30, 2001 and September 30, 2000
Total assets were essentially unchanged at $942.3 million at June 30, 2001,
compared to $942.7 million at September 30, 2000.
The market value of Freddie Mac stock increased from $273.3 million at
September 30, 2000 to $344.0 million at June 30, 2001 for an increase of $70.7
million. Mortgage securities decreased by $51.9 million from $367.7 million at
September 30, 2000 to $315.8 million at June 30, 2001 as part of the
CharterBank's plan to reduce interest rate risk by selling fixed rate securities
and either reducing asset size or replacing fixed rate securities with floating
rate securities. Total loans, net decreased from $253.5 million at September 30,
2000 to $235.8 million at June 30, 2001 for a reduction of $17.7 million. We
attribute the reduction in loans to refinancings in a lower interest rate
environment and an economic slowdown.
Deposits decreased from $274.4 million at September 30, 2000 to $190.4
million at June 30, 2001 for a decrease of $84.0 million. The decrease was a
result of CharterBank's decision not to renew approximately $90.0 million of
brokered deposits. The redemption of these brokered deposits was partially
funded by the sale of mortgage securities and proceeds from loan repayments.
Deferred income taxes increased by $27.0 million from $100.2 million at
September 30, 2000 to $127.2 million at June 30, 2001 as a result of an increase
in unrealized gain on the Freddie Mac stock.
Total equity increased $55.0 million from $204.5 million at September 30,
2000 to $259.5 million at June 30, 2001. This increase was primarily due to a
$43.4 million increase in accumulated other comprehensive income driven by after
tax unrealized gains on Freddie Mac stock, and a decrease of $7.4 million in the
unrealized loss on debt securities. Net income for the nine months ended June
30, 2001 was $4.2 million.
Comparison of Operating Results for the Three months Ended June 30, 2001 and
June 30, 2000
General
Net income was $1.5 million for the three months ended June 30, 2001 which
was $190,000 higher than the $1.3 million for the three months ended June 30,
2000. Total comprehensive income was $10.3 million for the three months ended
June 30, 2001 compared to a loss of $10.7 million for the three months ended
June 30, 2000.
Interest Income
Interest income decreased by $2.7 million to $11.5 million for the three
months ended June 30, 2001 from $14.2 million for the three months ended June
30, 2000. The major component of the decrease was a decrease in interest income
on mortgage securities resulting from a decrease in the average balance of
mortgage securities and the declining interest rate environment in 2001.
Interest income on loans also decreased by $201,000 due to a combination of a
reduction in average balances of loans and lower interest rates during the
quarter ended June 30, 2001.
23
Interest Expense
Interest expense decreased from $9.6 million for the three months ended
June 30, 2000 to $7.2 million for the three months ended June 30, 2001, for a
decrease of $2.4 million. Interest expense on deposits decreased by $962,000 and
interest expense on borrowings decreased by $1.5 million. The decrease in
interest expense on borrowings is primarily due to lower interest rates while
the decrease in deposit interest expense is due to lower rates, and lower levels
of brokered deposits.
Net Interest Income
Net interest income decreased by $254,000 from $4.5 million for the three
months ended June 30, 2000 to $4.3 million for the three months ended June 30,
2001. The decrease of $2.7 million in interest income was primarily offset by
the decrease of $2.4 million in interest expense. Accordingly, the interest rate
spread decreased 71 basis points for the three months ended June 30, 2001,
compared to the three months ended June 30, 2000, reflecting that asset yields
declined at a greater pace than the cost of interest-bearing liabilities.
Provision for Loan Losses
The provision for loan losses was $150,000 for the three months ended June
30, 2001 which reasonably compares to $130,000 provision for the three months
ended June 30, 2000.
Noninterest Income
Noninterest income of $435,000 for the three months ended June 30, 2001 was
slightly higher than the $422,000 for the three months ended June 30, 2000.
During the three months ended June 30, 2001, gain on sale of loans increased
$390,000 to $509,000 compared to $119,000 for the three months ended June 30,
2000. This increase was caused by a higher volume of loans originated and sold
and a higher profit on these sales. The primary reason for the increased volume
and increased profits was declining interest rates. This increase was offset by
a decrease in other income of $425,000 resulting primarily from a loss of
$380,000 on a loan servicing partnership for the three months ended June 30,
2001.
Noninterest Expense
Noninterest expense decreased to $2.6 million for the three months ended
June 30, 2001 from $3.1 million for the three months ended June 30, 2000 for a
decrease of $508,000. The three months ended June 30, 2000 included amortization
of intangibles of $227,000 for which there was no comparable charge to income in
the three months ended June 30, 2001, due to the impairment charge that was
taken at the end of the prior fiscal year. Noninterest expense for the three
months ended June 30, 2000 also reflected $158,000 in professional services due
to expenses related to the formation of Charter Insurance Company and our
subsequently withdrawn application to form a non-stock mutual holding company.
Occupancy expense
24
decreased by $105,000 primarily due to the closing of one branch facility in
Valley, Alabama in November 2000.
Income Taxes
Income taxes increased to $487,000 for the three months ended June 30, 2001
from $430,000 for the three months ended June 30, 2000 for an increase of
$57,000. The effective tax rate decreased slightly from 24.6% for the three
months ended June 30, 2000 to 24.5% for the three months ended June 30, 2001.
The corporate dividends received deduction continues to be a significant reason
that the effective rate is less than the statutory rate.
Comprehensive Income
Other comprehensive income was $8.8 million for the three months ended June
30, 2001, compared to a loss of $11.8 million for the three months ended June
30, 2000. This increase is primarily the result of the increase in the price of
Freddie Mac common stock over the comparable periods. During the three months
ended June 30, 2001, the price of Freddie Mac common stock increased from $64.83
per share at March 31, 2001 to $68.05 per share at June 30, 2001. During the
three months ended June 30, 2000, the price of Freddie Mac common stock
decreased from $44.19 per share to $40.50 per share.
Comparison of Operating Results for the Nine Months Ended June 30, 2001 and June
30, 2000
General
Net income for the nine months ended June 30, 2001 was $4.2 million,
compared to $4.0 million for the nine months ended June 30, 2000. Comprehensive
income was $55.0 million for the nine months ended June 30, 2001, compared to a
loss of $34.6 million for the nine months ended June 30, 2000.
Interest Income
Interest income was $37.7 million for the nine months ended June 30, 2001,
a decrease of $2.5 million when compared to $40.2 million for the nine months
ended June 30, 2000. Interest income on mortgage securities decreased $4.0
million for the nine months ended June 30, 2001, when compared to the same
period in 2000, while interest income on loans increased $1.2 million for the
nine months ended June 30, 2001 when compared to the same period in 2000.
Interest income on securities decreased due to lower average balances and lower
interest rates. Interest income on loans increased due to an increase in average
balances as yields on loans remained relatively flat.
25
Interest Expense
Interest expense for the nine months ended June 30, 2001 was $25.1 million,
which was a decrease of $1.5 million when compared to $26.6 million for the nine
months ended June 30, 2000. Interest on deposits decreased $1.7 million
reflecting the reduced level of brokered deposits and the lower interest rate
environment for the nine months ended June 30, 2001.
Net Interest Income
Net interest income was $12.6 million for the nine months ended June 30,
2001, which was a decrease of $1.0 million when compared to $13.6 million for
the nine months ended June 30, 2000. The $2.5 million decrease in interest
income was only partially offset by the decrease in interest expense.
Consequently, the interest rate spread decreased 84 basis points for the nine
months ended June 30, 2001 compared to the nine months ended June 30, 2000.
Provision for Loan Losses
The provision for loan losses for the nine months ended June 30, 2001 was
$450,000 compared to $310,000 for the nine months ended June 30, 2000. The
increase for the nine months ended June 30, 2001 was due to relatively higher
levels of charge-offs during the period.
Noninterest Income
Total noninterest income increased from $1.3 million for the nine months
ended June 30, 2000 to $1.7 million for the nine months ended June 30, 2001 for
an increase of $475,000. The gain on the sale of loans and the gain on sale of
securities increased $625,000 and $452,000, respectively, for the nine months
ended June 30, 2001 in the declining interest rate environment. Other income
decreased $637,000 due primarily to an increased loss of $487,000 on an
investment in a loan servicing partnership as underlying mortgage servicing
rights have declined in value as interest rates have decreased.
Noninterest Expense
Noninterest expense decreased $854,000 from $9.2 million for the nine
months ended June 30, 2000 to $8.4 million for the nine months ended June 30,
2001. The nine months ended June 30, 2000 included $702,000 in amortization of
intangibles for which there was no comparable charge to income in the nine
months ended June 30, 2001. Compensation expense increased $736,000 to $4.6
million for the nine months ended June 30, 2001 from $3.9 million for the nine
months ended June 30, 2000 due to increased staff to enhance the commercial
lending, loan review, the Auburn branch and other functions. Professional fees
decreased by $487,000 to $465,000 for the nine months ended June 30, 2001 from
$952,000 for the nine months ended June 30, 2000. Professional fees for the nine
months ended June 30, 2000 included expenses relating to the formation of
Charter Insurance Company and our subsequently withdrawn application to form a
non-stock mutual holding company.
26
Comprehensive Income
Other comprehensive income for the nine months ended June 30, 2001 was
$50.8 million compared to other comprehensive loss for the nine months ended
June 30, 2000 of $38.6 million. The increase is primarily due to the increase in
the price of Freddie Mac common stock between the two periods. The price of
Freddie Mac common stock increased from $54.06 per share at September 30, 2000
to $68.05 per share at June 30, 2001, while from September 30, 1999 to June 30,
2000 it decreased from $52.00 per share to $40.50 per share.
Income Taxes
Income tax expense of $1.4 million remained flat for the nine months ended
June 30, 2001 when compared to the nine months ended June 30, 2000. The
effective tax rate of 24.4% for the nine months ended June 30, 2001 was lower
than the effective rate of 25.5% for the prior period due to a higher level of
nondeductible intangible amortization in the prior period.
Asset Quality
CharterBank's ratio of nonperforming assets to total assets was .24% at
June 30, 2001 compared to .26% at March 31, 2001 and .37% at September 30, 2000,
respectively. Nonperforming loans to total loans was .62% at June 30, 2001
compared to .66% at March 31, 2001 and 1.09% at September 30, 2000 respectively.
Net charge-offs decreased to .50% (annualized) of average loans for the nine
months ended June 30, 2001 compared to .32% for the year ended September 30,
2000.
27
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 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. Based on asset size, we are also the largest federal
mutual savings and loan association in the State of Georgia with total assets of
$934.8 million, total deposits of $185.2 million and total equity of $249.2
million at March 31, 2001. We also currently own 5,055,000 shares of Freddie Mac
stock which, as of March 31, 2001, had an estimated fair market value of $327.7
million including an after tax unrealized gain of $197.0 million, and
represented approximately 35.1% 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 March 31, 2001, we had total loans of $252.3 million, of which $153.3
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."
28
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 and the
related deferred taxes. CharterBank will retain 2,555,000 shares of Freddie Mac
stock and the related deferred taxes. 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 along with the related deferred taxes. 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 along with the related deferred taxes. Charter Insurance
Company's revenues are expected to be less than 1% of Charter Financial's total
revenues.
29
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 $37.6 million and $51.3 million, or
$59.1 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.............................. $39,100 $52,900 $60,835
Less: offering expenses........................ 1,495 1,647 1,734
Net offering proceeds.......................... 37,605 51,253 59,101
Less:
Proceeds contributed to CharterBank......... 18,803 25,627 29,551
Proceeds used for loan to ESOP.............. 3,128 4,232 4,867
------- ------- -------
Proceeds retained by Charter Financial......... $15,674 $21,394 $24,683
======= ======= =======
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.
30
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.
31
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 received conditional approval
from The Nasdaq Stock Market to have our common stock quoted on the Nasdaq
National Market under the symbol "CHFN" 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.
32
REGULATORY CAPITAL COMPLIANCE
At March 31, 2001, CharterBank exceeded all regulatory capital
requirements. Set forth below is a summary of our capital computed under
accounting principles generally accepted in the United States of America
("GAAP") and our compliance with regulatory capital standards at March 31, 2001,
on a historical and pro forma basis. We have assumed that the indicated number
of shares were sold as of March 31, 2001 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 March 31, 2001 Based Upon the Sale at $10.00 Per Share
-------------------------------------------------------------------------------
6,083,500 Shares
3,910,000 Shares 4,600,000 Shares 5,290,000 Shares (15% Above
Historical at (Minimum of (Midpoint of (Maximum of Maximum of
March 31, 2001 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................ $249,212 26.66% $161,907 19.03% $164,491 19.27% $167,075 19.50% $170,047 19.76%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Tangible capital(3)........ 54,347 8.80 64,408 10.21 66,991 10.57 69,576 10.92 72,547 11.33
Requirement(4)............. 9,262 1.50 9,460 1.50 9,507 1.50 9,554 1.50 9,608 1.50
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess..................... 45,085 7.30 54,948 8.71 57,484 9.07 60,022 9.42 62,939 9.83
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Core capital(3)............ 54,347 8.80 64,408 10.21 66,991 10.57 69,576 10.92 72,547 11.33
Requirement(4)............. 18,524 3.00 18,920 3.00 19,014 3.00 19,108 3.00 19,216 3.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess..................... 35,823 5.80 45,488 7.21 47,977 7.57 50,468 7.92 53,331 8.33
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Risk-Based capital(3)(5)... 108,694 28.37 128,815 32.40 133,982 33.40 139,151 34.39 145,095 35.50
Requirement(4)............. 30,651 8.00 31,805 8.00 32,089 8.00 32,373 8.00 32,699 8.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess..................... $ 78,043 20.37% $ 97,010 24.40% $101,893 25.40% $106,778 26.39% $112,396 27.50%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
______________________________
(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 the shares
issued to persons other than First Charter, MHC, and the purchase by the
employee stock ownership plan of 8% of the shares issued to persons other
than First Charter, MHC. If CharterBank's post-reorganization tangible
capital does not exceed 10.0%, the management recognition plan will be
funded with 3% of the shares issued to persons other than First Charter,
MHC, and the employee stock ownership plan will be able to purchase up to
7% of the shares issued to persons other than First Charter, MHC.
(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 March 31, 2001.
(footnotes continued on following page)
33
(6) Set forth below is a reconciliation of equity under generally accepted
accounting principles at March 31, 200l to pro forma regulatory capital at
the midpoint of the offering range.
Midpoint of Range
(4,600,000 shares)
---------------------------
(Dollars in thousands)
Gross proceeds ................................................................ $ 46,000
ESOP ..................................................................... (3,680)
MRP ...................................................................... (1,840)
Expenses ................................................................. (1,571)
Cash infused into the MHC ................................................ (100)
----------
Net proceeds ............................................................. 38,809
Assets of Charter Insurance Company ($450,000 of cash) ................... (450)
Basis of Freddie Mac stock (2,500,000 shares at $1.40/share) ............. (3,500)
Proceeds after adjustment .................................................. 34,859
Proceeds retained at holding company (50% gross of proceeds less expenses) (22,215)
----------
Pro forma increase in core capital ......................................... $ 12,644
Historical core capital .................................................... 54,347
----------
Total pro forma core capital ............................................... $ 66,991
==========
Total capital
Increase to core capital ................................................. 12,644
Increase to supplementary capital (sup. capital may not exceed core cap.). 12,644
----------
Pro forma increase in total capital ........................................ $ 25,288
Historical risk-based capital .............................................. 108,694
----------
Total pro forma risked-based capital ....................................... $ 133,982
==========
Historical GAAP capital ..................................... $ 249,212
GAAP adjustments not included above:
Excluded unrealized gains on Freddie Mac stock ......... (158,575)
Plus tax effect at 38.6% ............................... 61,210
-----------
Historical GAAP capital after adjustment ................................... 151,847
Pro forma increase in core capital ......................................... 12,644
-----------
Pro forma GAAP capital ..................................................... $ 164,491
===========
34
CAPITALIZATION
The following table presents the historical deposits and consolidated
capitalization of CharterBank at March 31, 2001, 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
-----------------------------------------------------------------------------
Historical 6,083,500 Shares
as of 3,910,000 Shares 4,600,000 Shares 5,290,000 Shares (15% Above
March 31, (Minimum (Midpoint (Maximum Maximum of
2001 of Range) of Range) of Range) Range)(1)
------------ ----------------- ----------------- ------------------ -------------------
(In thousands)
Deposits(2)......................... $185,187 $185,187 $185,187 $185,187 $185,187
Borrowings.......................... 352,305 352,305 352,305 352,305 352,305
-------- -------- -------- -------- --------
Total deposits and borrowed funds... $537,492 $537,492 $537,492 $537,492 $537,492
======== ======== ======== ======== ========
Stockholders' equity:
Common stock, $0.01 par
value, 60,000,000
shares authorized; shares to
be issued
as reflected(3)................ - 196 230 265 304
Preferred stock, $.01 par
value, 10,000,000
shares authorized; no shares
to be issued................... - - - - -
Additional paid-in capital(3).... - 37,410 44,199 50,989 58,797
Retained earnings(4)............. 54,347 53,687 53,687 53,687 53,687
Accumulated other comprehensive
income (5)........................ 194,865 179,287 179,287 179,287 179,287
Less:
Common stock acquired by ESOP(6)... - (3,128) (3,680) (4,232) (4,867)
Common stock acquired by
management recognition plan(7).... - (1,564) (1,840) (2,116) (2,433)
-------- -------- -------- -------- --------
Total stockholders' equity.......... $249,212 $265,887 $273,883 $277,879 $284,775
======== ======== ======== ======== ========
____________________________________
(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 of up to 20% of the outstanding shares of Charter Financial's
common stock to qualifying depositors of CharterBank, tax qualified
employee plans and other members of Charter Bank in a subscription offering
and to certain other persons in a direct community offering and/or
syndicated community offering. 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 following
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 $15.578 million.
(6) Assumes that 8% of the shares issued to persons other than First Charter,
MHC 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. If CharterBank's post-reorganization
tangible capital does not exceed 10.0%, the employee stock ownership plan
will be able to purchase up to 7% of the shares issued to persons other
than First Charter, MHC. 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 4% of the
shares issued to persons other than First Charter, MHC, is purchased by a
management recognition plan through open market purchases. If
CharterBank's post-reorganization tangible capital does not exceed 10.0%,
the management recognition plan will be funded with 3% of the shares issued
to persons other than First Charter, MHC. 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.
35
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 $37.6 million and $51.3 million, or $59.1 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 $547,150 at the maximum offering range. No fee will be
paid with respect to shares of common stock purchased by the ESOP, the
management recognition plan, and officers, directors and employees of
CharterBank and their immediate families. See "Marketing Arrangements"
on page 155;
. 278,000 shares of common stock will be purchased by executive
officers, directors and employees of CharterBank; and
. total expenses, excluding fees and expenses paid to Sandler O'Neill &
Partners, L.P. will be approximately $1.1 million.
We calculated the pro forma consolidated net income and stockholders'
equity of Charter Financial for the six months ended March 31, 2001 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 4.09% 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 2.54% 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. CharterBank previously
expended approximately $500,000 to purchase land for the 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 ESOP. 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.
The tables and footnotes on pages 40 through 43 give effect to the ESOP and
management recognition plan under the current Office of Thrift Supervision
regulations. Under the current Office of Thrift Supervision regulations, the
ESOP is authorized to purchase up to 8% of the shares sold in the offering to
persons other than First Charter, MHC. In addition, current Office of Thrift
Supervision regulations permit Charter Financial make restricted stock awards
under the management recognition plan of up to 4.0% of the shares sold in the
offering to persons other than First Charter, MHC, provided CharterBank has
tangible capital in excess of 10% following the reorganization.
The Office of Thrift Supervision has proposed regulations which, if
adopted, would permit the ESOP to purchase up to 8% of 49.9% of the outstanding
shares of Charter Financial common stock, including those shares issued to
First Charter, MHC. In addition, the proposed regulations would permit Charter
Financial to make restricted stock awards under the management recognition plan
of up to 4% of 49.9% of the outstanding shares of Charter Financial common
stock, including those shares issued to First Charter, MHC, provided CharterBank
has tangible capital in excess of 10% following the reorganization. These
proposed regulations have not yet been adopted and may not be adopted for the
foreseeable future or at all, or if adopted, may permit restricted stock awards
in amounts lesser than permitted under the proposal. The tables and footnotes on
pages 44 through 47 give effect to the ESOP and management recognition plan as
if the proposed regulations have been adopted.
As described above, the tables on pages 40 through 43 give effect to
"management recognition plan", under the current and proposed Office of Thrift
Supervision regulations, respectively, which we expect to adopt following the
reorganization and present to stockholders for approval at an annual or special
meeting of stockholders to be held at least six
36
months following the completion of the reorganization. If the management
recognition plan is approved by stockholders, the management recognition plan
will acquire an amount of common stock reserved under the plan, 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.
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 ESOP, and retain all of the rest of the
proceeds at the holding company for capital needs that arise in the future.
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 stockholders at an annual or special
meeting of stockholders to be held at least six months following
completion of the reorganization;
. 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. Finally, the pro forma stockholders' equity per share does not
give effect to CharterBank's bad debt reserve in the event of liquidation.
37
Pro Forma Data Under Current Office of Thrift Supervision Regulations
At or for the Six Months Ended March 31, 2001
---------------------------------------------------
Maximum
Minimum Midpoint Maximum As Adjusted
3,910,000 4,600,000 5,290,000 6,083,500
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................................ $ 39,100 $ 46,000 $ 52,900 $ 60,835
Less expenses................................. 1,495 1,571 1,647 1,734
---------- ---------- ---------- ----------
Estimated net proceeds........................ 37,605 44,429 51,253 59,101
Less: Common stock purchased by ESOP(2)(4).... (3,128) (3,680) (4,232) (4,867)
Less: Common stock purchased by MRP(3)........ (1,564) (1,840) (2,116) (2,433)
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted......... $ 32,913 $ 38,909 $ 44,905 $ 51,801
========== ========== ========== ==========
For the 6 months ended March 31, 2001:
--------------------------------------
Consolidated net income:
Historical................................... $ 2,649 $ 2,649 $ 2,649 $ 2,649
Adjustment for mutual holding company
formation(5)................................ (143) (143) (143) (143)
Pro forma income on net proceeds............. 392 468 544 631
Pro forma ESOP adjustment(2)(4).............. (81) (95) (109) (126)
Pro forma MRP adjustment(3).................. (97) (114) (131) (151)
---------- ---------- ---------- ----------
Pro forma net income....................... $ 2,720 $ 2,765 $ 2,810 $ 2,860
========== ========== ========== ==========
Per share net income (reflects SOP 93-6)(6):
Historical................................... $ 0.14 $ 0.12 $ 0.10 $ 0.09
Adjustment for mutual holding company
formation(5)................................ (0.01) (0.01) (0.01) --
Pro forma income on net proceeds............. 0.02 0.02 0.02 0.02
Pro forma ESOP adjustment(2)(4).............. -- -- -- --
Pro forma MRP adjustment(3).................. (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Pro forma net income per share(7)........... $ 0.14 $ 0.12 $ 0.10 $ 0.10
========== ========== ========== ==========
Offering price as a ratio of pro forma net
annualized income per share.................. 35.71x 41.67x 50.00x 50.00x
At March 31, 2001
-----------------
Stockholders' equity:
Historical................................... $ 249,212 $ 249,212 $ 249,212 $ 249,212
Adjustment for mutual holding company
formation................................... (16,238) (16,238) (16,238) (16,238)
Estimated net proceeds....................... 37,605 44,429 51,253 59,101
Less: Common Stock acquired by ESOP(2)(4).... (3,128) (3,680) (4,232) (4,867)
Less: Common Stock acquired by MRP(3)........ (1,564) (1,840) (2,116) (2,433)
---------- ---------- ---------- ----------
Pro forma stockholders' equity.............. $ 265,887 $ 271,883 $ 277,879 $ 284,775
========== ========== ========== ==========
Stockholders' equity per share(6):
Historical................................... $ 12.75 $ 10.84 $ 9.42 $ 8.19
Adjustment for mutual holding company
formation................................... (0.83) (0.71) (0.61) (0.53)
Estimated net proceeds....................... 1.92 1.93 1.94 1.94
Less: Common Stock acquired by ESOP(2)(4).... (0.16) (0.16) (0.16) (0.16)
Less: Common stock acquired by MRP(3)........ (0.08) (0.08) (0.08) (0.08)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share... $ 13.60 $ 11.82 $ 10.51 $ 9.36
========== ========== ========== ==========
Offering price as a percentage of pro forma
stockholders' equity per share............... 73.53% 84.60% 95.15% 106.84%
========== ========== ========== ==========
38
_____________________
(1) We reserve the right to issue up to a total of 6,083,500 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 $60.8 million (15% above the
maximum of the offering range.)
(2) Assumes 8% of the shares sold to persons other than First Charter, MHC, 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 the shares sold to persons other than First Charter, MHC, will be
purchased by the management recognition plan. Before the management
recognition plan is implemented, it must be approved by Charter Financial's
stockholders. 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
0.79% . For purposes of the preceding table, it was assumed that the
number of unvested management recognition plan shares at March 31, 2001 was
156,400, 184,000, 211,600 and 243,340 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 March 31, 2001 was
13,003, 15,333, 17,633 and 20,278 for the minimum, midpoint, maximum and
15% above the maximum of the offering range, respectively.
(5) Includes adjustments for assets retained by First Charter, MHC and the
income received from those assets. These assets include $100,000 cash and
400,000 shares of Freddie Mac stock retained by First Charter, MHC. The
adjustment to consolidated net income includes income received from the
reinvestment of the $100,000 cash and the after-tax dividend income
received on the 400,000 shares of Freddie Mac stock. The adjustment for
the stockholders equity includes the $100,000 cash and the tax-adjusted
value of the 400,000 shares of Freddie Mac stock.
(6) Per share data for earnings per share is based upon 19,250,233, 22,647,333,
26,044,433 and 29,951,098 shares outstanding, representing shares sold in
the offering, shares purchased by the ESOP and management recognition plan
and shares issued to First Charter, MHC at the minimum midpoint, maximum
and 15% above the maximum of the offering range. Per share data for pro
forma stockholders' equity per share is based on 19,550,000, 23,000,000,
26,450,000 and 30,417,500 total shares outstanding at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively.
(7) As part of the reorganization, CharterBank intends on implementing a stock
option plan under which 10% of the shares sold to persons other than First
Charter, MHC, will be reserved for the grant of options. Before the stock
option plan is implemented, it must be approved by the holders of a
majority of the outstanding shares of Charter Financial Corp. held by
persons other than First Charter, MHC. In the event the shares issued, as
a result of the exercise of stock options, under the stock option 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. The effect on pro forma earnings
per share of Charter Financial if all stock options reserved for issuance
had been exercised at $10.00 and issued from authorized but unissued shares
of common stock is shown below:
Minimum Midpoint Maximum Maximum as Adjusted
Pro forma net income per
share, including stock options $0.14 $0.12 $0.11 $0.11
39
At or for the Year Ended September 30, 2000
------------------------------------------------------
Maximum As
Minimum Midpoint Maximum Adjusted
3,910,000 4,600,000 5,290,000 6,083,500
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............................................ $ 39,100 $ 46,000 $ 52,900 $ 60,835
Less expenses............................................. 1,495 1,571 1,647 1,734
---------- ---------- ---------- ----------
Estimated net proceeds................................. 37,605 44,429 51,253 59,101
Less: Common stock purchased by ESOP(2)(4)............. (3,128) (3,680) (4,232) (4,867)
Less: Common stock purchased by MRP(3)................. (1,564) (1,840) (2,116) (2,433)
---------- ---------- ---------- ----------
$ 32,913 $ 38,909 $ 44,905 $ 51,801
========== ========== ========== ==========
For the 12 months ended September 30, 2000
------------------------------------------
Consolidated net income
Historical............................................. $ 872 $ 872 $ 872 $ 872
Adjustment for mutual holding company
formation(5)........................................ (286) (286) (286) (286)
Pro forma income on net proceeds....................... 784 936 1,088 1,263
Pro forma ESOP adjustment(2)(4)........................ (162) (190) (219) (251)
Pro forma MRP adjustment(3)............................ (194) (228) (262) (302)
---------- ---------- ---------- ----------
Pro forma net income................................. $ 1,014 $ 1,014 $ 1,193 $ 1,296
========== ========== ========== ==========
Per share net income (reflects SOP 93-6)(6):
Historical............................................. $ 0.05 $ 0.04 $ 0.03 $ 0.03
Adjustment for mutual holding company
formation(5)........................................ (0.01) (0.01) (0.01) (0.01)
Pro forma income on net proceeds....................... 0.04 0.04 0.04 0.04
Pro forma ESOP adjustment(2)(4)........................ (0.01) (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(7).................... $ 0.06 $ 0.05 $ 0.04 $ 0.04
========== ========== ========== ==========
Offering price as a percentage of pro forma net
earnings per share...................................... 166.67x 200.00x 250.00x 250.00x
At September 30, 2000
---------------------
Stockholders' equity:
Historical............................................. $ 204,527 $ 204,527 $ 204,527 (S) $ 204,527
Adjustment for mutual holding company formation........ (13,594) (13,594) (13,594) (13,594)
Estimated net proceeds................................. 37,605 44,429 51,253 59,101
Less: Common Stock acquired by ESOP(2)(4).............. (3,128) (3,680) (4,232) (4,867)
Less: Common Stock acquired by MRP(3)................. (1,564) (1,840) (2,116) (2,433)
---------- ---------- ---------- ----------
Pro forma stockholders' equity....................... $ 223,846 $ 229,842 $ 235,838 $ 242,734
========== ========== ========== ==========
Stockholders' equity per share:(6)
Historical............................................. $ 10.46 $ 8.89 $ 7.73 $ 6.72
Adjustment for mutual holding company formation........ (0.70) (0.59) (0.51) (0.45)
Estimated net proceeds................................. 1.92 1.93 1.94 1.94
Less: Common Stock acquired by ESOP(2)(4).............. (0.16) (0.16) (0.16) (0.16)
Less: Common Stock acquired by MRP(3)................. (0.08) (0.08) (0.08) (0.08)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share............. $ 11.44 $ 9.99 $ 8.92 $ 7.97
========== ========== ========== ==========
Offering price as a percentage of pro forma
stockholders' equity per share.......................... 87.41% 100.10% 112.11% 125.47%
========== ========== ========== ==========
40
-------------------
(1) We reserve the right to issue up to a total of 6,083,500 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 $60.8 million (15% above the
maximum of the Independent Valuation.)
(2) Assumes 8% of the shares sold to persons other than First Charter, MHC, 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 the shares sold to persons other than First Charter, MHC, will be
purchased by the management recognition plan. Before the management
recognition plan is implemented, it must be approved by Charter Financial's
stockholders. 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
0.79%. For purposes of the preceding table, it was assumed that the number
of unvested management recognition plan shares at September 30, 2000 was
156,400, 184,000, 211,600 and 243,340 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
26,067, 30,667, 35,267 and 40,557 for the minimum, midpoint, maximum and
15% above the maximum of the offering range, respectively.
(5) Includes adjustments for assets retained by First Charter, MHC and the
income received from those assets. These assets include $100,000 cash and
400,000 shares of Freddie Mac stock retained by First Charter, MHC. The
adjustment to consolidated net income includes income received from the
reinvestment of the $100,000 cash and the after-tax dividend income
received on the 400,000 shares of Freddie Mac stock. The adjustment for
the stockholders equity includes the $100,000 cash and the tax-adjusted
value of the 400,000 shares of Freddie Mac stock.
(6) Per share data for earnings per share is based upon 19,263,267, 22,662,667,
26,062,067 and 29,971,377 shares outstanding, representing shares sold in
the offering, shares purchased by the ESOP and management recognition plan
and shares issued to First Charter, MHC at the minimum midpoint, maximum
and 15% above the maximum of the offering range. Per share data for pro
forma stockholders' equity per share is based on 19,550,000, 23,000,000,
26,450,000 and 30,417,500 total shares outstanding at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively.
(7) As part of the reorganization, CharterBank intends on implementing a stock
option plan under which 10% of the shares sold to persons other than First
Charter, MHC, will be reserved for the grant of options. Before the stock
option plan is implemented, it must be approved by the holders of a
majority of the outstanding shares of Charter Financial Corp. held by
persons other than First Charter, MHC. In the event the shares issued, as
a result of the exercise of stock options, under the stock option 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. The effect on pro forma earnings
per share of Charter Financial if all stock options reserved for issuance
had been exercised at $10.00 and issued from authorized but unissued shares
of common stock is shown below:
Minimum Midpoint Maximum Maximum as Adjusted
Pro forma net income per
share, including stock options $0.05 $0.06 $0.05 $0.05
41
Pro Forma Data Under Proposed Office of Thrift Supervision Conversion
Regulations
At or for the Six Months Ended March 31, 2001
---------------------------------------------------
Maximum
Minimum Midpoint Maximum As Adjusted
3,910,000 4,600,000 5,290,000 6,083,500
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................................. $ 39,100 $ 46,000 $ 52,900 $ 60,835
Less expenses.................................. 1,495 1,571 1,647 1,734
---------- ---------- ---------- -----------
Estimated net proceeds.......................... 37,605 44,429 51,253 59,101
Less: Common stock purchased by ESOP(2)(4) .... (7,804) (9,182) (10,559) (12,143)
Less: Common stock purchased by MRP(3) ........ (3,902) (4,591) (5,279) (6,071)
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted ..... $ 25,898 $ 30,657 $ 35,415 $ 40,887
========== ========== ========== ==========
For the 6 months ended March 31, 2001:
-------------------------------------
Consolidated net income:
Historical ................................... $ 2,649 $ 2,649 $ 2,649 $ 2,649
Adjustment for mutual holding company
formation(5) ............................. (143) (143) (143) (143)
Pro forma income on net proceeds ............. 303 363 424 493
Pro forma ESOP adjustment(2)(4) .............. (202) (237) (273) (314)
Pro forma MRP adjustment(3) .................. (242) (285) (327) (376)
---------- ---------- ---------- ----------
Pro forma net income...................... $ 2,365 $ 2,347 $ 2,330 $ 2,309
========== ========== ========== ==========
Per share net income (reflects SOP 93-6)(6):
Historical ................................... $ 0.14 $ 0.12 $ 0.10 $ 0.09
Adjustment for mutual holding company
formation(5) ............................... (0.01) (0.01) (0.01) -
Pro forma income on net proceeds ............. 0.02 0.02 0.02 0.02
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(7) ........ $ 0.13 $ 0.11 $ 0.09 $ 0.09
========== ========== ========== ==========
Offering price as a ratio of pro forma net
annualized income per share .................. 38.46x 45.45x 55.56x 55.56x
At March 31, 2001
-----------------
Stockholders' equity:
Historical ................................... $ 249,212 $ 249,212 $ 249,212 $ 249,212
Adjustment for mutual holding company
formation .................................. (16,238) (16,238) (16,238) (16,238)
Estimated net proceeds ....................... 37,605 44,429 51,253 59,101
Less: Common Stock acquired by ESOP(2)(4) .... (7,804) (9,182) (10,559) (12,143)
Less: Common Stock acquired by MRP(3) ........ (3,902) (4,591) (5,279) (6,071)
---------- ---------- ---------- ----------
Pro forma stockholders' equity ........... $ 258,872 $ 263,631 $ 268,389 $ 273,861
========== ========== ========== ==========
Stockholders' equity per share(6):
Historical ................................... $ 12.75 $ 10.84 $ 9.42 $ 8.19
Adjustment for mutual holding company
formation .................................. (0.83) (0.71) (0.61) (0.53)
Estimated net proceeds ....................... 1.92 1.93 1.94 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 . $ 13.24 $ 11.46 $ 10.15 $ 9.00
========== ========== ========== ==========
Offering price as a percentage of pro forma 75.53% 87.26% $ 98.52% 111.11%
stockholders' equity per share ............... ========== ========== ========== ==========
42
____________________________
1) We reserve the right to issue up to a total of 6,083,500 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 $60.8 million (15% above the maximum of
the offering range.)
(2) Assumes 8% of 49.9% of the outstanding shares of common stock 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 shares of common stock of Charter Financial
will be purchased by the management recognition plan. Before the
management recognition plan is implemented, it must be approved by Charter
Financial's stockholders. 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 March 31, 2001 was
390,218, 459,080, 527,942 and 607,133 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 March 31, 2001 was
32,518, 38,257, 43,995 and 50,594 for the minimum, midpoint, maximum and
15% above the maximum of the offering range, respectively.
(5) Includes adjustments for assets retained by First Charter, MHC and the
income received from those assets. These assets include $100,000 cash and
400,000 shares of Freddie Mac stock retained by First Charter, MHC. The
adjustment to consolidated net income includes income received from the
reinvestment of the $100,000 cash and the after-tax dividend income
received on the 400,000 shares of Freddie Mac stock. The adjustment for
the stockholders equity includes the $100,000 cash and the tax-adjusted
value of the 400,000 shares of Freddie Mac stock.
(6) Per share data for earnings per share is based upon 18,802,082, 22,120,097,
25,438,111 and 29,253,828 shares outstanding, representing shares sold in
the offering, shares purchased by the ESOP and management recognition plan
and shares issued to First Charter, MHC at the minimum midpoint, maximum
and 15% above the maximum of the offering range. Per share data for pro
forma stockholders' equity per share is based on 19,550,000, 23,000,000,
26,450,000 and 30,417,500 total shares outstanding at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively.
(7) Following the reorganization, CharterBank intends on implementing a stock
option plan under which 10% of 49.9% of the outstanding shares of common
stock of Charter Financial will be reserved for the grant of options.
Before the stock option plan is implemented, it must be approved by the
holders of a majority of the outstanding shares of Charter Financial Corp.
held by persons other than First Charter, MHC. In the event the shares
issued, as a result of the exercise of stock options, under the stock
option 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. The effect on pro forma
earnings per share of Charter Financial if all stock options reserved for
issuance had been exercised at $10.00 and issued from authorized but
unissued shares of common stock is shown below:
Minimum Midpoint Maximum Maximum as Adjusted
Pro forma net income per
share, including stock options $0.12 $0.10 $0.09 $0.09
43
At or for the Year Ended September 30, 2000
-------------------------------------------------------
Maximum as
Minimum Midpoint Maximum Adjusted
3,910,000 4,600,000 5,290,000 6,083,500
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.................................. $ 39,100 $ 46,000 $ 52,900 $ 60,835
Less expenses................................... 1,495 1,571 1,647 1,734
---------- ---------- ---------- ----------
Estimated net proceeds......................... 37,605 44,429 51,253 59,101
Less: Common stock purchased by ESOP(2)(4)..... (7,804) (9,182) (10,559) (12,143)
Less: Common stock purchased by MRP(3)......... (3,902) (4,591) (5,279) (6,071)
---------- ---------- ---------- ----------
$ 25,898 $ 30,657 $ 35,415 $ 40,887
========== ========== ========== ==========
For the 12 months ended September 30, 2000
------------------------------------------
Consolidated net income
Historical..................................... $ 872 $ 872 $ 872 $ 872
Adjustment for mutual holding company
formation(5)................................ (286) (286) (286) (286)
Pro forma income on net proceeds............... 606 727 847 986
Pro forma ESOP adjustment(2)(4)................ (403) (474) (546) (627)
Pro forma MRP adjustment(3).................... (484) (569) (655) (753)
---------- ---------- ---------- ----------
Pro forma net income........................ $ 305 $ 270 $ 232 $ 192
========== ========== ========== ==========
Per share net income (reflects SOP 93-6)(6):
Historical..................................... $ 0.05 $ 0.04 $ 0.03 $ 0.03
Adjustment for mutual holding company
formation(5)................................ (0.02) (0.01) (0.01) (0.01)
Pro forma income on net proceeds............... 0.03 0.03 0.03 0.03
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(7)........... $ 0.01 $ 0.01 $ - $ -
========== ========== ========== ==========
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......................... 37,605 44,429 51,253 59,101
Less: Common Stock acquired by ESOP(2)(4)...... (7,804) (9,182) (10,559) (12,143)
Less: Common Stock acquired by MRP(3)......... (3,902) (4,591) (5,279) (6,071)
---------- ---------- ---------- ----------
Pro forma stockholders' equity.............. $ 216,831 $ 221,590 $ 226,348 $ 231,820
========== ========== ========== ==========
Stockholders' equity per share:(6)
Historical..................................... $ 10.46 $ 8.89 $ 7.73 $ 6.72
Adjustment for mutual holding company
formation................................... (0.70) (0.59) (0.51) (0.45)
Estimated net proceeds......................... 1.92 1.93 1.94 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.... $ 11.08 $ 9.63 $ 8.56 $ 7.61
========== ========== ========== ==========
Offering price as a percentage of pro forma
stockholders' equity per share................. 90.25% 103.84% 116.82% 131.41%
========== ========== ========== ==========
______________
(1) We reserve the right to issue up to a total of 6,083,500 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 $60.8 million (15% above the maximum of the
Independent Valuation.)
(2) Assumes 8% of 49.9% of the outstanding shares of common stock 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% 49.9% of the outstanding shares of common stock of Charter Financial
will be purchased by the management recognition plan. Before the
management recognition plan is implemented, it must be approved by Charter
Financial's stockholders. 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
390,218, 459,080, 527,942 and 607,133 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
65,036, 76,513, 87,990 and 101,189 for the minimum, midpoint, maximum and
15% above the maximum of the offering range, respectively.
(5) Includes adjustments for assets retained by First Charter, MHC and the
income received from those assets. These assets include $100,000 cash and
400,000 shares of Freddie Mac stock retained by First Charter, MHC. The
adjustment to consolidated net income includes income received from the
reinvestment of the $100,000 cash and the after-tax dividend income
received on the 400,000 shares of Freddie Mac stock. The adjustment for
the stockholders equity includes the $100,000 cash and the tax-adjusted
value of the 400,000 shares of Freddie Mac stock.
(6) Per share data for earnings per share is based upon 18,834,600, 22,158,353
25,482,106 and 29,304,422 shares outstanding, representing shares sold in
the offering, shares purchased by the ESOP and management recognition plan
and shares issued to First Charter, MHC at the minimum midpoint, maximum
and 15% above the maximum of the offering range. Per share data for pro
forma stockholders' equity per share is based on 19,550,000, 23,000,000,
26,450,000 and 30,417,500 total shares outstanding at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively.
(7) Following the reorganization, CharterBank intends on implementing a stock
option plan under which 10% of 49.9% of the outstanding shares of common
stock of Charter Financial will be reserved for the grant of options.
Before the stock option plan is implemented, it must be approved by the
holders of a majority of the outstanding shares of Charter Financial Corp.
held by persons other than First Charter, MHC. In the event the shares
issued, as a result of the exercise of stock options, under the stock
option 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. The effect on pro forma
earnings per share of Charter Financial if all stock options reserved for
issuance had been exercised at $10.00 and issued from authorized but
unissued shares of common stock is shown below:
Minimum Midpoint Maximum Maximum as Adjusted
Pro forma net income per
share, including stock options $0.03 $0.03 $0.02 $0.02
45
CHARTERBANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
The Consolidated Statements of Income and Comprehensive Income 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-45. The
following condensed consolidated statements of income and comprehensive income
have been derived from the audited consolidated statements of income and
comprehensive income 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 F-1 of this prospectus.
The consolidated statements of income for the six month periods ended March 31,
2001 and 2000 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
accounting principles generally accepted in the United States of America. The
results for the six month period ended March 31, 2001 are not necessarily
indicative of the results of CharterBank for the entire year or any other
period.
For the Six
Months For the Years Ended
Ended March 31, September 30,
----------------------- --------------------------------------
2001 2000 2000(1) 1999 1998
------ ------ ---------- -------- ---------
(Unaudited) (Restated) (In thousands)
Interest and dividend income........ $ 26,167 $ 26,033 $ 54,213 $ 36,969 $ 29,175
-------- -------- -------- -------- --------
Interest expense.................... 17,884 16,939 36,647 23,341 19,409
-------- -------- -------- -------- --------
Net interest income................. 8,283 9,094 17,566 13,628 9,766
Provision for loan losses........... 300 180 1,410 240 180
-------- --------- -------- --------- --------
Net interest income after
provision for loan losses........ 7,983 8,914 16,156 13,388 9,586
-------- --------- -------- --------- --------
Noninterest income (loss)........... 1,295 834 1,949 38,749 (3,307)
Noninterest expenses................ 5,774 6,120 15,943 10,749 6,622
-------- --------- -------- --------- --------
Income (loss) before provision
for income taxes................. 3,504 3,628 2,162 41,388 (343)
Income tax expense (benefit)........ 855 942 1,290 14,359 (818)
-------- --------- -------- --------- --------
Net income.......................... $ 2,649 $ 2,686 $ 872 $ 27,029 $ 475
======== ========= ======== ========= ========
Other comprehensive income (loss),
net of tax....................... $ 42,037 $ (26,828) $ 5,165 $ (23,731) $ 51,604
======== ========= ======== ========= ========
Comprehensive income (loss)......... $ 44,686 $ (24,142) $ 6,037 $ 3,298 $52,079
======== ========= ======== ========= ========
_________________________
(1) Certain balance sheet and income statement items for the year ended
September 30, 2000 have been restated. See note 22 on page F-44 of
prospectus for a discussion of the restatement.
46
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 at March 31, 2001 also
contains non-interest bearing liabilities of approximately $156.8 million of
which $123.8 million represents 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
47
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."
48
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, during the six months ended March 31,
2001, CharterBank extended its interest rate reset on $102.0 million of Federal
Home Loan Bank borrowings from one month to seven or more years and reduced its
mortgage related investment securities by $66.9 million. The risk profile after
these actions is shown in the Net Portfolio Value table in the next section of
the prospectus.
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.
49
The table below sets forth, as of March 31, 2001, the estimated changes in
net interest portfolio value 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 $ 216,403 $ (36,270) (14.35)% 24.77%
+200 bp 228,139 (24,534) (9.71)% 25.55%
+100 bp 239,586 (13,087) (5.18)% 26.26%
0 bp 252,673 - - % 27.08%
-100 bp 254,499 1,826 0.72% 26.84%
-200 bp 244,617 (8,056) (3.19)% 25.66%
-300 bp 235,366 (17,307) (6.85)% 24.51%
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 March 31, 2001, fixed rate
investment and mortgage securities comprised of $148.7 million or 48.1% of our
total portfolio of investment and mortgage securities of $309.5 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.
50
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 with and without the effects of
the Freddie Mac stock, which had a dividend return on cost basis of
approximately 54.31% at March 31, 2001. However, the appreciation on the market
value of the Freddie Mac stock results in only 1.11% 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 six months ended March 31, 2001, as
compared to the six months ended March 31, 2000, 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 47 basis points during this time period, while
long-term fixed rate mortgage securities decreased 9 basis points in yield. The
yield on loans receivable increased 15 basis points during the six months ended
March 31, 2001 compared to the six months ended March 31, 2000; yet, the costs
of deposits increased 61 basis points from 5.08% to 5.69% in comparing the
similar 2000 period to the six months ended March 31, 2001. The combination of
these rate changes reduced the overall net interest margin by 29 basis points
from 2.05% for the six months ended March 31, 2000 to 1.76% for the six months
ended March 31, 2001.
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.
51
At March 31, For the Six Months Ended March 31,
------------------ ---------------------------------------------------------------
2001 2001 2000
------------------ ------------------------------ ------------------------------
Average Average
Actual Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------- ------ ------- -------- ------- ------- -------- -------
Assets: (Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits in other
financial institutions....................... $ 17,465 4.80% $ 8,993 $ 233 5.18% $ 2,213 $ 61 5.51%
FHLB common stock and other equity............ 12,700 7.25 12,689 474 7.47 12,161 468 7.70
Mortgage-backed securities and collateralized
mortgage obligations available for sale..... 300,738 6.54 339,352 11,861 6.99 376,713 13,345 7.08
Other investment securities available for sale 8,786 6.42 14,110 481 6.82 22,390 708 6.32
Loans receivable.............................. 247,409 8.70 252,793 11,248 8.90 224,809 9,834 8.75
-------- -------- ------- -------- -------
Total interest-earning assets excluding
Freddie Mac common stock.................... 587,098 7.14 627,937 24,297 7.74 638,286 24,416 7.65
Freddie Mac common stock...................... 327,716 1.11 312,760 1,870 1.20 248,134 1,617 1.30
-------- -------- ------- -------- -------
Total interest-earning assets including
Freddie Mac common stock.................... 914,814 5.15 940,697 26,167 5.56 886,420 26,033 5.87
Total non-interest earning assets............ 20,014 - 17,391 - - 25,265 - -
-------- -------- ------- -------- -------
Total assets................................. $934,828 $958,088 $26,167 $911,685 $26,033
======== ======== ======= ======== =======
Liabilities and Equity:
Interest-Bearing Liabilities:
NOW accounts.................................. 14,449 1.79 15,026 142 1.89 13,810 143 2.07
Savings accounts.............................. 8,328 1.99 8,098 79 1.95 8,647 178 4.12
Money market deposit accounts................. 15,015 4.45 11,999 295 4.92 9,667 215 4.45
Certificates of deposit accounts.............. 138,680 6.20 181,463 5,648 6.22 238,622 6,344 5.32
-------- -------- ------- -------- -------
Total interest-bearing deposits.............. 176,472 5.49 216,586 6,164 5.69 270,746 6,880 5.08
Borrowed funds................................ 352,305 5.71 369,798 11,720 6.34 342,978 10,059 5.87
-------- -------- ------- -------- -------
Total interest-bearing liabilities........... 528,777 5.64 586,384 17,884 6.10 613,724 16,939 5.52
Noninterest-bearing deposits.................. 8,712 - 8,351 - - 8,221 - -
Other noninterest-bearing liabilities......... 148,124 - 128,402 - - 100,026 - -
-------- -------- ------- -------- -------
Total noninterest-bearing liabilities........ 156,839 - 136,753 - - 108,247 - -
-------- -------- ------- -------- -------
Total liabilities............................ 685,616 4.35 723,137 17,884 4.95 721,971 16,939 4.69
Total equity................................. 249,212 234,951 - 189,714 -
-------- -------- ------- -------- -------
Total liabilities and equity................. $934,828 $958,088 $17,884 $911,685 $16,939
======== ======== ======= ======== =======
Net interest income, including Freddie Mac
common stock................................. $ 8,283 $ 9,094
======= =======
Net interest rate spread, including Freddie Mac
common stock(1).............................. (0.54)% 0.35%
Net interest margin, including Freddie Mac
common stock(2)............................... 1.76% 2.05%
Ratio of interest-earning assets to average
interest-bearing liabilities, including
Freddie Mac common stock..................... 160.44% 144.46%
Net interest income excluding
Freddie Mac common stock dividends........... $ 6,413 $ 7,477
======= =======
Net interest rate spread excluding
Freddie Mac common stock(3).................. 1.64% 2.13%
Net interest rate margin excluding
Freddie Mac common stock(4).................. 2.04% 2.34%
Ratio of interest-earning assets to average
interest-bearing liabilities, excluding
Freddie Mac common stock..................... 107.10% 104.02%
(footnotes on following page)
52
For The Years Ended September 30,
-------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- -------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost 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% $ 1,710 $ 103 6.02%
FHLB common stock and other equity.............. 12,660 971 7.67 10,059 736 7.32 9,348 672 7.19
Mortgage-backed securities and collateralized
mortgage obligations available for sale....... 381,924 27,477 7.19 261,272 16,592 6.35 187,883 12,163 6.47
Other investment securities available for sale.. 18,152 1,194 6.58 26,218 1,524 5.81 7,244 480 6.63
Loans receivable................................ 240,401 21,076 8.77 180,772 15,015 8.31 153,031 13,153 8.59
-------- ------- -------- ------- -------- -------
Total interest-earning assets excluding
Freddie Mac common stock...................... 655,762 50,877 7.76 481,374 34,015 7.07 359,216 26,571 7.40
Freddie Mac common stock........................ 232,471 3,336 1.44 306,379 2,954 0.96 246,136 2,604 1.06
-------- ------- -------- ------- -------- -------
Total interest-earning assets including
Freddie Mac common stock...................... 888,233 54,213 6.10 787,753 36,969 4.69 605,352 29,175 4.82
Total non-interest earning assets.............. 22,756 - - 10,682 - - 15,393 - -
-------- ------- -------- ------- -------- -------
Total assets................................... $910,989 $54,213 $798,435 $36,969 $620,745 $29,175
======== ======= ======== ======= ======== =======
Liabilities and Equity:
Interest-Bearing Liabilities:
NOW accounts.................................... 13,717 282 2.06 6,601 128 1.94 5,104 123 2.41
Savings accounts................................ 8,585 275 3.20 6,503 292 4.49 6,357 168 2.64
Money market deposit accounts................... 10,063 483 4.80 8,189 321 3.92 6,538 277 4.24
Certificates of deposit accounts................ 230,482 12,892 5.59 177,416 9,682 5.46 94,416 5,410 5.73
-------- ------- -------- ------- -------- -------
Total interest-bearing deposits................ 262,847 13,932 5.30 198,709 10,423 5.25 112,415 5,978 5.32
Borrowed funds.................................. 365,745 22,715 6.21 247,914 12,918 5.21 235,542 13,431 5.70
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities............. 628,592 36,647 5.83 446,623 23,341 5.23 347,957 19,409 5.58
Noninterest-bearing deposits.................... 8,472 - - 3,411 - - 2,496 - -
Other noninterest-bearing liabilities........... 93,187 - - 122,751 - - 95,815 - -
-------- ------- -------- ------- -------- -------
Total noninterest-bearing liabilities.......... 101,659 - - 126,162 - - 98,311 - -
-------- ------- -------- ------- -------- -------
Total liabilities.............................. 730,251 36,647 5.02 572,785 23,341 4.08 446,268 19,409 4.35
Total equity................................... 180,738 - 225,650 - 174,477 -
-------- ------- -------- ------- -------- -------
Total liabilities and equity................... $910,989 $36,647 $798,435 $23,341 620,745 $19,409
======== ======= ======== ======= ======== =======
Net interest income,
including Freddie Mac
common stock................................... $17,566 $13,628 $ 9,766
======= ======= =======
Net interest rate spread, including Freddie Mac
common stock(1)................................ 0.27% (0.54)% (0.76)%
Net interest margin, including Freddie Mac
common stock(2)................................ 1.98% 1.73% 1.61%
Ratio of interest-earning assets to average
interest-bearing liabilities, including
Freddie Mac common stock...................... 141.31% 176.38% 173.97%
Net interest income excluding
Freddie Mac common stock dividends............. $14,230 $10,674 $ 7,162
======= ======= =======
Net interest rate spread excluding
Freddie Mac common stock(3).................... 1.93% 1.84% 1.82%
Net interest rate margin excluding
Freddie Mac common stock (4)................... 2.17% 2.22% 1.99%
Ratio of interest-earning
assets to average
interest-bearing
liabilities, excluding
Freddie mac common stock....................... 104.32% 107.78% 103.24%
(footnotes on following page)
53
________________________________
(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.
(3) Net interest rate spread excluding Freddie Mac common stock represents the
difference between the weighted average yield on total interest-earning
assets excluding Freddie Mac common stock and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin excluding Freddie Mac common stock represents net
interest income excluding Freddie Mac common stock dividends as a
percentage of average interest-earning assets excluding Freddie Mac common
stock.
54
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.
55
Six Months Ended March 31, 2001 Year Ended September 30, 2000
Compared To Six Months Ended Compared To Year Ended
March 31, 2000 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.................. $ 374 $ (7) $ (195) $ 172 $ (21) $ 37 $ (5) $ 11
FHLB common stock and other
equity securities....................... 41 (28) (7) 6 190 35 10 235
Mortgage-backed securities and
collateralized mortgage obligations
available for sale...................... (2,645) (339) 1,500 (1,484) 7,661 2,195 1,029 10,885
Other investment securities
available for sale...................... (523) 112 184 (227) (469) 202 (63) (330)
Loans receivable......................... 2,449 337 (1,372) 1,414 4,995 832 274 6,061
-------- -------- -------- -------- -------- ------- ------- --------
Total interest-earning assets........... (304) 75 110 (119) 12,316 3,301 1,245 16,862
Freddie Mac common stock................. 840 (248) (339) 253 (710) 1,471 (379) 382
-------- -------- -------- -------- -------- ------- ------- --------
Total interest-earning assets........... $ 536 $ (173) $ (229) $ 134 $ 11,606 $ 4,772 $ 866 $ 17,244
-------- -------- -------- -------- -------- ------- ------- --------
Interest-bearing liabilities:
NOW accounts............................. $ 25 $ (25) $ (1) $ (1) $ 138 $ 8 $ 8 $ 154
Savings accounts......................... (23) (188) 112 (99) 93 (84) (26) (17)
Money market deposit accounts............ 104 45 (69) 80 73 72 17 162
Certificates of deposit.................. (3,039) 2,148 185 (696) 2,909 231 70 3,210
-------- -------- -------- -------- -------- ------- ------- --------
Total interest-bearing deposits......... (2,923) 1,980 227 (716) 3,213 227 69 3,509
Borrowed funds........................... 1,574 1,612 (1,525) 1,661 6,139 2,479 1,179 9,797
-------- -------- -------- -------- -------- ------- ------- --------
Total interest-bearing liabilities...... $ (1,349) $ 3,592 $ (1,298) $ 945 $ 9,352 $ 2,066 $ 1,248 $ 13,306
-------- -------- -------- -------- -------- ------- ------- --------
Change in net interest income............. $ 1,885 $ (3,765) $ 1,069 $ (811) $ 2,554 $ 2,066 $ (382) $ 3,938
======== ======== ======== ======== ======== ======= ======= ========
Year Ended September 30, 1999
Compared To Year Ended
September 30, 1998
Increase/(Decrease)
--------------------------------------------
Due To
---------------------------------
Volume Rate Combined Net
------- -------- ---------- --------
(In Thousands)
Interest-earning assets:
Interest-bearing deposits in other
financial institutions.................. $ 81 $ (20) $ (16) $ 45
FHLB common stock and other
equity securities....................... 51 12 1 64
Mortgage-backed securities and
collateralized mortgage
obligations available for sale.......... 4,748 (225) (94) 4,429
Other investment securities
available for sale...................... 1,258 (59) (155) 1,044
Loans receivable......................... 2,383 (428) (93) 1,862
-------- -------- -------- --------
Total interest-earning assets........... 8,521 (720) (357) 7,444
Freddie Mac common stock................. (639) (246) 1,235 350
-------- -------- -------- --------
Total interest-earning assets........... $ 7,882 $ (966) $ 878 $ 7,794
-------- -------- -------- --------
Interest-bearing liabilities:
NOW accounts............................. $ 36 $ (24) $ (7) $ 5
Savings accounts......................... 4 118 2 124
Money market deposit accounts............ 70 (21) (5) 44
Certificates of deposit.................. 4,768 (255) (241) 4,272
-------- -------- -------- --------
Total interest-bearing deposits......... 4,878 (182) (251) 4,445
Borrowed funds........................... 705 (1,154) (64) (513)
-------- -------- -------- --------
Total interest bearing liabilities...... $ 5,583 $ (1,336) $ (315) $ 3,932
-------- -------- -------- --------
Change in net interest income............. $ 2,299 $ 370 $ 1,193 $ 3,862
======== ======== ======== ========
56
Comparison of Financial Condition at March 31, 2001 and September 30, 2000
Our consolidated total assets decreased $7.8 million, or 0.83%, to $934.8
million at March 31, 2001 from $942.7 million at September 30, 2000. The
decrease was primarily due to a $67.0 million, or 18.2%, decrease in mortgage
securities which was partially offset by a $54.5 million, or 19.1%, increase in
the market value of Freddie Mac stock.
Total mortgage securities available for sale decreased $67.0 million, or
18.2%, to $300.7 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.
Whereas CharterBank held fixed rate U.S. Government agencies, mortgage-baked
securities, and collateralized mortgage obligations aggregating approximately
$237.1 million at September 30, 2000, these fixed rate investments were $148.7
million at March 31, 2001, representing an $88.4 million reduction during this
six-month period. Variable rate investments and mortgage securities increased
from $144.5 million at September 30, 2000 to $160.9 million at March 31, 2001.
Deposits decreased $89.2 million, or 32.5%, to $185.2 million at March 31,
2001 from $274.4 million at September 30, 2000. The primary cause of the
decrease was the maturing of approximately $89.4 million of brokered
certificates of deposit which were redeemed primarily with the proceeds from
sales of mortgage securities. We also experienced a decline of $257,000 in
retail deposits between September 30, 2000 and March 31, 2001.
Borrowings, including Federal Home Loan Bank advances and repurchase
agreements, totaled $352.3 million at March 31, 2001, an increase of $86,000
over $352.2 million at September 30, 2000.
Total equity increased $44.7 million, or 21.8%, to $249.2 million at March
31, 2001 from $204.5 million at September 30, 2000. The increase was primarily
due to a $42.0 million increase in accumulated other comprehensive income driven
by after tax unrealized gains on securities, primarily Freddie Mac stock, and
$2.6 million in net income for the six months ended March 31, 2001.
Comparison of Operating Results for the Six Months Ended March 31, 2001 and 2000
General
Net income was $2.6 million for the six months ended March 31, 2001, a
decrease of $38,000, or 1.4%, compared to the six months ended March 31, 2000.
Operations were adversely affected by a $811,000 decrease in net interest income
primarily related to the increased cost of borrowed funds. In addition, we had a
$120,000 increase in the provision for loan losses due to higher loan
delinquency levels, higher losses as the economy shows signs of slowing and
consideration of larger balance commercial real estate loans in the loan
portfolio. These reductions in earnings were offset by a $461,000 increase in
total non-interest income, a decrease of $345,000 in total non-interest expense
and a $87,000 decrease in income tax expense.
57
Other comprehensive income was $42.0 million for the six months ended March
31, 2001, which represented a $68.8 million increase as compared to the other
comprehensive loss of $26.8 million for the six months ended March 31, 2000.
This increase in other comprehensive income relates to an increase in the value
of our investment in Freddie Mac stock and the recovery in the fair value of
other, largely fixed rate, investments in mortgage securities. Given the
composition of our investment portfolio, the recovery in fair value of mortgage
securities was due to the lower interest rate environment at March 31, 2001
compared to March 31, 2000.
Comprehensive Income
Other comprehensive income was $42.0 million for the six months ended March
31, 2001 compared to a loss of $26.8 million for the same period in 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 $64.83 at
March 31, 2001, resulting in an after tax increase of $33.4 million. The
mortgage securities portion of the balance sheet provided the remaining $8.6
million of other comprehensive income for the 2001 period. The per share price
of Freddie Mac stock declined from $52.00 to $44.188 during the six months
ended March 31, 2000, resulting in an after tax total decrease of $24.2 million.
The mortgage securities portion of the balance sheet provided the remaining $2.6
million of other comprehensive loss for the 2000 period.
The impact of appreciation (depreciation) in the price of Freddie Mac stock
on our total comprehensive income (loss) is shown in the table below.
Six Months Ended March 31, 2001
-----------------------------------------------------------
Market Price Total Market Unrealized Gain
Shares Per Share Value Net of Tax
--------- -------------- -------------- -----------------
September 30, 2000 5,055,000 $54.0625 $273,285,938 $163,569,491
March 31, 2001 5,055,000 64.830 327,715,650 196,989,334
-------- ------------ ------------
Change in Freddie Mac stock....... - $10.7675 $ 54,429,712 33,419,843
Other comprehensive
income related to
mortgage securities
and other investments........... 8,616,894
Total other comprehensive income.. $ 42,036,737
============
58
Six Months Ended March 31, 2000
-----------------------------------------------------------
Market Price Total Market Unrealized Gain
Shares Per Share Value Net of Tax
---------- -------------- ------------ ----------------
September 30, 1999 5,055,000 $52.0000 $262,860,000 $157,167,965
March 31, 2000 5,055,000 44.188 223,367,813 132,919,762
-------- ------------ ------------
Change in Freddie Mac stock....... - $ (7.812) $(39,492,187) (24,248,203)
Other comprehensive
loss related to
mortgage securities
and other investments........... (2,579,978)
Total other comprehensive loss.... $(26,828,181)
============
Interest Income
Total interest and dividend income for the six months ended March 31, 2001
was $26.2 million, up $135,000 or 0.5% from $26.0 million for the six months
ended March 31, 2000. Total interest and dividend income, excluding Freddie Mac
stock dividends, was $24.3 million for the six months ended March 31, 2001, a
$118,000 or 0.48% decrease, compared with $24.4 million for the same period in
2000. Increases in interest income on loans, interest income on interest bearing
deposits and dividend income were almost fully offset with decreases in interest
income on mortgage securities and interest income on investment securities.
This decrease related primarily to a decrease in interest income on mortgage
securities of $1.5 million, or 11.1%, to $11.9 million from $13.3 million for
the six months ended March 31, 2000. The decrease in interest income on mortgage
securities was primarily related to our sale of certain securities consistent
with our strategy to reduce interest rate risk. Interest income on investment
debt securities available for sale decreased $227,000 to $481,000 from $708,000
for the six months ended March 31, 2000.
Interest income on loans increased by 14.3% to $11.2 million for the six
months ended March 31, 2001 from $9.8 million for the six months ended March 31,
2000. The growth in interest income on loans was due in part to a $28.0 million
or 12.4% increase in the average balance of total loans, which rose to $252.8
million for the six months ended March 31, 2001 compared to $224.8 million for
the six months ended March 31, 2000. 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, mortgage-backed
securities, and collateralized mortgage obligations available for sale decreased
$45.6 million from $399.1 million for the six months ended March 31, 2000 to
$353.5 million for the six months ended March 31, 2001. 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 191 basis points greater
than the average yields on our mortgage-backed securities and collateralized
mortgage obligations.
59
The yield on interest-earning assets, excluding Freddie Mac stock,
increased 9 basis points for the six months ended March 31, 2001 when compared
to the same period in 2000. Total interest-earning assets averaged $627.9
million for the six months ended March 31, 2001, down from $638.3 million for
the comparable 2000 period, representing a 1.62% decrease. The average yield on
loans, net, increased 15 basis points to 8.90% due to the increase in higher-
yielding commercial real estate loans in our portfolio. The yield on mortgage-
related securities decreased from 7.08% to 6.99%.
Dividend income on Freddie Mac stock increased by $253,000 to $1.9 million
for the six months ended March 31, 2001 from $1.6 million for the six months
ended March 31, 2000 due to an increase in Freddie Mac's quarterly dividend from
$0.17 to $0.20 per share.
Interest Expense
Total interest expense for the six months ended March 31, 2001 was $17.9
million, a $0.9 million, or 5.6%, increase from the six months ended March 31,
2000. This increase in interest expense was due to a 58 basis point increase in
average cost of funds. The average balance of interest-bearing liabilities was
reduced from $613.7 million to $586.3 million for the six months ended March 31,
2001. The increase in average cost was spread across borrowed funds (47 basis
points), certificates of deposit (90 basis points), and money market accounts
(47 basis points). The increase reflects the higher interest rate environment
that prevailed during the 2001 period as compared to the 2000 period. The drop
in rates starting in January 2001 was not in effect long enough to reduce the
average rates for the 2001 period down to the levels of the prior 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 decreased $716,000, or 10.4%, to $6.2 million
for the six months ended March 31, 2001 compared with $6.9 million for the same
period in 2000. The average balance of certificates of deposit decreased to
$181.4 million in 2001 from $238.6 million in 2000 due primarily to the
replacement of certain wholesale certificates of deposit with borrowings and the
redemption of other wholesale certificates of deposit with the proceeds from the
sales of mortgage securities. Interest expense on certificates of deposit
decreased $696,000 for the six months ended March 31, 2001 compared with 2000
with a $57.1 million drop in average balances more than offsetting a 90 basis
point increase in rate. Interest expense on money market balances increased
$80,000, reflecting a $2.3 million rise in average money market account balances
and a 47 basis point increase in average cost. We continue to seek to increase
our core retail deposits as the cost of such funds are generally lower than
wholesale deposits cost.
Interest expense on borrowings increased $1.7 million for the six months
ended March 31, 2001 compared to the same period in 2000 as a result of the
$26.8 million rise in the average balance of borrowings resulting from
redemption of wholesale certificates of deposit and a 47 basis point increase in
average cost.
60
Net Interest Income
Net interest income for the six months ended March 31, 2001 decreased
$811,000 or 8.9% to $8.3 million compared to $9.1 million for the six months
ended March 31, 2000. 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 by 89 basis points to
negative 54 basis points. The yield on interest-earning assets was 5.56% for
the six months ended March 31, 2001 which is down from 5.87% for the six months
ended March 31, 2000. Our net interest rate spread is negative because our
largest asset, Freddie Mac stock, which accounts for $312.8 million or 33.2% of
average interest-earning assets for the six months ended March 31, 2001, has a
yield of 1.2%.
If we exclude the Freddie Mac stock from average earning assets and the
dividend on Freddie Mac stock from interest and dividend income, the yield on
assets increases from 5.56% to 7.74%. The net interest rate spread excluding
Freddie Mac stock dividends - the difference between the average yield on
average total interest-earning assets and the average cost of average total
interest-bearing liabilities - decreased 49 basis points to 1.64% for the six
months ended March 31, 2001 from 2.13% for the comparable period in 2000. Net
interest margin, which is net interest income divided by average total interest-
earning assets, decreased 30 basis points to 2.04% for the six months ended
March 31, 2001 as compared to 2.34% for the six months ended March 31, 2000.
These decreases are due to the rising interest rate environment between the two
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 reducing
floating rate borrowings, 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.
A substantial portion of our earning assets are invested in mortgage
related securities that had a yield of 6.99% for the six months ended March 31,
2001 and over half of our interest-bearing liabilities were borrowings which had
a cost of 6.34% for the same period. Accordingly, our balance sheet, excluding
our Freddie Mac stock, reflects a wholesale or marginal investment strategy that
yielded a modest 65 basis point spread during the six months ended March 31,
2001. 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 2000. Conversely, the spread between
loans receivable and deposits, including wholesale deposits, was 321 basis
points for the six months ended March 31, 2001 which compares more favorably to
the thrift industry as a whole.
Our net interest margin and net interest spread are low when compared to
industry standards primarily due to two factors. First, the dividend rate of
our Freddie Mac stock investment, as compared to its market value, is low.
However, when compared to our cost basis in the investment, the dividend rate is
almost 60%. 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. Our Freddie Mac stock had a dividend yield of
61
1.20% which lowered the yield on earning assets from 7.74% to 5.56% for the six
months ended March 31, 2001.
Provision for Loan Losses and Asset Quality
During the six months ended March 31, 2001, we provided $300,000 for loan
losses, compared to $180,000 for the 2000 period. The provision for the six
months ended March 31, 2001 reflected higher loan delinquency levels, higher
losses as the economy showed signs of slowing, and consideration of larger
balance commercial real estate loans in the loan portfolio. Net charge-offs for
the six months ended March 31, 2001 were $1.3 million and consisted primarily of
loans acquired in the Citizens acquisition for which loan loss reserves were
provided in a prior period.
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. We
estimate our allowance for loan losses based on a methodology which assigns a
credit grade to each loan in the portfolio.
Underperforming loans are balloon loans that are 90 days or more past
contractual maturity on which we are still receiving monthly payments and
accruing interest. Non-performing loans are nonaccrual and restructured loans.
The following table shows underperforming and non-performing assets:
At March 31, 2001 At September 30, 2000
----------------- ---------------------
(In thousands)
Underperforming loans...................... $ 515 $ 159
Total non-performing loans................. 1,661 2,831
Foreclosed real estate, net................ 768 630
Total non-performing assets................ 2,429 3,461
Non-performing loans to total loans........ 0.66% 1.09%
Non-performing assets to total assets...... 0.26% 0.37%
In addition to the underperforming loans of $515,000 at March 31, 2001,
other disbursed loans of approximately $2.3 million and a committed line of
credit with an undisbursed amount of $584,000 are potential problem loan
relationships. This 2.3 million is composed of the following two items. First,
we have a $981,000 loan relationship which is secured by a retail building and
certain low income residential rental properties. While this loan is correct and
has only been 30 days past due once, the cash flows from the borrower's
financial statements indicate weak debt service coverage. Second, we have a
$1,900,000 line of credit with $1,316,000 drawn as of March 31, 2001 secured by
high risk receivables with another borrower. This loan has never been delinquent
but is of concern because of difficulty in valuing the collateral and the high
risk nature of the collateral. Management is not aware of any loans classified
for regulatory purposes as loss, doubtful, substandard, or special mention that
have not been disclosed above which (i) represent or result
62
from trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or (ii)
represent material credits about which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
At March 31, 2001, the allowance for loan losses as a percentage of total
loans was 2.13% compared with 2.22% at March 31, 2000. Net charge-offs for the
six months ended March 31, 2001 totaled $1.3 million and net charge-offs for the
year ended September 30, 2000 were $774,000. For the eighteen months since the
Citizens acquisition, total net charge-offs were approximately $2.1 million or
38.0% of the allowance for loan losses as of March 31, 2001. While delinquencies
and non-performing loan levels are similar at September 30, 2000 and March 31,
2001, as shown in the table below, loan delinquencies as a percentage of total
loans were significantly higher at interim periods between these two dates, thus
demonstrating one factor contributing to the increase in the provision for loan
losses for the six months ended March 31, 2001.
Total
30-89 Days 90+ Days Delinquency
Percentage Percentage Percentage
---------- ---------- ----------
March 31, 2001 3.44% 0.61% 4.06%
February 28, 2001 4.45 0.81 5.26
January 31, 2001 4.29 0.88 5.17
December 31, 2000 5.50 1.13 6.63
November 30, 2000 3.64 1.05 4.70
October 31, 2000 3.92 0.94 4.86
September 31, 2000 3.08 1.08 4.13
Our allowance for loan loss methodology is a loan classification based
system. We base the required reserve on a percentage of the loan balance for
each type of loan and classification level. Doubtful, substandard and special
mention loans are reserved at 60%, 17.5% and 5% respectively. CharterBank
establishes specific reserves in addition to general reserves when inherent
losses are indentifiable at the loan level. Loans may be classified manually and
are automatically classified if they are not previously classified when they
reach certain levels of delinquency. Unclassified loans are reserved at
different percentages based on our perception of the inherent losses in the loan
portfolio. Unclassified loans are reserved at percentages as listed in the table
below:
HIGH LOW
------ -----
1-4 family 2.00% 0.25%
Commercial real estate 2.25 2.00
Commercial 5.00 1.00
Consumer 10.00 0.25
Construction 2.25 1.00
One of the higher percentages on the 1-4 family loans is for a loan plan
that provides low to moderate income borrowers with limited credit histories
loans for up to 100% of the purchase price of the house. The conforming 1-4
family loans in the portfolio are at lower percentages. The above percentages
are based on each individual lending program and its loss history and
underwriting characteristics including loan to value, credit score, debt
coverage, collateral, and capacity to service debt. We obtain updated credit
scores on our portfolio approximately every eighteen months and reevaluate based
on loan plan, loan to value, and credit score. This analysis is used to
validate the loan loss reserve matrix as well as assist in establishing overall
lending direction. The 10% percentage on consumer loans is applied to our
overdraft protection loans. These loans have a maximum credit line of $1,000
and are unsecured. The overdraft protection loan is a relatively new product to
CharterBank and has an unproven loss experience. CharterBank's initial loss
experience on this loan product was high. As a result, CharterBank recently
tightened its credit standards on its overdraft protection loans. The 5% reserve
percentage on commercial loans is for workout loans that have high inherent
losses due to the nature of workouts.
The largest change in the allocation of the allowance for loan losses is
the drop in the consumer allocation from $2.3 million at September 30, 2000 to
$1.0 million at March 31, 2001. During this period there was a decline in
consumer loan balances of $3.2 million including gross charge-offs of consumer
loans of $1.2 million. Auto loans with balloon payments in excess of $500, were
specifically reserved at 50% of the estimated balloon payment, for specific
reserves of $176,000 at March 31, 2001. CharterBank acquired these loans in the
Citizens acquisition and
63
such loan terms are not in accordance with CharterBank's lending policy. In many
cases borrowers on these auto loans have limited capacity to pay a balloon. In
these cases, specific reserves have been established for these loans.
The basis for the CharterBank's unallocated reserves of approximately
$456,000 at March 31, 2001 is:
(1) the increase in the number of large balance loans in the portfolio
relative to the loan loss reserve - With relatively few large balance
commercial real estate loans, a loss on one loan could use the entire
loss reserve for that type of loan. For that reason, CharterBank
believes that it is appropriate to have unallocated reserves. For
example, within the past year CharterBank has added two commercial real
estate loan relationships between $5.0 million and $6.0 million, while
allocated general reserves for commercial real estate loans are $1.6
million. In addition, CharterBank has two commercial credit lines of
approximately $2.0 million which significantly exceed the allocated
commercial reserves of $425,000;
(2) recent growth in commercial and commercial real estate loans for which
CharterBank has limited loss history information, yet for which credit
losses have increased - With allocated general reserves of $1.6 million
for commercial real estate and $425,000 for commercial loans,
CharterBank has individual loans in each category that exceed the
allocated general reserves. The allocated general reserves are based on
the best company specific information available. The general reserves
are supplemented by additional unallocated reserves, as appropriate,
based on industry standards;
(3) local economic concerns - Local employer West Point Stevens, the
largest single employer in the West Point area, announced in June 2000
that it would expense $125.0 million in reorganization charges,
consolidate units and out source work to cut costs. In addition,
Powertel, a regional provider of wireless telephone services is in the
process of being purchased by VoiceStream (Deutsch Telekom);
(4) overall softening economic environment in the nation and the states of
Georgia and Alabama - Unemployment rates have increased in each state
from September 30, 2000 to March 31, 2001; and
(5) volatility including higher levels of delinquent loans from month to
month.
Noninterest Income
Noninterest income includes service fees on deposit accounts, servicing
released loan fees, other service charges and net gains on sales of securities.
Total noninterest income increased $461,000, or 55.3%, to $1.3 million for the
six months ended March 31, 2001 compared with $834,000 for the 2000 period.
This partially resulted from a $236,000 increase in gain on sale of loans, net
and servicing released loan fees from $300,000 for the six months ended March
31, 2000 to $536,000 for the six months ended March 31, 2001. This $236,000
increase was caused by management's decision to sell loans servicing released
(as opposed to selling a portion of loans servicing retained) and a more
favorable mortgage origination environment in 2001. The six months ended March
31, 2000 included a loss on sale of securities of $182,000 compared to a gain of
$219,000 for the six months ended March 31, 2001. The gains on sale of
securities resulted as CharterBank restructured its portfolio of investment
securities, mortgage-backed securities, and collateralized mortgage obligations
to reduce its investment in fixed rate investments. Such fixed rate investments
decreased by approximately $88.4 million during the six months ended March 31,
2001 from $237.1 million at September 30, 2000 to $148.7 million at March 31,
2001. Fees on deposits were relatively stable with $355,000 in the six months
ended March 31, 2001, which represented a $22,000 increase from the $333,000 for
the six months ended March 31, 2000. Other income for the six months ended
March 31, 2001 was $39,000, a decrease of $141,000 from the total of $180,000
for the six months ended March 31, 2000. This decrease was caused by our
decision to terminate an arrangement that provided fee income with a company
that originated loans through a call center.
Noninterest Expense
Total noninterest expense decreased $345,000, or 5.6%, to $5.8 million
during the six months ended March 31, 2001 compared with $6.1 million for the
six months ended March 31, 2000. The 2000 non interest expense included
$475,000 of goodwill amortization associated with the Citizens acquisition.
There was no comparable expense during the six months ended March 31, 2001 since
management had assessed the goodwill as impaired and, accordingly, wrote it off
during the quarter ended September 30, 2000. Noninterest expense included
$670,000 for professional services for the six months ended March 31, 2000
compared to $340,000 for the same period in 2001. The six months ended March 31,
2000 included professional fees and services related to the expense of formation
of Charter Insurance Company and our subsequently withdrawn application to form
a non-stock mutual holding company.
64
Salaries and employee benefits combined with occupancy and equipment
expense comprised 55.6% of total noninterest expense for the six months ended
March 31, 2001. Salaries and employee benefits increased $698,000, or 27.8%, to
$3.2 million for the six months ended March 31, 2001 compared with $2.5 million
for 2000, 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 noninterest expense by the sum
of net interest income and noninterest income, excluding gains(losses) on
securities transactions, was 61.70% for the six months ended March 31, 2001
compared with 60.53% for the comparable 2000 period. The ratio of noninterest
expense to average assets was 1.21% for 2001 and 1.34% for 2000 with the largest
factor in the increase being the charge for impairment of goodwill. 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 and ratio of noninterest
expense to average assets are lower than they 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 $86,000, or 9.2%, to $855,000 for the six
months ended March 31, 2001 compared with $941,000 for the comparable 2000
period, resulting in an effective tax rate of 24.4% for the six months ended
March 31, 2001 and 25.9% for the comparable 2000 period. The effective tax rate
also reflects the dividend exclusion for 70% of the Freddie Mac stock dividends.
The lower effective tax rate for the six months ended March 31, 2001 reflects a
higher proportion of income that qualified for that tax exclusion and the
elimination of nondeductible goodwill amortization.
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 $10.1 million, or 3.9%,
from $263.1 million to $273.3 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
65
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 $6.0 million, or 3.0%, 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 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.
Noninterest expenses for the year ended September 30, 2000 were increased 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 charge-offs and non-performing loans and
growth in commercial/commercial real estate loans, 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 a loss of $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 $10.7 million and net unrealized
gains on Freddie Mac stock which 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.
66
Year Ended September 30, 2000
-----------------------------------------------------------
Market
Price Total Market Unrealized Gain
Shares Per Share Value Net of Tax
------------ ------------ ------------- ---------------
September 30, 1999 5,055,000 $52.0000 $262,860,000 $157,167,965
September 30, 2000 5,055,000 54.0625 273,285,938 163,569,491
-------- ------------ ------------
Change in Freddie Mac stock....... - $ 2.0625 $ 10,425,938 6,401,526
Other comprehensive
loss related to
mortgage securities
and other investments.......... (1,236,354)
Total other comprehensive income.. $ 5,165,172
============
Year Ended September 30, 1999
---------------------------------------------------------
Market
Price Total Market Unrealized Gain
Shares Per Share Value Net of Tax
--------- ------------ ------------ ---------------
September 30, 1998 5,660,000 $ 49.625 $280,877,500 $170,171,359
September 30, 1999 5,055,000 52.000 262,860,000 157,167,965
-------- ------------ ------------
Change in Freddie Mac stock....... (605,000) $ 2.375 $(18,017,500) (13,003,394)
Other comprehensive
loss related to
mortgage securities
and other investments.......... (10,727,875)
Total other comprehensive loss.... $(23,731,269)
============
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 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 $45.4 million, or
21.2%, increase in the balance of total loans, which rose to $259.7 million at
September 30, 2000. Average loans
67
for the year ended September 30, 2000 were $180.7 million compared to $187.0
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 related
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 69
basis points and total interest-earning assets excluding Freddie Mac stock
averaged $652.8 million for the year ended September 30, 2000, up from $481.4
million from the comparable 1999 period, a 36.2% increase. The average yield on
loans, net, increased 46 basis points to 8.77%, 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 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
combined 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 the average balance of borrowed
funds is attributable to our use of borrowed
68
funds to purchase mortgage related securities and fund loan growth during the
year. The increase in the average 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 5 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 $174.4 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.
Our 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 exceeds 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 $3.9 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 81 basis points to
0.27% for the year ended September 30, 2000 from negative 0.54% 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
would 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 25 basis points to 1.98% for the year
ended September 30, 2000.
Provision for Loan Losses and Asset Quality
For the year ended September 30, 2000, we provided $1.4 million for loan
losses, compared to $240,000 for the year ended September 30, 1999. Gross
charge-offs totaled $1.1 million for the year ended September 30, 2000 as
compared to the prior year total of $420,000. These charge-offs in 2000
primarily
69
relate to the auto loan portfolio and other loans acquired in the Citizens
acquisition. The higher provision in 2000 reflects:
(1) higher levels of charge-offs and non-performing loans - Net charge-
offs for the year ended September 30, 2000 were $773,801 compared to
net charge-offs of $336,282 for the year ended September 30, 1999.
Non-performing loans at September 30, 2000 were $2.8 million compared
to $2.0 million at September 30, 1999. The largest components of this
increase was a $301,000 increase in nonaccrual auto loans, a $225,000
increase in nonaccrual nonresidential loans and a $225,000 increase in
nonaccrual 1-4 family residential permanent loans;
(2) a weakening economic environment - Local employer West Point Stevens,
the largest single employer in the West Point area, announced in June
2000 that it would expense $125.0 million in reorganization charges,
consolidate units and out source work to cut costs. In addition,
Powertel, a regional provider of wireless telephone services
headquartered in West Point, is in the process of being purchased by
VoiceStream (Deutsch Telekom); and
(3) growth in the commercial and commercial real estate loan portfolios of
$20.0 million and $5.6 million in consumer loans - CharterBank's
reserve methodology, as outlined on page 99, requires reserves based
on a percentage of the outstanding balance for each type of loan. The
percentage is based on CharterBank's estimate of losses inherent
within that type of loan.
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 fiscal 2000 charge-offs of the
portfolio acquired in the Citizens acquisition. The relatively high coverage
ratio for both years as compared to other community banks and CharterBank's
historical level reflects the additional losses inherent in the portfolio
acquired in the Citizens acquisition, the growth in the commercial real estate
portfolio, and signs of a slowdown in the local economy.
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.
The table below shows under-performing and non-performing assets:
September 30, 2000 September 30, 1999
------------------ ------------------
(In thousands)
Underperforming loans.................. $ 159 $ -
Total non-performing loans............. 2,831 1,989
Foreclosed real estate, net............ 630 222
Total non-performing assets............ 3,461 2,211
Non-performing loans to total loans.... 1.09% 0.93%
Non-performing assets to total assets.. 0.37% 0.24%
Our allowance for loan loss methodology is a loan classification based
system. We base the required reserve on a percentage of the loan balance for
each type of loan and classification level. Doubtful, substandard and special
mention loans are reserved at 60.0%, 17.5% and 5.0% respectively. Loans may be
classified manually and are automatically classified if they are not previously
classified when they reach certain levels of delinquency, no longer than 90 days
delinquent. Unclassified loans are reserved at different percentages based on
our perception of the inherent losses in the type of loan. The conforming 1-4
family loans in the portfolio are reserved at lower percentages. Reserve
percentages are based on each individual lending program and its loss history
and underwriting characteristics including loan to value, credit score, debt
coverage, collateral, and capacity to service debt. We update credit scores on
our portfolio approximately every eighteen months and analyze based on loan
plan, loan to value, and credit score. This analysis is used to validate the
loan loss reserve matrix as well as assist in establishing overall lending
direction.
70
Noninterest Income
Noninterest income decreased to $1.9 million for the year ended September
30, 2000 compared with $38.7 million in the prior year. The primary 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 and donation 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.
Noninterest 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.
Noninterest 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
$523,000 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 reevaluation of the fee structure on deposit accounts.
Noninterest Expense
Total noninterest 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 CharterBank.
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 properties acquired in the Citizens acquisition for the entire fiscal
year in 2000.
71
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
intangible assets acquired in the Citizens acquisition 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 in connection with the Citizens acquisition in August 1999.
Although Citizens was not a going concern at the time of the Citizens
acquisition, CharterBank believed that the purchase of assets and assumption of
liabilities was a strategic investment for CharterBank that would be profitable.
However, after one year of operations following the Citizens acquisition,
CharterBank performed an analysis of expected cash flows associated with
the assets purchased and liabilities assumed in the Citizens acquisition. This
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. More specifically, the
analysis showed that:
. reduced loans outstanding from prepayments and charge-offs
significantly reduced actual and projected interest income;
. actual and projected noninterest income dropped significantly as
CharterBank experienced deposit run-off; and
. CharterBank was unable to achieve the projected reductions in
operating expenses.
Based on this analysis, it became evident that even the marginal benefits
anticipated from the Citizens acquisition would not be realized, and thus,
CharterBank determined that the goodwill acquired in the Citizens acquisition
was impaired. Accordingly, CharterBank recorded the impairment loss of $3.6
million for the year ended September 30, 2000.
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. 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.
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
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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.
Year Ended September 30, 1999
--------------------------------------------------------------
Market Price Total Market Unrealized Gain
Shares Per Share Value Net of Tax
--------- ------------ ------------- ---------------
September 30, 1998 5,660,000 $49.625 $280,877,500 $170,171,359
September 30, 1999 5,055,000 52.000 262,860,000 157,167,965
------- ------------ ------------
Change in Freddie Mac stock....... (605,000) $ 2.375 $(18,017,500) (13,003,394)
Other comprehensive
loss related to
mortgage securities
and other investments.......... (10,727,875)
Total other comprehensive loss.... $(23,731,269)
============
73
Year Ended September 30, 1998
--------------------------------------------------------------
Market Price Total Market Unrealized Gain
Shares Per Share Value Net of Tax
--------- ------------ ------------- ---------------
September 30, 1997 5,660,000 $35.250 $199,515,000 $119,498,794
September 30, 1998 5,660,000 49.625 280,877,500 170,171,359
------- ------------ ------------
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 and dividend income increased $7.8 million to $37.0 million
for the year ended September 30, 1999 compared to $29.2 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 $122.2
million to $481.4 million for the year ended September 30, 1999 as compared to
$359.2 million for the year ended September 30, 1998. The average yield on
interest-earning assets excluding Freddie Mac stock decreased 33 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 $27.7 million to $180.8
million for the year ended September 30, 1999 as compared to $153.0 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 8.59% for the year ended September 30, 1998 to 8.31% for the same
period in 1999 due to the lower interest rates that prevailed in the mortgage
market during the majority of 1999.
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
74
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 for the year ended September 30, 1999 increased $3.9
million or 39.5%, to $13.76 million compared with $9.8 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 2 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
was 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. The high proportion of securities assets
75
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 22 basis points to negative 0.54% for the year ended September 30,
1999 from negative 0.76% for the prior year. The increase was attributable to
growth in interest-earning assets other than our Freddie Mac stock during the
year and an increase in the quarterly dividend per share of Freddie Mac stock
during the year from $0.12 per share to $0.15 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 1.73% for the year ended September 30, 1999.
Provision for Loan Losses and Asset Quality
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
higher inherent losses 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 1.23% at September 30, 1998. The increase in coverage was
attributable to approximately $3.8 million in loan loss reserves that were
acquired in the Citizens acquisition. The increased coverage reflected the
significantly higher probable and inherent losses in the acquired loan
portfolio. In particular, the consumer auto loan portfolio acquired in the
Citizens acquisition was identified by management as containing significant
inherent losses 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.
The table below shows total non-performing loans:
September 30, 1999 September 30, 1998
------------------ ------------------
(In thousands)
Total non-performing loans............. $1,989 $ 306
Foreclosed real estate, net............ 222 130
Total non-performing assets............ 2,211 436
Non-performing loans to total loans.... 0.93% 0.18%
Non-performing assets to total assets.. 0.24% 0.06%
76
Our allowance for loan loss methodology is a loan classification based
system. We base the required reserve on a percentage of the loan balance for
each type of loan and classification level. Doubtful, substandard and special
mention loans are reserved at 60.0%, 17.5% and 5.0% respectively. Loans may be
classified manually and are automatically classified if they are not previously
classified when they reach certain levels of delinquency. Unclassified loans are
reserved at different percentages based on our perception of the inherent losses
in the type of loan.
Noninterest Income
Total noninterest 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
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.
Noninterest Expense
Total noninterest 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 CharterBank.
Salaries and employee benefits increased by $695,000 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.
77
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 $36.0 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.
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
March 31, 2001 and September 30, 2000, our maximum borrowing capacity from the
Federal Home Loan Bank is approximately $280.5 million and $283.9 million,
respectively. At March 31, 2001 and September 30, 2000 we had outstanding
borrowings of $236.8 million and $234.8 million with unused borrowing capacity
of $43.7 million and $49.1 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 March 31, 2001, repurchase agreements totaled $115.6 million, a $1.9
million decrease over the amount outstanding at September 30, 2000 of $117.5
million. The funding for this reduction in wholesale deposits came from the sale
of fixed-rate mortgage securities. Wholesale deposits were $40.9 million at
March 31, 2001 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.
78
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 six months ended
March 31, 2001, we originated approximately $59.3 million in total loans.
Residential mortgage loans accounted for 64.1 % of the originations,
construction loans accounted for 18.4% of the originations and commercial real
estate for 13.4% of the originations during the six month period ended March 31,
2001. 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 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 $46.5
million for the six months ended March 31, 2001 and $124.1 million for the year
ended September 30, 2000 and $474.3 million for the year ended September 30,
1999. At March 31, 2001 and September 30, 2000, CharterBank had loan
commitments to borrowers of approximately $7.6 million and $5.1 million,
respectively and available home equity and unadvanced lines of credit of
approximately $9.4 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 $185.2 million at March 31, 2001, a $89.1 million decrease from the $274.3
million balance at September 30, 2000. The decrease reflects the maturing of
approximately $89.3 million in brokered deposits during the period 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 $112.3 million and $202.2
million at March 31, 2001 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 March 31,
2001 and September 30, 2000, we exceeded each of the applicable regulatory
capital requirements. Our tier 1 capital was $54.3 million and $51.7 million at
March 31, 2001 and September 30, 2000, respectively. Tier 1 capital represented
14.2% and 13.2% of risk-weighted assets at March 31, 2001 and September 30, 2000
respectively. Tier 1 capital represented 8.8% and 7.5% of total regulatory
assets at March 31, 2001 and September 30, 2000 which exceeds the well
capitalized requirements of 5.0%. At March 31, 2001 and September 30, 2000,
respectively, we had a risk-based total capital of $108.7 million and $103.4
million, a risk-based capital ratio of 28.4% 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.
79
The construction of our new Auburn branch is under contract for $1.7
million. We anticipate incurring an additional $200,000-$300,000 of equipment
related capital expenses in connection with the Auburn branch. In connection
with the construction of the Auburn branch, we previously purchased the land
upon which the branch is being built for approximately $500,000. 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.
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
80
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, FASB 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.
Impact of Inflation and Changing Prices
The consolidated 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.
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.
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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.
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.
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At March 31, 2001 and September 30, 2000, we had total loans receivable of
$252.3 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
$153.3 million, or 60.8%, and $152.8 million, or 58.9%, of total loans at March
31, 2001 and September 30, 2000, respectively. Loans secured by mortgages on
commercial real estate totaled $59.2 million at March 31, 2001 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 or 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 March 31, 2001, management estimates that approximately $20.0 million of
total commercial real estate loans are secured by real estate in the Atlanta
metropolitan area, approximately $25.0 million of total commercial real estate
loans are secured by real estate in the local bank market, 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 March 31, 2001 and September
30, 2000 consisted of consumer loans totaling $26.7 million and $29.9 million,
respectively, real estate construction loans of $6.0 million and $7.1 million,
respectively, and commercial loans of $7.1 million and $9.0 million,
respectively. Our consumer loan portfolio at March 31, 2001 contains about $2.1
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 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.
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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 March 31, At September 30
----------------------------------------------------------------------------
2001 2000 1999 1998
------------------- ------------------ ------------------ ------------------
Percent Percent Percent Percent
of of of of
Amount Total Amount Total Amount Total Amount Total Amount
-------- ------- -------- ------- -------- ------- -------- ------- --------
(Dollars in Thousands)
1-4 family residential
real estate(1).......... $153,320 60.8% $152,822 58.9% $132,036 61.6% $116,395 69.0% $101,399
Commercial real estate..... 59,194 23.4 60,838 23.4 46,545 21.7 34,343 20.4 22,419
Consumer and other(2)...... 26,718 10.6 29,915 11.5 24,353 11.4 9,026 5.4 6,126
Commercial................. 7,096 2.8 8,987 3.5 3,245 1.5 3,601 2.1 3,116
Real estate construction(3) 6,003 2.4 7,138 2.7 8,038 3.8 5,295 3.1 4,390
-------- ----- -------- ----- -------- ----- -------- ----- --------
Total loans............. 252,331 100.0% 259,700 100.0% 214,217 100.0% 168,660 100.0% 137,450
===== ===== ===== =====
Less:
Net deferred loan costs
(fees).................. 43 113 (51) (246) (348)
Allowance for loan losses.. (5,375) (6,346) (5,710) (2,054) (1,846)
-------- -------- -------- -------- --------
Loans receivable, net... $246,999 $253,467 $208,456 $166,360 $135,256
======== ======== ======== ======== ========
---------------------------------
1997 1996
---------------------------------
Percent Percent
of of
Total Amount Total
------- --------- -------
1-4 family residential
real estate(1).......... 73.7% $ 78,951 78.9%
Commercial real estate..... 16.3 10,902 10.9
Consumer and other(2)...... 4.5 5,411 5.4
Commercial................. 2.3 3,878 3.9
Real estate construction... 3.2 875 0.9
----- -------- -----
Total loans............. 100.0% 100,017 100.0%
===== =====
Less:
Net deferred loan costs
(fees).................. (285)
Allowance for loan losses.. (1,627)
--------
Loans receivable, net... $ 98,105
========
-----------------------------------
(1) Excludes loans held for sale.
(2) Includes home equity loans and second mortgage loans.
(3) Net of undisbursed proceeds on loans-in-process.
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Loan Maturity and Repricing. The following table shows the repricing dates
or contractual maturity dates as of March 31, 2001. 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 March 31, 2001
---------------------------------------------------------------------------
1-4 family
Residential
Real Estate Commercial Consumer Real Estate
Loans Real Estate and Other Commercial Construction(1) Totals
----------- ----------- --------- ---------- --------------- ------
(In thousands)
Amounts due:
Within one year...................... $ 50,471 $15,444 $10,715 $3,164 $6,003 $ 85,797
After one year:
One to three years................ 29,829 4,882 2,968 649 - 38,328
Three to five years............... 47,126 14,531 1,506 2,957 - 66,120
Five to ten years................. 7,759 18,201 4,234 245 - 30,439
Over ten years.................... 18,135 6,136 7,295 81 - 31,647
-------- ------- ------- ------ ------------ --------
Total due after one year............. 102,849 43,750 16,003 3,932 - 166,534
-------- ------- ------- ------ ------------ --------
Total amount due: $153,320 $59,194 $26,718 $7,096 $6,003 $252,331
======== ======= ======= ====== ============ ========
(1) Presented net of undisbursed proceeds on loans-in-process.
The following table presents, as of March 31, 2001, the dollar amount of
all loans contractually due or scheduled to reprice after March 31, 2002 and
whether such loans have fixed interest rates or adjustable interest rates.
Due After March 31, 2002
----------------------------
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
1-4 family residential
real estate.......... $31,707 $71,142 $102,849
Commercial real estate.. 30,160 13,590 43,750
Consumer and other...... 16,003 - 16,003
Commercial.............. 2,991 941 3,932
------- ------- --------
Total loans.......... $80,861 $85,673 $166,534
======= ======= ========
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The following table presents our loan originations, purchases, sales and
principal payments for the periods indicated.
For the Six Months
Ended March 31, For the Years Ended September 30,
---------------------- ----------------------------------
2001 2000 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............. 38,008 46,839 92,504 139,499 95,766
1-4 family real estate acquired
in Citizens acquisition...................... - - - 8,405 -
Commercial real estate and commercial.......... 7,975 16,736 55,445 10,725 16,561
Commercial real estate and commercial
acquired in Citizens acquisition............. - - - 9,122 -
Consumer and other loans....................... 2,327 8,730 15,506 10,769 4,576
Consumer and other loans acquired
through Citizens acquisition................. - - - 9,455 -
Real estate construction....................... 10,953 8,596 7,696 14,457 8,202
Real estate construction loans acquired
through Citizens acquisition................. - - - 369 -
-------- -------- -------- -------- --------
Total originations and loans acquired
through Citizens acquisition................ 59,263 80,901 171,151 202,801 125,105
Less:
Principal repayments, unadvanced funds and
other, net................................... 43,181 32,756 87,430 133,428 30,590
Sale of residential mortgage loans, principal
balance...................................... 21,525 16,716 36,186 23,129 63,204
Loan charge-offs (recoveries), and transfers
to foreclosed real estate.................... 1,926 1,329 2,052 687 101
-------- -------- -------- -------- --------
Total deductions............................. 66,632 50,801 125,668 157,244 93,895
Net loan activity.............................. (7,369) 30,100 45,483 45,557 31,210
-------- -------- -------- -------- --------
Ending balance............................... $252,331 $244,317 $259,700 $214,217 $168,660
======== ======== ======== ======== ========
-------------------------
(1) Excludes loans held for sale.
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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 March 31, 2001 and September 30, 2000,
loans on one-to-four-family properties accounted for 60.8% and 58.9% 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
$38.0 million for the six months ending March 31, 2001, $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 March 31, 2001 was $104,000 and $105,000
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 $10.0 million in one- to four-
family adjustable rate mortgage loans in the six months ended March 31, 2001 and
approximately $70.0 million in the year ended September 30, 2000. At March 31,
2001 and September 30, 2000, 70.8% 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
87
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 March 31, 2001, our
portfolio contained $68.9 million of 5-1 and similar adjustable rate loans with
a weighted average rate of 8.10%. 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 $536,000 and $730,000 of our
non-interest income for the six months ended March 31, 2001 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 March 31, 2001 and
September 30, 2000, CharterBank serviced loans for Freddie Mac with an aggregate
balance of $141.4 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 March
31, 2001 and September 30, 2000, we had $21.1 million and $22.3 million,
respectively, of home equity and second mortgage loans. We also had $4.9 million
and $5.0 million of unfunded home equity commitments at March 31, 2001 and
September 30, 2000, respectively.
88
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 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 March 31, 2001 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
construction permanent loan with a commitment of $5.6 million at September 30,
2000 and $5.2 million at March 31, 2001 with approximately $371,000 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
89
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
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 March 31, 2001 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 March 31, 2001 and September 30, 2000, the consumer loan portfolio
totaled $26.7 million and $29.9 million, respectively, or 10.6% 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 March 31, 2001, we had a total of $2.1 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 $1.0 million for the six months ended March 31, 2001 and
$600,000 for the year ending September 30, 2000. At March 31, 2001, management
has established reserves of over $1,000,000 for consumer loans with the reserves
on auto loans being the primary component of these reserves.
90
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 $855,000
and $639,000 at March 31, 2001 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:
. 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
91
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.
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 March 31, 2001, and September 30, 2000, 1999 and 1998, we
had $1.7 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 $50,000 for the six month period
ended March 31, 2001. For the year ended September 30, 2000, there would have
been $176,000 of additional interest income recorded on these loans.
92
At September 30,
At March 31, ------------------------------------------
2001 2000 1999 1998 1997 1996
----------- ------- ---- ---- ---- -----
(In thousands)
Underperforming loans - accruing loans
delinquent 90 days or more........... $ 515 $ 159 $ - $ - $ - $ -
====== ====== ====== ===== ====== ======
Total non-performing loans.............. 1,661 2,831 1,989 306 1,173 1,611
Foreclosed real estate, net............. 768 630 222 130 270 98
------ ------ ------ ----- ------ ------
Total non-performing assets............. 2,429 3,461 2,211 436 1,443 1,709
====== ====== ====== ===== ====== ======
Non-performing loans to total loans..... 0.66% 1.09% 0.93% 0.18% 0.85% 1.61%
====== ====== ====== ===== ====== ======
Non-performing assets to total assets... 0.26% 0.37% 0.24% 0.06% 0.29% 0.49%
====== ====== ====== ===== ====== ======
Nonperforming assets at March 31, 2001 and September 30, 2000, 1999 and 1998
were $2.4 million, $3.5 million, $2.2 million, and $436,000 respectively. Of
these totals, $88,000, $824,000, $523,000, and $0 respectively represented auto
loans.
We generally 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 March 31, 2001, September
30, 2000, and September 30, 1999, impaired loans totaled $400,000, $1,200,000
and $2,000,000 respectively. Approximately $309,000, $460,000, and $500,000 of
total impaired loans at March 31, 2001, September 30, 2000, and September 30,
1999, respectively, relate to loans acquired through the Citizens acquisition.
At March 31, 2001 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 March 31, 2001 and September 30, 2000 and 1999,
respectively, we had $768,000, $630,000 and $222,000 in foreclosed real estate.
93
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 Six Months
Ended March 31, At or for Years Ended September 30,
--------------------- ------------------------------------------------------
2001 2000 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............ (33) (25) (104) (49) (156) (37) (30)
Commercial real estate................. - (91) (91) - - - -
Commercial............................. (364) (21) (26) (133) (1) (2) -
Consumer and other..................... (1,197) (349) (713) (238) (100) (84) (64)
Real estate construction............... (23) (204) (204) - - - -
-------- -------- -------- -------- -------- -------- --------
Total charge-offs...................... (1,617) (690) (1,138) (420) (257) (123) (94)
-------- -------- -------- -------- -------- -------- --------
Recoveries:
1-4 residential real estate............ 119 1 32 1 25 - 3
Commercial real estate................. 21 18 18 - 220 - -
Commercial............................. - 20 20 - - - 20
Consumer and other..................... 206 176 294 83 40 42 68
Real estate construction............... - - - - - - -
-------- -------- -------- -------- -------- -------- --------
Total recoveries....................... 346 215 364 84 285 42 91
-------- -------- -------- -------- -------- -------- --------
Net (charge-offs) recoveries.............. (1,271) (475) (774) (336) 29 (81) (3)
Provision for loan losses................. 300 180 1,410 240 180 300 171
-------- -------- -------- -------- -------- -------- --------
Balance at end of period.................. $ 5,375 $ 5,415 $ 6,346 $ 5,710 $ 2,054 $ 1,846 $ 1,627
======== ======== ======== ======== ======== ======== ========
Total loans receivable (2)................ $252,331 $244,317 $259,700 $214,217 $168,660 $137,450 $100,017
======== ======== ======== ======== ======== ======== ========
Average loans outstanding................. $257,751 $226,970 $242,868 $178,496 $152,728 $121,523 $ 82,135
======== ======== ======== ======== ======== ======== ========
Allowance for loan losses
as a percent of total
loans receivable (2)................... 2.13% 2.22% 2.44% 2.67% 1.22% 1.34% 1.63%
======== ======== ======== ======== ======== ======== ========
Net loans (charged off)
recovered as a percent
of average outstanding(3).............. (0.99)% (0.42)% (0.32)% (0.19)% 0.02% (0.07)% -%
======== ======== ======== ======== ======== ======== ========
-----------------------------------
(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.
94
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;
. estimated losses 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 OTS 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 six months ended March 31, 2001 and the year ended September 30,
2000, we increased our allowance for loan losses through a $300,000 and $1.4
million provision for loan losses, respectively, based on our evaluation of the
items discussed above. Management believes, that to the best of its
knowledge, the allowance for loan losses is sufficient to cover all known losses
and inherent losses in the current loan portfolio at March 31, 2001 and
September 30, 2000. 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 Six Months Ended March 31, 2001 and 2000 and the
Years Ended September 30, 2000, 1999 and 1998 -- Provision for Loan
Losses."
95
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 September 30,
At March 31, --------------------------------------------------------------
2001 2000 1999
----------------------------- ------------------------------ -----------------------------
Percent Percent Percent
of loans of loans of loans
Loan in Each Loan in Each Loan in Each
Balances Category Balances Category Balances Category
by to Total by to Total by to Total
Loan Category Amount Category Loans Amount Category Loans Amount Category Loans
----- -------- ----- ------ -------- ----- ------ -------- -----
(Dollars in thousands)
1-4 family residential
real estate............. $1,421 $153,320 60.8% $1,228 $152,822 58.9% $1,529 $132,036 61.6%
Commercial real estate..... 1,632 59,194 23.4 1,487 60,838 23.4 1,448 46,545 21.7
Consumer loans and
other(1)................ 1,030 26,718 10.6 2,345 29,915 11.5 2,154 24,353 11.4
Commercial................. 425 7,096 2.8 623 8,987 3.5 376 3,245 1.5
Real estate construction... 411 6,003 2.4 236 7,138 2.7 119 8,038 3.8
Unallocated................ 456 - - 427 - - 84 - -
------ -------- ------ ------ -------- ------ ------ -------- ------
Total allowance for loan
losses.................. $5,375 $252,331 100.00% $6,346 $259,700 100.00% $5,710 $214,217 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
At September 30,
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------
Percent Percent Percent
of loans of loans of loans
Loan In Each Loan In Each Loan In Each
Balances Category Balances Category Balances Category
by to Total by to Total by to Total
Loan Category Amount Category Loans Amount Category Loans Amount Category Loans
------ -------- -------- ------ -------- ------- ------ -------- --------
(Dollars In Thousands)
1-4 family residential
real estate............. $ 727 $116,395 69.0% $ 625 $101,399 73.7% $ 526 $ 78,951 78.9%
Commercial real estate..... 684 34,343 20.4 725 22,419 16.3 559 10,902 10.9
Consumer loans and
other(1)................ 248 9,026 5.4 162 6,126 4.5 73 5,411 5.4
Commercial................. 54 3,601 2.1 56 3,116 2.3 15 3,878 3.9
Real estate construction... 58 5,295 3.1 44 4,390 3.2 16 875 0.9
Unallocated................ 283 - - 234 - - 438 - -
------ -------- ------ ------ -------- ------ ------ -------- ------
Total allowance for loan
losses.................. $2,054 $168,660 100.00% $1,846 $137,450 100.00% $1,627 $100,017 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
_____________________
(1) Includes home equity lines of credit, excludes loans held for sale.
96
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.
97
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 $280.4 million, of which $236.8
million of borrowings 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
6.53% and 6.97% as of March 31, 2001 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 March 31, 2001
and September 30, 2000. For information see "Management Discussion and
Analysis - Carrying Values, Yields and Maturities."
98
Investment Portfolio. The following table sets forth the composition of
our investment securities portfolio at the dates indicated.
At September 30,
At March 31, -----------------------------------------------------------------------
2001 2000 1999 1998
---------------------- ---------------------- ----------------------- ----------------------
Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value
---------- --------- ----------- --------- ----------- ---------- ---------- ----------
(Dollars in Thousands)
Investment Securities:
Federal Home Loan Bank
stock..................... $ 12,700 $ 12,700 $ 12,588 $ 12,588 $ 10,408 $ 10,408 $ 9,890 $ 9,890
SBA loan participation
certificates.............. - - - - - - - -
U.S. Government agencies... 7,932 7,751 14,449 12,880 31,388 29,950 - -
Other debt securities...... 1,000 1,035 1,000 1,003 2,044 2,256 1,756 1,995
-------- -------- -------- -------- -------- -------- -------- --------
Total investment
securities............. $ 21,632 $ 21,486 $ 28,037 $ 26,471 $ 43,840 $ 42,614 $ 11,646 $ 11,885
-------- -------- -------- -------- -------- -------- -------- --------
Mortgage-backed and
mortgage-related
securities:
Ginnie Mae................. 43,474 42,925 85,700 82,171 81,651 77,919 10,564 10,547
Fannie Mae................. 43,126 42,715 52,832 50,783 64,839 62,536 45,591 45,602
Freddie Mac................ 4,165 4,185 25,043 24,355 24,357 23,785 22,498 22,667
Non-agency................. - - - - - - 1,970 1,905
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed
and mortgage-
related securities.. 90,765 89,825 163,575 157,309 170,847 164,240 80,623 80,721
-------- -------- -------- -------- -------- -------- -------- --------
Collateralized mortgage
obligations:
Fannie Mae................. 69,927 69,854 78,831 77,777 61,621 60,528 81,894 82,682
Freddie Mac................ 79,396 79,175 70,513 69,369 60,493 59,464 42,180 42,660
Non-agency................. 60,447 58,361 67,198 59,946 74,288 68,950 44,413 44,772
Ginnie Mae................. 3,517 3,522 3,518 3,306 3,504 3,316 - -
-------- -------- -------- -------- -------- -------- -------- --------
Total collateralized
mortgage obligations... 213,287 210,912 220,060 210,398 199,906 192,258 168,487 170,114
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed
securities and
collateralized
mortgage
obligations....... 304,052 300,737 383,635 367,707 370,753 356,498 249,110 250,835
-------- -------- -------- -------- -------- -------- -------- --------
Total investment and
mortgage securities.... $325,684 $322,223 $411,672 $394,178 $414,593 $399,112 $260,756 $262,720
======== ======== ======== ======== ======== ======== ======== ========
Freddie Mac common stock... $ 6,886 $327,716 $ 6,886 $273,286 $ 6,886 $262,860 $ 7,642 $280,877
======== ======== ======== ======== ======== ======== ======== ========
Total investment and
mortgage securities
and Freddie Mac common
stock.................. $332,570 $649,939 $418,558 $667,464 $421,479 $661,972 $268,398 $543,597
======== ======== ======== ======== ======== ======== ======== ========
At September 30,
---------------------------------------------
1997 1996
---------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------------------- ---------------------
Investment Securities:
Federal Home Loan Bank
stock..................... $ 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...... 1,929 2,047 1,093 1,179
-------- -------- -------- --------
Total investment
securities............. $ 16,456 $ 16,557 $ 14,327 $ 14,374
-------- -------- -------- --------
Mortgage-backed and
mortgage-related
securities:
Ginnie Mae................. 5,074 5,057 2,997 2,945
Fannie Mae................. 23,280 23,247 6,323 6,281
Freddie Mac................ 6,423 6,426 4,546 4,584
Non-agency................. - - - -
-------- -------- -------- --------
Total mortgage-backed
and mortgage-
related securities.. 34,777 34,730 13,866 13,810
-------- -------- -------- --------
Collateralized mortgage
obligations:
Fannie Mae................. 45,672 45,805 28,481 28,027
Freddie Mac................ 37,941 38,138 28,246 28,153
Non-agency................. 10,240 10,324 17,758 17,716
Ginnie Mae................. - - - -
-------- -------- -------- --------
Total collateralized
mortgage obligations... 93,853 94,267 74,485 73,896
-------- -------- -------- --------
Total mortgage-backed
securities and
collateralized
mortgage
obligations....... 128,630 128,997 88,351 87,706
-------- -------- -------- --------
Total investment and
mortgage securities.... $145,086 $145,554 $102,678 $102,080
======== ======== ======== ========
Freddie Mac common stock... $ 7,642 $199,515 $ 7,709 $139,566
======== ======== ======== ========
Total investment and
mortgage securities
and Freddie Mac common
stock.................. $152,728 $345,069 $110,387 $241,646
======== ======== ======== ========
99
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 March 31, 2001 At September 30, 2000
-------------------------------------- --------------------------------------
Amortized Unrealized Amortized Unrealized
Costs Market Value Gain/(Loss) Costs Market Value Gain/(Loss)
---------- ------------ ------------ ---------- ------------ ------------
(Dollars in Thousands)
Fixed rate investment securities:
U.S. Government agencies...................... $ 7,932 $ 7,751 $ (181) $ 14,449 $ 12,880 $ (1,569)
-------- -------- -------- -------- -------- --------
Total fixed rate investment securities..... 7,932 7,751 (181) 14,449 12,880 (1,569)
Fixed rate mortgage-backed and
mortgage-related securities:
Ginnie Mae.................................... 41,293 40,731 (562) 83,450 79,960 (3,490)
Fannie Mae.................................... 34,219 33,794 (425) 47,213 45,263 (1,950)
Freddie Mac................................... 4,165 4,185 20 4,290 4,088 (202)
-------- -------- -------- -------- -------- --------
Total fixed rate mortgage-backed and
mortgage related securities............ 79,677 78,710 (967) 134,953 129,311 (5,642)
Fixed rate collateralized
mortgage obligations:
Fannie Mae.................................... 2,860 2,913 53 15,649 15,330 (319)
Freddie Mac................................... 4,341 4,383 42 15,714 15,092 (622)
Non-agency.................................... 53,471 51,394 (2,078) 68,425 61,161 (7,264)
Ginnie Mae.................................... 3,517 3,522 4 3,518 3,306 (212)
-------- -------- -------- -------- -------- --------
Total fixed rate collateralized
mortgage obligations................... 64,189 62,212 (1,977) 103,306 94,889 (8,417)
Total fixed rate mortgage-backed securities
and collateralized mortgage
obligations............................ 143,866 140,922 (2,944) 238,259 224,200 (14,059)
Total fixed rate investment and mortgage
securities............................. 151,798 148,673 (3,125) 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......................... 11,087 11,115 28 28,622 27,998 (624)
Variable rate collateralized
mortgage obligations....................... 149,099 148,700 (399) 116,754 115,509 (1,245)
-------- -------- -------- -------- -------- --------
Total variable rate investment and
mortgage securities........................ 161,186 160,850 (336) 146,376 144,510 (1,866)
Federal Home Loan Bank stock.................. 12,700 12,700 - 12,588 12,588 -
Freddie Mac Common Stock...................... 6,886 327,716 320,830 6,886 273,286 266,400
-------- -------- -------- -------- -------- --------
Total investment and mortgage
securities and Freddie Mac common stock.... $332,570 $649,939 $317,369 $418,558 $667,464 $248,906
======== ======== ======== ======== ======== ========
100
Investment Portfolio Maturities. The composition and maturities of the
investment securities portfolio (debt securities) and the mortgage-backed
securities portfolio at March 31, 2001 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 More than Ten Years
------------------- ------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
Investment securities
available for sale:
Federal Agencies.......... $ - - $ - - $ - - $ 7,932 6.18%
Other debt securities..... 1,000 8.23% - - - - - -
--------- --------- ------- --------
Total investment
securities.............. 1,000 8.23 - - - - 7,932 6.18
--------- --------- ------- --------
Mortgage-backed securities
available for sale:
Ginnie Mae................ - - - - - - 43,474 6.35
Fannie Mae................ - - 5,400 6.47% 9,779 6.11% 27,948 6.49
Freddie Mac............... - - - - 54 6.44 4,111 6.24
--------- --------- ------- --------
Total mortgage-backed
securities.............. - - 5,400 6.47 9,833 6.11 75,533 6.39
--------- --------- ------- --------
Collateralized mortgage
obligations:
Fannie Mae................ - - - - - - 69,927 6.63
Freddie Mac............... - - - - 186 5.76 79,210 6.61
Non-agency................ - - - - 107 7.05 60,340 6.59
Ginnie Mae................ - - - - - - 3,517 6.78
--------- --------- ------- --------
Total collateralized
mortgage obligations.... - - - - 293 6.23 212,994 6.62
--------- --------- ------- --------
Total...................... $1,000 8.23% $5,400 6.47% $10,126 6.11% $296,458 6.38%
========= ========= ======= ========
Total Securities
----------------------------------
Weighted
Amortized Market Average
Cost Value Yield
--------- ------ --------
Investment securities
available for sale:
Federal Agencies.......... $ 7,932 $ 7,751 6.18%
Other debt securities..... 1,000 1,035 8.23
-------- --------
Total investment
securities.............. 8,932 8,786 6.41
-------- --------
Mortgage-backed securities
available for sale:
Ginnie Mae................ 43,474 42,925 6.35
Fannie Mae................ 43,126 42,715 6.40
Freddie Mac............... 4,165 4,185 6.24
-------- --------
Total mortgage-backed
securities.............. 90,765 89,825 6.36
-------- --------
Collateralized mortgage
obligations:
Fannie Mae................ 69,927 69,854 6.63
Freddie Mac............... 79,396 79,175 6.61
Non-agency................ 60,447 58,361 6.59
Ginnie Mae................ 3,517 3,522 6.78
-------- --------
Total collateralized
mortgage obligations.... 213,287 210,912 6.60
-------- --------
Total...................... $312,984 $309,523 6.53%
======== ========
101
U.S. Agency Obligations. The balances of U.S. Agency obligations of $7.8
million at March 31, 2001 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 March 31, 2001, equity securities are primarily
comprised of 5,055,000 shares of Freddie Mac common stock which had a per share
market value of $64.83 per share, a total market value of $327.7 million and a
cost basis of approximately $1.40 per share. The large unrealized pre-tax gain
of approximately $320.8 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 35.1% 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 79.9% 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
102
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 March 31, 2001, the estimated average life
of our fixed rate mortgage backed security portfolio was 10.1 years and of our
fixed rate collateralized mortgage obligation portfolio was 17.6 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.
103
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 March 31, -------------------------------
2001 2000
------------------------------ -------------------------------
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................. $ 43,474 14.30% $ 42,925 $ 85,700 22.33% $ 82,171
Fannie Mae................. 43,126 14.18 42,715 52,832 13.77 50,783
Freddie Mac................ 4,165 1.37 4,185 25,043 6.53 24,355
Other...................... - - - - - -
Collateralized mortgage
obligations available
for sale:
Fannie Mae................. 69,927 23.00 69,854 78,831 20.55 77,777
Freddie Mac................ 79,396 26.11 79,175 70,513 18.38 69,369
Other...................... 60,447 19.88 58,361 67,198 17.52 59,946
Ginnie Mae................. 3,517 1.16 3,522 3,518 0.92 3,306
-------- ------ -------- -------- ------ --------
Total................... $304,052 100.00% $300,737 $383,635 100.00% $367,707
======== ====== ======== ======== ====== ========
At September, 30
-----------------------------------------------------------------
1999 1998
------------------------------ -------------------------------
Amortized Percent of Market Amortized Percent of Market
Cost Total Value Cost Total Value
--------- ---------- ------ --------- ---------- -------
Mortgage-backed
securities available
for sale:
Ginnie Mae................. $ 81,651 22.01% $ 77,919 $ 10,564 4.24% $ 10,547
Fannie Mae................. 64,839 17.49 62,536 45,591 18.30 45,602
Freddie Mac................ 24,357 6.57 23,785 22,498 9.03 22,667
Other...................... - - - 1,970 0.79 1,905
Collateralized mortgage
obligations available
for sale:
Fannie Mae................. 61,621 16.62 60,528 81,894 32.88 82,682
Freddie Mac................ 60,493 16.32 59,464 42,180 16.93 42,660
Other...................... 74,288 20.04 68,950 44,413 17.83 44,772
Ginnie Mae................. 3,504 0.95 3,316 - - -
-------- ------ -------- -------- ------ --------
Total................... $370,753 100.00% $356,498 $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
Other...................... 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
======== ====== ======== ======== ====== ========
104
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
March 31, 2001, 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 March 31, 2001, our total deposits amounted to $185.2 million,
of which $144.3 million were retail deposits and $40.9 million were wholesale
deposits. Wholesale deposits consist of brokered certificates of deposit and/or
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 March 31, 2001 and September 30, 2000, demand deposits, NOW deposits,
savings, and money market accounts represented 25.1% 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
105
costs of our deposit accounts for the six months ended March 31, 2001 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/or 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 had no brokered deposits as of March 31, 2001. 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 $40.9 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 March 31, 2001, our credit union certificates of deposit totaled $40.9
million, or 22.1% of total deposits. At September 30, 2000, our credit union
certificates of deposit totaled $40.5 million, or 14.8% of total deposits.
106
Deposit Distribution Weighted Average. The following table sets forth the
distribution of our deposit accounts, by account type, at the dates indicated.
At March 31, ----------------------------
2001 2000
----------------------------- ----------------------------
Weighted Weighted
Average Average
Amount Percent Rates Amount Percent Rates
-------- ------- -------- ------ ------- --------
(Dollars in thousands)
Retail:
Non-certificated accounts:
Non-interest bearing
demand deposits (1)..... $ 8,715 4.71% -% $ 8,060 2.94% -%
NOW deposits............. 14,449 7.80 1.79 13,962 5.09 1.95
Savings deposits......... 8,328 4.50 1.99 8,386 3.06 1.99
Money market deposits.... 15,015 8.11 4.45 11,440 4.17 5.42
-------- ------ -------- ------
Total non-certificated
accounts................. 46,507 25.12 2.35 41,848 15.25 2.53
Certificates of deposit:
Due within 1 year........ 74,984 40.49 5.81 77,076 28.09 5.74
Over 1 year through 3
years................... 16,979 9.17 6.07 19,204 7.00 6.08
Over 3 years............. 5,819 3.14 6.40 6,418 2.34 6.32
-------- ------ -------- ------
Total retail certificates
of deposit................ 97,782 52.80 5.89 102,698 37.43 5.76
-------- ------ -------- ------
Total retail deposits.... 144,289 77.92 4.75 144,546 52.68 4.83
-------- ------ -------- ------
Wholesale:
Certificates of deposit
Due within 1 year......... 37,324 20.15 6.93 125,166 45.62 6.13
Over 1 year through 3
years.................... 3,574 1.93 6.95 4,659 1.70 6.55
Over 3 years.............. - - - - - -
-------- ------ -------- ------
Total wholesale:.......... 40,898 22.08 6.93 129,825 47.32 6.15
-------- ------ -------- ------
Total certificate
accounts................ 138,680 74.88 6.20 232,523 84.75 5.98
-------- ------ -------- ------
Total deposit accounts... $185,187 100.00% 5.07% $274,371 100.00% 5.37%
======== ====== ======== ======
At September 30,
--------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
Weighted Weighted
Average Average
Amount Percent Rates Amount Percent Rates
-------- ------- -------- ------ ------- --------
Retail:
Non-certificated accounts:
Non-interest bearing
demand deposits (1)..... $ 8,704 3.08% -% $ 2,608 1.92% -%
NOW deposits............. 14,495 5.12 2.00 5,169 3.81 2.42
Savings deposits......... 8,789 3.11 2.49 7,345 5.42 2.68
Money market deposits.... 9,686 3.42 4.10 6,160 4.54 4.08
-------- ------ -------- ------
Total non-certificated
accounts................. 41,674 14.73 2.17 21,282 15.69 2.69
Certificates of deposit:
Due within 1 year........ 87,533 30.93 5.07 63,435 46.78 5.73
Over 1 year through 3 18,755 6.63 5.45 12,363 9.12 5.69
years...................
Over 3 years............. 5,769 2.04 5.43 3,728 2.75 5.53
-------- ------ -------- ------
Total retail certificates
of deposit................ 112,057 39.60 5.09 79,526 58.64 5.71
-------- ------ -------- ------
Total retail deposits.... 153,731 54.33 4.30 100,808 74.34 5.08
-------- ------ -------- ------
Wholesale:
Certificates of deposit
Due within 1 year......... 84,206 29.76 5.25 26,782 19.75 5.94
Over 1 year through 3
years.................... 44,929 15.88 5.22 7,922 5.84 5.99
Over 3 years.............. 99 - 6.13 99 - 6.13
-------- ------ -------- ------
Total wholesale:.......... 129,234 45.67 5.24 34,803 25.66 5.95
-------- ------ -------- ------
Total certificate
accounts................ 241,291 85.27 5.17 114,329 84.31 5.79
-------- ------ -------- ------
Total deposit accounts... $282,965 100.00% 4.07% $135,611 100.00% 5.26%
======== ====== ======== ======
_________________________
(1) Includes mortgagors' escrow payments.
107
Deposit Flow. The following table summarizes the deposit activity of the
Bank for the periods indicated.
Six Months Ended
March 31, For the Years Ended September 30,
------------------ ---------------------------------
2001 2000 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of period... $274,371 $282,965 $282,965 $135,611 $ 89,889
Net (decrease) increase before
interest credited............. (93,664) (14,804) (17,679) 142,798 42,917
Interest credited................ 4,480 3,788 9,085 4,556 2,805
-------- -------- -------- -------- --------
Balance at end of period......... $185,187 $271,949 $274,371 $282,965 $135,611
======== ======== ======== ======== ========
Total (decrease) increase in
deposit accounts.......... $(89,184) $(11,016) $ (8,594) $147,354 $ 45,722
======== ======== ======== ======== ========
Percentage (decrease) increase... (32.50)% (3.89)% (3.04)% 108.66% 50.86%
C.D. Maturities. At March 31, 2001, we had $33.2 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.................. $ 6,885 6.16%
Over three months through six months.. 6,621 6.09
Over six months through 12 months..... 5,920 5.99
Over 12 months........................ 6,112 6.67
------- ----
Total.............................. $25,538 6.23%
======= ====
Wholesale:
Three months or less.................. $ 4,600 7.31%
Over three months through six months.. 600 6.51
Over six months through 12 months..... 1,500 6.65
Over 12 months........................ 1,000 6.93
------- ----
Total.............................. $ 7,700 7.07%
======= ====
Total................................. $33,238 6.42%
======= ====
108
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 March 31, 2001
-----------------------------------------------------------------------
Period To Maturity
-----------------------------------------------------------------------
Less than One to Two to More Than Percent of
One Year Two Years Three Years Three Years Total Total
--------- --------- ----------- ----------- ----- ----------
(Dollars in Thousands)
Retail:
4.00% and below.. $ - $ - $ - $ - $ - -
4.01% to 5.00%... 6,160 930 292 365 7,747 7.92%
5.01% to 6.00%... 38,480 4,617 2,629 1,220 46,946 48.01
6.01% to 7.00%... 29,532 4,842 2,910 3,989 41,273 42.21
7.01% and above.. 812 285 474 245 1,816 1.86
------- ------- ------ ------ ------- ------
Total........ $74,984 $10,674 $6,305 $5,819 $97,782 100.00%
======= ======= ====== ====== ======= ======
Wholesale:
4.00% and below.. - - - - - -
4.01% to 5.00%... 99 - - - 99 .24%
5.01% to 6.00%... 6,802 298 - - 7,100 17.36
6.01% to 7.00%... 5,876 1,290 199 - 7,365 18.01
7.01% and above.. 24,547 1,787 - - 26,334 64.39
------- ------- ------ ------ ------- ------
Total........ $37,324 $ 3,375 $ 199 $ - $40,898 100.00%
======= ======= ====== ====== ======= ======
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 March 31, 2001, our total
borrowings totaled $352.3 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.
109
Federal Home Loan Bank Advances. At March 31, 2001, our outstanding FHLB
advances totaled $236.7 million, as compared to $234.7 million at September 30,
2000. At March 31, 2001, 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;
. certain qualifying first mortgage loans with unpaid principal balances
totaling $147.1 million; and
. certain mortgage-backed securities, collateralized mortgage
obligations, corporate securities, and U.S. Government Agency
securities with an aggregate fair value of $125.6 million.
At March 31, 2001, CharterBank has available lines of credit commitments
with the FHLB totaling $280.5 million, of which $236.8 million was advanced and
$43.7 million was available at March 31, 2001.
Securities Sold Under Agreements to Repurchase. We had approximately $115.6
million and $117.5 million of securities sold under agreements to repurchase
outstanding at March 31, 2001 and September 30, 2000, respectively. The
securities sold under agreement to repurchase at March 31, 2001 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 $122.0 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 March 31, 2001 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.
110
The following table sets forth information concerning balances and interest
rates on the Bank'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 Six
Months Ended
March 31, At or for the Year Ended September 30,
-------------------------- --------------------------------------
2001 2000 2000 1999 1998
--------- -------- --------- -------- ---------
(Dollars in thousands)
Federal Home Loan Bank advances:
Average balance outstanding........ $239,517 $235,151 $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..................... 236,750 237,500 234,750 205,650 197,000
Weighted average interest rate
during the period.............. 6.26% 5.76% 6.25% 4.61% 5.07%
Weighted average interest rate at
end of period.................. 5.83% 6.11% 6.32% 5.34% 4.80%
Securities sold under agreements
to repurchase:
Average balance outstanding........ $130,281 $107,827 $122,726 $ 60,135 $ 59,660
Maximum amount outstanding at any
month-end during the period.... 157,963 137,127 153,308 111,320 127,765
Balance outstanding at end of
the period..................... 115,555 137,127 117,469 107,217 91,638
Weighted average interest rate
during the period.............. 6.49% 6.09% 6.64% 5.42% 5.82%
Weighted average interest rate at
end of period.................. 5.54% 5.11% 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.
111
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 six months ended March 31, 2001, CharterBank recognized
$(71,615) equity in the net earnings (loss) of the limited partnerships, and
$(28,602) and $448,000 for the years ended September 30, 2000 and 1999,
respectively. CharterBank's equity investment in the limited partnership
at March 31, 2001 was approximately $1.8 million. See Note 11 of the Notes to
Consolidated Financial Statements for further discussion of the limited
partnership interest.
112
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 (including approximately $500,000 used to purchase the land upon which
the branch is being built). 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 March 31, 2001, the
properties and leasehold improvements owned by us had an aggregate net book
value of $2.0 million.
Year of Lease
or License Deposits as of
Location Ownership Year Opened Expiration(1) March 31, 2001
--------------------------- --------- ----------- ------------- --------------
(In thousands)
Administrative/Main Office:
600 Third Avenue Owned 1965 - $94,332
West Point, Georgia
Branch Offices:
300 Church Street Owned 1976 - 23,184
LaGrange, Georgia
3500 20/th/ Avenue(2) Leased 1963 7/31/08 61,020
Valley, Alabama
91 River Road(2) Owned 1989 - 6,313
Valley, Alabama
Auburn, Alabama(3) Owned 2001 - -
Loan Production Offices:
15 Ruth Drive, Suite C Leased 1993 Month-to- -
Newnan, Georgia Month
118-C Enterprise Court Leased 1993 10/31/01 -
Columbus, Georgia
Airport Plaza Leased 1994 Month-to- 338
Auburn, Alabama(3) Month
___________________
(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, for the permanent branch but are
authorized to accept deposits in loan production office where we are
accepting deposits. We are not aggressively pursuing deposits.
113
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 March 31, 2001, 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 Holdings
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.
114
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
March 31, 2001, 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 March 31, 2001, 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;
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. 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.
Liquidity. CharterBank is required to maintain a sufficient amount of
liquid assets to ensure its safe and sound operation.
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 March 31, 2001, CharterBank met the criteria for being considered "well-
capitalized."
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
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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
March 31, 2001, 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.
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.
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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:
. 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;
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. 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;
. 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;
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. 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).
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
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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 and has not been audited for the past five
years. The last federal audit of CharterBank's federal tax return was related
to the fiscal year ended September 30, 1991.
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.
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.
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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.
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 March 31, 2001, the years when they began serving as directors
and the years when their current terms of office as directors will expire:
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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 51 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 March 31, 2001.
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.
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.
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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 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.
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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.
Executive Officers Who are Not Directors
Curtis R. Kollar, 49, 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, 49, 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
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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
___________________________
(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 each have entered into parallel
employment agreements with Mr. Robert Johnson to secure his services as
President and Chief Executive Officer. The employment agreements have 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. These
agreements provide 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 agreements also guarantee 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;
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. material reduction in duties, functions or responsibilities;
involuntary relocation of the executive's principal place of
employment to a location over 35 miles in distance from CharterBank's
principal office in West Point, Georgia and over 35 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.
The employment agreements also provide 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" 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 will enter into a two-year change of control agreement with
Bonnie F. Bonner and one-year change of control agreements with Curtis R.
Kollar, William C. Gladden, Linda Drummond and Lee Washam. These agreements
will be guaranteed by Charter Financial. 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 35 miles from CharterBank's principal office on
the day before the change of control and over 35 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
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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.
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 up to
8% of the shares sold in the offering to persons other than First Charter,
MHC. If CharterBank's post-reorganization tangible capital does not exceed
10%, purchases by the employee stock ownership plan may be limited to 7% of
the outstanding common stock of Charter Financial.
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
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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.
The Office of Thrift Supervision has proposed regulations which would
permit the ESOP to purchase up to 8% of 49.9% of the outstanding shares of
Charter Financial common stock, including those shares issued to First Charter,
MHC. These proposed regulations have not yet been adopted and may not be adopted
for the foreseeable future or at all, or if adopted, may permit ESOP purchases
in amounts lesser than permitted under the proposal. However, if the Office of
Thrift Supervision adopts these proposed regulations, the ESOP may purchase up
to 8% of 49.9% of the outstanding shares of Charter Financial common stock,
including those shares issued to First Charter, MHC, or 7% of 49.9% of the
outstanding common stock of Charter Financial if CharterBank's post-
reorganization tangible capital does not exceed 10%. If the proposed
regulations are adopted prior to the close of the offering, Charter Financial
intends to fund the ESOP with 8% of 49.9% of the outstanding shares of Charter
Financial.
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.
Mutual Fund Option Plan. CharterBank maintains the CharterBank Mutual Fund
Option Plan under which certain key employees and directors of CharterBank may
be granted options to purchase shares of selected mutual funds at a reduced
price. Under this plan, a plan
133
participant may elect to reduce the compensation which would otherwise be
received by him during the plan year. The amount of a participant's compensation
reduction is converted by means of a formula into an option to purchase selected
mutual fund shares at a discounted exercise price. The formula provides that the
number of shares subject to each participant compensation reduction option shall
be (i) the amount of the compensation reduction divided by (ii) 75% of the fair
market value of the shares at the time of grant. The exercise price of the
compensation reduction options is 25% of the greater of the fair market value at
the time of exercise or the time of grant. CharterBank will pay each participant
a dividend equivalent payment equal in value to the after-tax net value of
dividends or distributions made on the mutual fund shares subject to the
options.
The plan also allows discretionary grants by CharterBank to eligible
employees and directors, the exercise price, vesting, exercise period and other
terms of which are determined by the committee under the plan. Upon a change of
control (as defined in the plan) all such options vest. Unless otherwise
determined in the option agreement, all options granted under the plan are not
exercisable until both (i) one year has elapsed since the date of the option
grant and (ii) the options have vested. This plan does not require CharterBank
to purchase any mutual fund shares subject to these options until the options
are exercised.
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 implementing this plan until 6 months after the reorganization.
If we implement this plan within one year after the reorganization, applicable
regulations require that we first obtain the approval of the holders of a
majority of the outstanding shares of Charter Financial Corp. held by persons
other than First Charter, MHC. We have not decided whether we will implement
this plan before or after the one-year anniversary of the reorganization.
We expect to adopt a stock option plan that will authorize the Compensation
Committee to grant options to purchase up to 10% of the shares sold in the
offering to persons other than First Charter, MHC, 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:
. 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.
134
. 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, if permitted by the Office of Thrift
Supervision, 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 deduction unless the shares
acquired are resold sooner than two years after the option was granted or one
year after the option was exercised.
The Office of Thrift Supervision has proposed regulations which would allow
us to grant options to purchase up to 10% of 49.9% of the outstanding shares
of Charter Financial common stock, including those shares issued to First
Charter, MHC. These proposed regulations have not yet been adopted and may not
be adopted for the foreseeable future or at all, or if adopted, may permit stock
option awards in amounts lesser than permitted under the proposal.
135
Management Recognition Plan. We intend to implement a management
recognition plan for our directors and officers as part of the reorganization.
Applicable regulations prohibit us from implementing this plan until 6 months
after the reorganization. If we implement this plan within one year after the
reorganization, applicable regulations require that we first obtain the approval
of the holders of a majority of the outstanding shares of Charter Financial
Corp. held by persons other than First Charter, MHC. We have not decided
whether we will implement this plan before or after the one-year anniversary of
the reorganization.
We expect to adopt a management recognition plan that will authorize the
Personnel and Compensation Committee to make restricted stock awards of up to
4% of the shares sold in the offering to persons other than First Charter,
MHC. If CharterBank's post-reorganization tangible capital does not exceed
10%, our ability to make restricted stock awards may be limited to 3% of the
shares sold in the offering to persons other than First Charter, MHC. 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, if permitted by the Office of Thrift
Supervision, 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
136
goals are met. However, pending vesting, the award recipient may have voting and
dividend 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.
The Office of Thrift Supervision has proposed regulations which would
permit us to make restricted stock awards for up to 4% of 49.9% of the
outstanding shares of Charter Financial common stock, including those shares
issued to First Charter, MHC, or 3% of 49.9% of the outstanding common stock
of Charter Financial if CharterBank's post-reorganization tangible capital does
not exceed 10%. These proposed regulations have not yet been adopted and may
not be adopted for the foreseeable future or at all, or if adopted, may permit
restricted stock awards in amounts lesser than permitted under the
proposal.
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 $883,886. 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.
137
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 200,000 shares, or approximately 3.8% of shares we sell in the offering
and .8% of our outstanding common stock (assuming the sale of 5,290,000 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 up to
1,363,800 shares, or 25.8% of the shares sold in the offering and 5.2% of our
outstanding common stock (assuming the sale of 5,290,000 shares of the common
stock).
Number Percent of
Name Amount of Shares Shares Sold
------------------------------------ ------ --------- -----------
Directors and Executive Officers:
John W. Johnson, Jr. $ 500,000 50,000 0.95%
Robert L. Johnson 300,000 30,000 0.57
David Z. Cauble, III 100,000 10,000 0.19
Jane W. Darden 100,000 10,000 0.19
William B. Hudson 100,000 10,000 0.19
Thomas M. Lane 100,000 10,000 0.19
R. Terry Taunton 100,000 10,000 0.19
Curtis R. Kollar 300,000 30,000 0.57
William C. Gladden 50,000 5,000 0.09
Lee Washam 300,000 30,000 0.57
Bonnie F. Bonner 50,000 5,000 0.09
---------- -------
Total to be Purchased by Directors $2,000,000 200,000 3.78%
and Executives Officers ========== =======
138
THE REORGANIZATION AND THE OFFERING
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 49.9% 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.
--------------------------------------------------------------------------------
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 along with any
deferred taxes associated with the Freddie Mac stock, 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.
Upon a complete liquidation of CharterBank after the reorganization, each
depositor would have a claim as a creditor of the same general priority as the
claims of all other general creditors of CharterBank. However, except as
described below, a depositor's claim would be solely for the amount of the
balance in such depositor's deposit account plus accrued interest. Such
depositor would not have an interest in the value or assets of CharterBank above
that amount. Instead, the holder of CharterBank's common stock (i.e., Charter
Financial) would be entitled to any assets remaining upon a liquidation of
CharterBank.
Upon a complete liquidation of Charter Financial, each holder of shares of
the common stock of Charter Financial, including First Charter, MHC, would be
entitled to receive a pro rata share of Charter Financial's assets, following
payment of all debts, liabilities and claims of greater priority of or against
Charter Financial including the rights of depositors in the liquidation account
of CharterBank, if any.
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If liquidation of First Charter, MHC occurs following completion of the
reorganization, all depositors of CharterBank at that time will be entitled, pro
rata to the value of their deposit accounts, to a distribution of any assets of
First Charter, MHC remaining after payment of all debts and claims of
creditors.
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 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
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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;
. 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 July 20, 2001, the estimated pro forma market value of the
common stock of Charter
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Financial Corp. being offered to persons other than First Charter, MHC ranged
from a minimum of $39.1 million to a maximum of $52.9 million with a midpoint of
$46.0 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 $39.1 million to
$52.9 million, with a midpoint of $46.0 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 3,910,000 and
5,290,000 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.
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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 6,083,500 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.
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.
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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 June 30, 2001,
other than those depositors who would otherwise qualify as eligible
account holders and except for officers, directors and their
associates; and
(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
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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 $500,000 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 the shares sold in the offering to
persons other than First Charter, MHC. As a tax-qualified employee benefit
plan, the ESOP expects to purchase up to 8% of the shares sold in the offering
to persons other than First Charter, MHC, or up to 312,800 shares, based on the
issuance of 3,910,000 shares at the minimum of the offering range or up to
423,200 shares based on the issuance of 5,290,000 at the maximum of the offering
range. The Office of Thrift Supervision has proposed regulations which would
permit the ESOP to purchase up to 8% of 49.9% of the outstanding shares of
Charter Financial common stock, including those shares issued to First Charter,
MHC. These proposed regulations have not yet been adopted and may not be adopted
for the foreseeable future or at all, or if adopted, may permit ESOP purchases
in amounts lesser than permitted under the proposal. However, if the Office of
Thrift Supervision adopts these proposed regulations, the ESOP may purchase up
to 8% of 49.9% of the outstanding shares of Charter Financial common stock,
including those shares issued to First Charter, MHC, or up to 780,400 and
1,055,900 shares of common stock, respectively, at the minimum and maximum of
the offering range. If the proposed regulations are adopted prior to the close
of the offering, Charter Financial intends to fund the ESOP with 8% of the
49.9% of the outstanding shares of Charter Financial. Subscriptions by the ESOP
will not be aggregated i.e., 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.
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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 third priority and without payment,
non-transferable rights to subscribe for common stock in an amount of up to
$500,000. 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 June 30,
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 $500,000. See "- Limitations on Common Stock Purchases."
Expiration Date for the Subscription Offering. The subscription offering
will expire at 5:00 p.m. Eastern time, on September 17, 2001, unless we extend
this period to November 1, 2001.
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
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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 distribution of the
stock. No person may purchase more than $500,000 of common stock in the direct
community offering. Further, any shares sold in the direct community offering
and/or the syndicated community offering must first be filled up to a maximum of
2% of the shares issued in the offering to promote a wide distribution of stock.
Thereafter, we must allocate any remaining shares on an equal number of shares
per order basis until we fill all orders. 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 $500,000 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 September 27, 2003.
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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
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approval of the Office of Thrift Supervision and to compliance with applicable
state and federal securities laws.
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.
The following table sets forth the per share and total commissions and
expenses to be paid to Sandler O'Neill & Partners, L.P. by us at each level of
the offering range (assuming all shares are sold in the subscription offering or
direct community offering).
Minimum Midpoint Maximum Supermaximum
--------- -------- -------- ------------
Commissions:
Per share total.......... $ 0.11 $ 0.11 $ 0.11 $ 0.11
Total.................... $424,650 $504,000 $583,350 $674,600
Expenses................. 125,000 125,000 125,000 125,000
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
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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.
Offering Expenses. The following table sets forth the estimated expenses
that we expect to pay as part of the offering, other than underwriting
commissions and expenses:
SEC Registration Fee (1)........................................... $ 15,209
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
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)............. 15,000
Miscellaneous...................................................... 10,391
--------
Total.............................................................. $975,000
========
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 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.
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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 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
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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 (706) 645-3202, 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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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
$500,000;
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(4) The tax-qualified employee benefit plans are permitted to purchase up
to 8% of the shares of common stock sold in the offering to persons
other than First Charter, MHC. As a tax-qualified employee benefit
plan, the ESOP intends to purchase 8% of the shares of common stock
sold in the offering to persons other than First Charter, MHC ( or
more if the Office of Thrift Supervision adopts proposed regulations
permitting mutual holding companies to purchase additional stock for
stock benefit plans);
(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 $500,000, 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
$1,300,000 subject to increase as described below.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the $500,000 and $1,300,000 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.
If we sell more than 5,290,000 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."
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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 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
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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
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voting stock of the institution or the ability to control the election of a
majority of the directors 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.
--------------------------------------------------------------------------------
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
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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.
Ownership of Common Stock by Management. We expect our directors and
officers to purchase up to 200,000 shares of common stock in the offering.
Directors and officers are expected to control the voting of 3.8% of the shares
of common stock sold in the offering (at the maximum of the offering range), and
may control the voting of approximately 8% 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 5,290,000 shares of common stock (or
6,083,500 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 21,160,000 shares of common stock to First Charter, MHC (or
24,334,000 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
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majority of the issued and outstanding voting stock of Charter Financial must be
held at all times by First Charter, MHC.
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) (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
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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.
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.
163
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.
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 (706) 645-3202, 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.
164
CHARTERBANK
Index to Consolidated Financial Statements
Consolidated Statements of Financial Condition at March 31, 2001
(unaudited) and September 30, 2000 and 1999 F-2
Consolidated Statements of Income and Comprehensive Income (Loss)
for the Six Months ended March 31, 2001 and 2000 (unaudited)
and for Each of the Years in the Three-Year Period ended
September 30, 2000 F-4
Consolidated Statements of Equity for the Six Months ended
March 31, 2001 (unaudited) and for Each of the Years in the
Three-Year Period ended September 30, 2000 F-6
Consolidated Statements of Cash Flows for the Six Months ended
March 31, 2001 and 2000 (unaudited) and for Each of the Years
in the Three-Year Period ended September 30, 2000 F-7
Notes to Consolidated Financial Statements F-9
Independent Auditors' Report F-45
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.
The financial statements for the holding companies Charter Financial
and First Charter, MHC are not included as the formation of the
companies has not been approved.
F-1
CHARTERBANK
Consolidated Statements of Financial Condition
March 31, 2001 (unaudited) and September 30, 2000 and 1999
March 31, September 30,
--------------- -----------------------------------------
Assets 2001 2000 1999
--------------- ---------------------- -----------------
(Unaudited) (As restated - note 22)
Cash and amounts due from depository
institutions (note 18) $ 7,501,722 5,662,675 5,033,121
Interest-bearing deposits in other financial
institutions 17,465,258 2,629,767 5,209,359
-------------- -------------- ------------
Cash and cash equivalents 24,966,980 8,292,442 10,242,480
-------------- -------------- ------------
Loans held for sale, market value of $412,000,
$839,000 and $2,897,000 at March 31, 2001,
September 30, 2000 and 1999, respectively 410,000 832,526 2,896,798
Freddie Mac common stock and other equity
securities (note 4) 327,715,650 273,285,938 263,135,825
Mortgage-backed securities and collateralized
mortgage obligations available for sale
(notes 5 and 13) 300,737,770 367,707,904 356,498,633
Other investment securities available
for sale (notes 4 and 13) 8,786,014 13,882,374 31,930,108
Federal Home Loan Bank stock (notes 4 and 13) 12,700,000 12,587,500 10,407,500
Loans receivable, net of undisbursed proceeds of
loans-in-process 252,331,255 259,699,417 214,216,827
Unamortized loan origination costs (fees), net 43,079 113,317 (50,838)
Allowance for loan losses (5,375,458) (6,346,001) (5,709,802)
-------------- -------------- ------------
Loans receivable, net
(notes 6 and 13) 246,998,876 253,466,733 208,456,187
-------------- -------------- ------------
Real estate owned (note 7) 767,779 629,993 222,210
Accrued interest and dividends receivable
(note 8) 3,981,595 4,476,844 4,395,153
Premises and equipment, net (note 9) 3,644,185 3,534,071 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) 4,119,438 3,990,493 5,269,722
-------------- -------------- ------------
Total assets $ 934,828,287 942,686,818 904,585,754
============== ============== ============
F-2
March 31, September 30,
------------ -----------------------------
Liabilities and Equity 2001 2000 1999
------------ ----------- -----------
(Unaudited) (As restated- note 22)
Liabilities:
Deposits (note 12) $185,186,759 274,370,643 282,965,378
Borrowings (note 13) 352,304,750 352,218,500 312,866,769
Advance payments by borrowers for taxes
and insurance 1,449,892 1,998,777 2,034,702
Deferred income taxes (note 14) 121,625,651 100,247,176 96,677,839
Other liabilities 25,049,090 9,324,980 11,551,783
------------ ----------- ------------
Total liabilities 685,616,142 738,160,076 706,096,471
------------ ----------- ------------
Equity (note 18):
Retained earnings 54,347,287 51,698,621 50,826,334
Accumulated other comprehensive
income - net unrealized holding gains
on securities available for sale 194,864,858 152,828,121 147,662,949
------------ ----------- ------------
Total equity 249,212,145 204,526,742 198,489,283
Commitments and contingencies
(notes 6, 15, 16, and 19)
------------ ----------- ------------
Total liabilities and equity $934,828,287 942,686,818 904,585,754
============ =========== ============
See accompanying notes to consolidated financial statements.
F-3
CHARTERBANK
Consolidated Statements of Income and Comprehensive Income (Loss)
For the Six Months ended March 31, 2001 and 2000 (unaudited)
and the Years ended September 30, 2000, 1999, and 1998
March 31, September 30,
----------------------- -----------------------------------
2001 2000 2000 1999 1998
----------- ---------- ---------- ---------- -----------
(Unaudited) (As restated - note 22)
Interest and dividend income:
Investment debt securities $ 480,958 707,533 1,194,033 1,524,095 479,973
Investment equity securities 2,343,614 2,085,133 4,307,513 3,689,704 3,276,080
Mortgage-backed securities and collateralized mortgage
obligations 11,861,480 13,344,511 27,476,406 16,592,249 12,162,877
Loans receivable 11,248,324 9,834,694 21,075,913 15,015,066 13,153,429
Interest-bearing deposits in other financial institutions 232,949 60,668 159,089 148,332 103,038
----------- ----------- ---------- ----------- -----------
Total interest and dividend income 26,167,325 26,032,539 54,212,954 36,969,446 29,175,397
----------- ----------- ---------- ----------- -----------
Interest expense:
Deposits (note 12) 6,164,257 6,879,962 13,932,849 10,423,679 5,978,373
Borrowings (note 13) 11,720,486 10,058,886 22,714,554 12,917,754 13,431,467
----------- ----------- ---------- ----------- -----------
Total interest expense 17,884,743 16,938,848 36,647,403 23,341,433 19,409,840
----------- ----------- ---------- ----------- -----------
Net interest income 8,282,582 9,093,691 17,565,551 13,628,013 9,765,557
Provision for loan losses (note 6) 300,000 180,000 1,410,000 240,000 180,000
----------- ----------- ---------- ----------- -----------
Net interest income after provision for
loan losses 7,982,582 8,913,691 16,155,551 13,388,013 9,585,557
----------- ----------- ---------- ----------- -----------
Noninterest income:
Loan servicing fees 217,294 203,263 410,468 290,615 227,997
Service charges on deposit accounts 354,675 332,779 700,568 377,717 327,299
Gain on sale of loans and servicing released loan fees 536,033 300,463 730,457 1,133,051 1,029,640
Gain (loss) on sale of mortgage-backed securities,
collateralized mortgage obligations, and
other investments (notes 4 and 5) 219,113 (182,477) (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) (71,615) -- (28,602) 448,000 (5,797,145)
Other 39,489 179,771 263,787 239,216 139,147
----------- ----------- ---------- ----------- -----------
Total noninterest income (loss) 1,294,989 833,799 1,949,042 38,749,894 (3,306,556)
----------- ----------- ---------- ----------- -----------
Noninterest expenses:
Salaries and employee benefits (notes 15 and 16) 3,209,695 2,511,669 4,956,345 4,193,329 3,498,530
Occupancy 840,102 882,588 1,942,041 1,252,843 1,046,983
Furniture and equipment 195,158 235,640 419,208 379,188 268,094
Net cost of operations of real estate owned 5,474 50,076 106,785 18,718 37,720
Federal insurance premiums and other regulatory fees 113,886 155,019 267,498 259,828 180,103
Marketing 189,916 204,455 375,787 315,327 247,764
Charitable contributions (note 4) 12,328 17,176 61,689 2,181,656 24,599
Legal and professional 340,201 670,089 1,455,120 752,677 373,166
Amortization and impairment of intangibles (note 3) -- 475,000 4,533,333 66,667 --
Other 867,591 918,134 1,824,538 1,328,991 945,045
----------- ----------- ---------- ----------- -----------
Total noninterest expenses 5,774,351 6,119,846 15,942,344 10,749,224 6,622,004
----------- ----------- ---------- ----------- -----------
Income (loss) before income taxes, carried forward $ 3,503,220 3,627,644 2,162,249 41,388,683 (343,003)
=========== =========== ========== =========== ===========
F-4
CHARTERBANK
Consolidated Statements of Income and Comprehensive Income (Loss)
For the Six Months ended March 31, 2001 and 2000 (unaudited)
and the Years ended September 30, 2000, 1999, and 1998
March 31, September 30,
------------------------ -----------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ----------- ----------
(Unaudited) (As restated - note 22)
Income (loss) before income taxes, brought forward $ 3,503,220 3,627,644 2,162,249 41,388,683 (343,003)
Income tax expense (benefit) - (note 14) 854,554 941,234 1,289,962 14,359,324 (817,916)
----------- ----------- ---------- ----------- ----------
Net income 2,648,666 2,686,410 872,287 27,029,359 474,913
----------- ----------- ---------- ----------- ----------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during
the period, net of income taxes of $26,511,581,
$(16,936,361), $3,197,892, $(899,027), and $31,543,476
for the six months ended March 31, 2001 and 2000
(unaudited) and for the years ended September 30, 2000,
1999, and 1998, respectively 42,171,272 (26,940,222) 5,086,803 (1,466,834) 52,081,857
Less reclassification adjustment for losses (gains)
included in net income, net of income taxes of
$84,578, $(70,436), $(49,268), $13,996,860, and
$289,126, for the six months ended March 31, 2001
and 2000 (unaudited) and for the years ended September 30,
2000, 1999, and 1998, respectively (134,535) 112,041 78,369 (22,264,435) (477,380)
----------- ----------- ---------- ----------- ----------
Total other comprehensive income (loss) 42,036,737 (26,828,181) 5,165,172 (23,731,269) 51,604,477
----------- ----------- ---------- ----------- ----------
Comprehensive income (loss) $44,685,403 (24,141,771) 6,037,459 3,298,090 52,079,390
=========== =========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
F-5
CHARTERBANK
Consolidated Statements of Equity
For the Six Months ended March 31, 2001 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
Accumulated
other
comprehensive
income -
net unrealized
holding gains
on securities
Retained available for Total
earnings 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
Net income (unaudited) 2,648,666 -- 2,648,666
Change in net unrealized holding gains
on securities, net of income taxes of
$26,596,159 (unaudited) -- 42,036,737 42,036,737
-------------- ------------- -----------
Balance at March 31, 2001 (unaudited) $ 54,347,287 194,864,858 249,212,145
============== ============= ===========
F-6
CHARTERBANK
Consolidated Statements of Cash Flows
For the Six Months ended March 31, 2001 and 2000 (unaudited) and the Years
ended September 30, 2000, 1999, and 1998
March 31,
---------------------------
2001 2000
------------- -----------
Cash flows from operating activities:
Net income $ 2,648,666 2,686,410
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300,000 180,000
Depreciation and amortization 246,543 724,902
Provision for asset impairment -- --
Deferred income tax (benefit) expense (5,048,529) 161,000
Equity in loss (earnings) of limited partnerships 71,615 --
(Accretion) amortization of premiums and discounts, net (2,355,141) 506,088
Gain on sale of loans held for sale (11,936) (40,464)
Proceeds from sale of loans held for sale 21,536,869 16,753,474
Originations and purchases of loans held for sale (21,102,407) (18,996,544)
(Gain) loss on sales of mortgage-backed securities,
collateralized mortgage obligations, and other
investments (219,113) 182,477
Donation of FNMA stock -- --
Gain on disposition of stock -- --
(Gain) loss on sales of real estate owned (11,759) 49,912
Donation of real estate owned -- --
Freddie Mac common stock contributed to charitable
organization -- --
Changes in assets and liabilities:
Decrease (increase) in accrued interest and dividends
receivable 495,249 (92,665)
Decrease (increase) in income tax refunds receivable -- 2,998,250
(Increase) decrease in other assets (200,560) 1,796,639
Increase (decrease) in other liabilities 15,724,110 (2,479,160)
------------- -------------
Net cash provided by operating activities 12,073,607 4,430,319
------------- -------------
Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities and
collateralized mortgage obligations available for sale 114,532,730 32,205,133
Principal collections on mortgage-backed securities and
collateralized mortgage obligations available for sale 13,956,020 16,802,307
Purchases of mortgage-backed securities and collateralized
mortgage obligations available for sale (46,378,745) (89,713,490)
Purchases of equity securities and other investment
securities available for sale (112,500) (2,287,500)
Principal collections on other investment securities available for sale -- 15,000,000
Proceeds from sale of other investment securities available for sale 6,564,772 1,982,424
Proceeds from sale of Freddie Mac stock -- --
Net decrease (increase) in loans receivable, exclusive of loan sales 5,535,444 (31,705,944
Proceeds from sale of real estate owned 506,386 869,567
Purchases of premises and equipment, net of dispositions (356,657) (703,487)
Purchase of loans -- --
Acquisition of Citizens Bancgroup, Inc., net of cash paid -- --
------------- -------------
Net cash provided by (used in) investing activities 94,247,450 (57,550,990)
------------- -------------
September 30,
------------------------------------------------
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 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 (benefit) expense 322,177 7,831,928 (2,025,709)
Equity in loss (earnings) 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 held for sale (44,874) (153,346) (620,970)
Proceeds from sale of loans held for sale 36,230,650 23,282,129 63,825,430
Originations and purchases of loans held for sale (34,121,504) (22,435,402) (65,727,913)
(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) --
(Gain) 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 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) --
(Increase) decrease in other assets 1,050,627 (223,465) (2,274,747)
Increase (decrease) in other liabilities (2,226,803) 2,872,043 2,030,882
------------ ------------ ------------
Net cash provided by operating activities 11,551,230 527,590 362,404
------------ ------------ ------------
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 decrease (increase) in loans receivable, exclusive of loan sales (47,698,339) (9,694,763) (31,413,858)
Proceeds from sale of real estate owned 783,655 303,487 245,054
Purchases of premises and equipment, net of dispositions (529,882) (459,310) (182,151)
Purchase of loans -- (8,271,000) --
Acquisition of Citizens Bancgroup, Inc., net of cash paid -- 1,404,425 --
------------ ------------ ------------
Net cash provided by (used in) investing activities (44,222,339) (126,286,760) (146,388,010)
------------ ------------ ------------
(Continued)
F-7
CHARTERBANK
Consolidated Statements of Cash Flows
For the Six Months ended March 31, 2001 and 2000 (unaudited) and
the Years ended September 30, 2000, 1999, and 1998
March 31,
--------------------------------------
2001 2000
--------------- ----------------
(Unaudited)
Cash flows from financing activities:
Net increase in savings and demand
deposit accounts $ 4,657,988 1,508,986
Net (decrease) increase in time deposits (93,841,872) (12,525,280)
Proceeds from Federal Home Loan Bank advances 273,000,000 276,750,000
Principal payments on advances from Federal Home
Loan Bank (271,000,000) (244,900,000)
Proceeds from other borrowings 35,094,000 31,995,607
Principal payments on other borrowings (37,007,750) (2,085,000)
Net (decrease) increase in advance payments by borrowers
for taxes and insurance (548,885) (525,538)
--------------- ----------------
Net cash (used in) provided by financing activities (89,646,519) 50,218,775
--------------- ----------------
Net increase (decrease) in cash and cash
equivalents 16,674,538 (2,901,896)
Cash and cash equivalents at beginning of period 8,292,442 10,242,480
--------------- ----------------
Cash and cash equivalents at end of period $ 24,966,980 7,340,584
=============== ================
Supplemental disclosures of cash flow information:
Interest paid $ 18,641,557 16,303,892
=============== ================
Income taxes paid $ 150,000 --
=============== ================
Detail of acquisitions:
Fair value of assets acquired $ -- --
Liabilities assumed -- --
--------------- ----------------
Net cash acquired in acquisition $ -- --
=============== ================
Financing activities:
Real estate acquired through foreclosure of the
loans receivable $ 632,413 1,023,531
=============== ================
Contribution of real estate acquired for sale to charity $ -- --
=============== ================
September 30,
-------------------------------------------------------
2000 1999 1998
--------------------- ------------- -------------
(As rested - note 23)
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 (used in) 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 period 10,242,480 6,167,160 4,256,960
--------------- ------------ -------------
Cash and cash equivalents at end of period 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 consolidated financial statements.
F-8
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
(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 consolidated financial statements.
(a) Basis of Presentation
In preparing the consolidated 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 consolidated
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.
(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
F-9
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998.
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 the interest method 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 the
interest method 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 the interest method over the contractual
life of the loans.
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
F-10
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998.
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 using the
interest method over the estimated life of the serviced loans
considering assumed prepayment patterns.
(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 determined through
consideration of such factors as changes in the nature and volume of
the portfolio, overall portfolio quality, delinquency trends,
collateral, loan concentrations, specific problem loans, and economic
conditions that may affect the borrowers' ability to pay.
To the best of management's ability, all known and inherent losses
that are both probable and reasonable to estimate have been recorded.
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. 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.
F-11
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2000 and 2001 (unaudited) and Years ended
September 30, 2000, 1999, and 1998.
(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.
(h) Mortgage Banking Activities
In June 1996, the FASB 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.
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
F-12
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998.
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 March 31, 2001 (unaudited) and 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. At March 31, 2001 (unaudited)
and September 30, 2000, the Company was 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 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.
(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.
F-13
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
(n) Accounting Pronouncements
In June 1998, the FASB 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. The Company adopted SFAS No. 133, as
amended, on October 1, 2000. The adoption of SFAS No. 133, as amended,
did not have a material impact on the Company's consolidated financial
statements.
In September 2000, the FASB 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.
(o) Reclassifications
Certain reclassifications have been made to the 1999 and 1998
consolidated 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 recorded at fair value,
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
==============
F-14
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
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
================== ==================
(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.
F-15
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
(4) Investment Securities
Investment securities available for sale are summarized as follows:
March 31, 2001
(unaudited)
-----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
--------------- ----------------- --------------- ------------------
Freddie Mac common stock $ 6,886,116 320,829,534 -- 327,715,650
Other:
U.S. Government agencies 7,931,565 -- 180,551 7,751,014
Corporate debt 1,000,000 35,000 -- 1,035,000
--------------- ----------------- --------------- ------------------
8,931,565 35,000 180,551 8,786,014
--------------- ----------------- --------------- ------------------
$ 15,817,681 320,864,534 180,551 336,501,664
=============== ================= =============== ==================
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
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
--------------- ----------------- --------------- ------------------
$ 22,335,105 266,402,322 1,569,115 287,168,312
=============== ================= =============== ==================
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
Other equity securities 92,541 183,284 -- 275,825
--------------- ----------------- --------------- ------------------
6,978,657 256,157,168 -- 263,135,825
--------------- ----------------- --------------- ------------------
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
--------------- ----------------- --------------- ------------------
$ 40,318,147 256,185,888 1,438,102 295,065,933
=============== ================= =============== ==================
The Company's investment in Federal Home Loan Bank stock was $12,700,000
(unaudited), $12,587,500 and $10,407,500 at March 31, 2001 (unaudited) and
September 30, 2000 and 1999, respectively. Under SFAS No. 115 Accounting
for Certain Investments in Debt and Equity Securities, the investment in
Federal Home Loan Bank stock is carried at cost because it is considered a
restricted stock investment. The investment in Federal Home Loan Bank stock
was not considered impaired at March 31, 2001 (unaudited) and September 30,
2000 and 1999.
F-16
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
The amortized cost and fair value of investments in debt securities
available for sale at March 30, 2001 (unaudited) and 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.
March 31, 2001 September 30, 2000
------------------------------------- ------------------------------------
Amortized cost Estimated Amortized Estimated
fair value cost fair value
---------------- ---------------- ---------------- ---------------
(unaudited)
Due less than one year $ 1,000,000 1,035,000 1,000,000 1,002,500
Due after one year through five years -- -- -- --
Due after five years through ten years -- -- -- --
Due after ten years 7,931,565 7,751,014 14,448,989 12,879,874
---------------- ---------------- ---------------- ---------------
$ 8,931,565 8,786,014 15,448,989 13,882,374
================ ================ ================ ===============
Proceeds from sales of investment securities for the six months ended March
31, 2001 and 2000 (unaudited) and the years ended September 30, 2000, 1999,
and 1998 were $6,564,772 (unaudited), $1,982,424 (unaudited), $3,135,170,
$28,149,121, and $22,352,291, respectively. Gross gains of $185,337,
$148,097, and $46,388 were realized on sales of investment securities for
the years ended September 30, 2000, 1999, and 1998, respectively. There
were no gross gains on sales of investment securities for the six months
ended March 31, 2001 and 2000 (unaudited). Gross realized losses on sales
of investment securities for the six months ended March 31, 2001 and 2000
(unaudited) and for the years ended September 30, 2000, 1999, and 1998 were
$42,229 (unaudited), $17,577 (unaudited), $22,072, $12,968, and $8,689,
respectively.
During the year ended September 30, 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 the year ended September 30, 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 $8,786,014
(unaudited), $13,882,374 and $26,841,596 at March 31, 2001 (unaudited) and
September 30, 2000 and 1999, respectively, were pledged to secure Federal
Home Loan Bank advances and to collateralize securities sold under
agreements to repurchase.
F-17
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
(5) Mortgage-Backed Securities and Collateralized Mortgage Obligations
Mortgage-backed securities and collateralized mortgage obligations
available for sale are summarized as follows:
March 31, 2001
(unaudited)
--------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
----------------- --------------- ---------------- -------------------
Mortgage-backed securities:
FNMA certificates $ 43,126,256 129,031 540,064 42,715,223
GNMA certificates 43,473,674 68,310 616,660 42,925,324
FHLMC certificates 4,165,049 25,556 5,301 4,185,304
Collateralized mortgage obligations:
FNMA 69,926,921 245,836 319,095 69,853,662
GNMA 3,517,508 22,161 17,719 3,521,950
FHLMC 79,395,842 249,237 470,021 79,175,058
Other 60,447,027 32,217 2,117,995 58,361,249
----------------- --------------- ---------------- -------------------
$ 304,052,277 772,348 4,086,855 300,737,770
================= =============== ================ ===================
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
================= =============== ================ ===================
F-18
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
Proceeds from sales, gross gains, and gross losses on the sales of
mortgage-backed securities and collateralized mortgage obligations are as
follows:
Gross Gross
Proceeds gains losses
----------------- -------------- -------------
Six months ended:
March 31:
2001 (unaudited) $ 114,532,730 429,033 167,691
2000 (unaudited) 32,205,133 1,487 166,387
Year ended:
September 30:
2000 67,269,563 38,957 346,552
1999 260,278,302 757,275 496,759
1998 224,913,926 995,413 266,606
Mortgage-backed securities and collateralized mortgage obligations with an
aggregate carrying amount of $238,112,724 (unaudited), $284,469,404 and
$236,913,212 at March 31, 2001 (unaudited) and 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
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 March 31, 2001 (unaudited) and 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 March 31, 2001 (unaudited) and 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 March 31, 2001 (unaudited) and
September 30, 2000 and 1999. These investments are classified as available
for sale and are carried at fair value in the Company's consolidated
financial statements.
F-19
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999 and 1998
The following table shows additional information related to the
collateralized mortgage obligations held by the Company:
March 31, 2001
(unaudited)
----------------------------------------------------------------------------
Weighted- Net
Fair Average unrealized
value Life Yield loss
----------------- ----------------- ----------- ---------------
Fixed rate $ 62,211,217 17.60 years 6.596% $ (1,979,062)
Variable rate 148,700,700 15.18 years 6.614 (396,379)
--------------- --------------
Total $ 210,911,917 $ (2,375,383)
=============== ==============
September 30, 2000
----------------------------------------------------------------------------
Weighted- Net
Fair average unrealized
Value life Yield 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 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)
=============== ==============
(6) Loans Receivable
Loans receivable are summarized as follows:
March 31, September 30,
------------------ ------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
(unaudited)
1-4 family residential real estate mortgage $ 153,319,783 152,821,962 132,035,747
Commercial real estate 59,194,455 60,837,874 46,544,858
Commercial 7,096,270 8,986,583 3,244,785
Real estate construction 14,445,857 16,018,366 13,510,507
Consumer and other 26,718,132 29,914,580 24,352,786
Undisbursed proceeds of loans-in-process (8,443,242) (8,879,948) (5,471,856)
----------------- ------------------ ------------------
Loans receivable, net of undisbursed proceeds
of loans-in-process 252,331,255 259,699,417 214,216,827
Unamortized loan origination costs (fees), net 43,079 113,317 (50,838)
Allowance for loan losses (5,375,458) (6,346,001) (5,709,802)
----------------- ------------------ ------------------
Loans receivable, net $ 246,998,876 253,466,733 208,456,187
================= ================== ==================
F-20
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
In addition to the above, the Company was servicing loans primarily for the
Federal Home Loan Mortgage Corporation with aggregate principal balances of
$159,671,717 (unaudited), $171,532,909, $165,057,335, and $132,429,806, at
March 31, 2001 and 2000 (unaudited) and September 30, 2000, 1999, and 1998,
respectively.
Loans to certain executive officers, directors, and their associates
totaled $1,116,156 (unaudited), $883,886 and $758,245 at March 31, 2001
(unaudited) and 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 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
New loans (unaudited) 502,767
Repayments (unaudited) 270,497
-------------
Balance at March 31, 2001 (unaudited) $ 1,116,156
=============
At March 31, 2001 (unaudited) and September 30, 2000 and 1999, the Company
had $1,661,084 (unaudited), $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 six months ended March 31, 2001 and 2000
(unaudited) and the years ended September 30, 2000, 1999, and 1998.
March 31, September 30,
-------------------------------- ------------------------------------------
2001 2000 2000 1999 1998
------------- -------------- -------------- ------------- -------------
(unaudited)
Interest income at contractual rate $ 71,129 83,548 303,990 44,937 35,414
Interest income actually recorded (21,358) (16,773) (127,679) (16,195) (22,975)
------------- -------------- -------------- ------------- -----------
Reduction of interest income $ 49,771 66,775 176,311 28,742 12,439
============= ============== ============== ============= ===========
The following is a summary of transactions in the allowance for loan
losses:
March 31, September 30,
------------------------------ ----------------------------------------------
2001 2000 2000 1999 1998
------------- ------------- ------------ ------------ -----------
(unaudited)
Balance at beginning of year $ 6,346,001 $ 5,709,802 5,709,802 2,054,288 1,845,613
Loan loss reserve of acquired
company -- -- -- 3,751,796 --
Loans charged off (1,616,468) (689,679) (1,137,938) (420,101) (256,166)
Recoveries on loans previously
charged off 345,925 214,384 364,137 83,819 284,841
Provision for loan losses charged
to operations 300,000 180,000 1,410,000 240,000 180,000
------------- ------------- ------------ ------------ -----------
Balance at end of year $ 5,375,458 $ 5,414,507 6,346,001 5,709,802 2,054,288
============= ============= ============ ============ ===========
F-21
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
At March 31, 2001 (unaudited) and September 30, 2000 and 1999, pursuant to
the definition within SFAS 114, the Company had impaired loans of
approximately $400,000 (unaudited), $1,200,000, and $2,000,000 with related
amounts included in the allowance for loan losses of approximately $168,000
(unaudited), $715,000, and $560,000, respectively.
The average recorded investment in impaired loans for the six months ended
March 31, 2001 and 2000 (unaudited) and for the years ended September 30,
2000, 1999, and 1998 was approximately $931,000 (unaudited), $1,355,000
(unaudited), $740,000, $500,000, and $600,000, respectively. Interest
income recognized on impaired loans for the six months ended March 31, 2001
and 2000 (unaudited) and 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
consolidated 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 March 31, 2001 (unaudited) and September 30, 2000 and 1999 is as follows:
March 31, September 30,
----------------- ------------------------------------
2001 2000 1999
----------------- ---------------- ----------------
(unaudited)
Financial instruments whose contract amounts
represent credit risk - commitments:
Mortgage loans $ 7,556,785 5,109,000 7,444,548
Open-end consumer loans 6,653,437 6,953,873 6,553,796
Open-end commercial loans 2,741,100 456,254 460,000
Construction loans 8,443,242 8,879,948 5,471,856
-------------- ---------------- ----------------
Total commitments $ 25,394,564 21,399,075 19,930,200
============== ================ ================
The Company was also committed to sell loans of approximately $536,000
(unaudited) and $1,349,000 at March 31, 2001 (unaudited) and September 30,
2000, respectively.
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.
Page F-22
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
The following summarizes the Company's commitments to fund fixed-rate loans
at March 31, 2001 (unaudited) and September 30, 2000 and 1999:
Amount Range of rates
------------------- --------------------
March 31, 2001 (unaudited) $ 5,340,785 6.75 - 10.00%
================= ==================
September 30, 2000 $ 1,188,000 7.63 - 10.50%
================= ==================
September 30, 1999 $ 2,602,346 7.50 - 11.63%
================= ==================
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 March 31, 2001 (unaudited) and September 30, 2000 and 1999,
adjustable rate mortgage loans with interest rate caps and floors amounted
to $108,541,355 (unaudited), $117,758,166, and $89,475,956, respectively.
The Company has sold loans and has the obligation to repurchase any loan or
loans that become 90 days or more delinquent. At March 31, 2001 (unaudited)
and September 30, 2000 and 1999, the balance of these loans was $6,723,732
(unaudited), $7,602,761, and $8,757,542 respectively with a related
recourse reserve in other liabilities of $163,454 at March 31, 2001
(unaudited) and September 30, 2000 and 1999, respectively.
(7) Real Estate Owned
At March 31, 2001 (unaudited) and September 30, 2000 and 1999, real estate
owned is summarized as follows:
March 31, September 30,
------------------ ----------------------------
2001 2000 1999
-------------- ------------ ------------
(unaudited)
Real estate acquired through foreclosure $ 767,779 629,993 222,210
============== ============ ============
F-23
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999 and 1998
(8) Accrued Interest and Dividends Receivable
At March 31, 2001 (unaudited) and September 30, 2000 and 1999, accrued
interest and dividends receivable are summarized as follows:
March 31, September 30
---------------- ----------------------------------
2001 2000 1999
---------------- -------------- ----------------
(unaudited)
Loans $ 1,718,520 1,791,634 1,585,415
Mortgage-backed securities and collateralized
mortgage obligations 1,930,836 2,265,767 2,230,487
Investment securities 105,205 170,011 382,523
Other 227,034 249,432 196,728
---------------- -------------- ----------------
$ 3,981,595 4,476,844 4,395,153
================ ============== ================
(9) Premises and Equipment
Premises and equipment at March 31, 2001 (unaudited) and September 30, 2000
and 1999 is summarized as follows:
March 31, September 30,
---------------- ---------------------------------
2001 2000 1999
---------------- -------------- ---------------
(unaudited)
Land $ 1,152,232 1,152,232 671,868
Buildings and improvements 3,370,151 3,359,995 3,957,224
Furniture, fixtures, and equipment 2,746,846 2,519,319 2,125,290
Construction in progress 191,987 101,035 --
--------------- -------------- ---------------
7,461,216 7,132,581 6,754,382
Less accumulated depreciation 3,817,031 3,598,510 3,301,953
--------------- -------------- ---------------
$ 3,644,185 3,534,071 3,452,429
=============== ============== ===============
The Company recorded an impairment allowance of $200,000 during the year
ended September 30, 2000 relating to certain buildings and improvements
which represent current and former branch sites to be sold. The aggregate
fair value of such properties (which are included in other assets) was
estimated at $415,870 at March 31, 2001 (unaudited) and September 30, 2000.
F-24
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
(10) Mortgage Servicing Rights
Activity in mortgage servicing rights (which are included in other assets)
for the six months ended March 31, 2001 (unaudited) and for the years
ended September 30, 2000 and 1999 consists of the following:
March 31, September 30,
------------------ -----------------------------------------
2001 2000 1999
------------------ ------------------- -----------------
(unaudited)
Balance at beginning of period $ 1,097,284 1,320,840 1,021,995
Capitalized during the period 4,554 107,877 626,797
Amortization expense (149,546) (331,433) (327,952)
---------------- ------------------- -----------------
Balance at end of period $ 952,292 1,097,284 1,320,840
================ =================== =================
There was no valuation allowance at March 31, 2001 (unaudited) and
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 is 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 $(71,615) during the six
months ended March 31, 2001 (unaudited) and $(28,602), $448,000, and
$(5,797,145) during the years ended September 30, 2000, 1999, and 1998. An
independent valuation of the mortgage servicing rights of the limited
partnerships is performed quarterly. During the year ended September 30,
1998, the Company wrote off its entire limited partnership investment of
$2 million in the partnership for which it had a previous 12% interest
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.
F-25
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended September
30, 2000, 1999 and 1998
Financial information (unaudited), including balance sheets as of March
31, 2001 and September 30, 2000 and 1999 for the 21% partnership and
income statements for the six months ended March 31, 2001 and 2000 and the
years ended September 30, 2000, 1999, and 1998 for both partnerships, is
as follows:
March 31, September 30,
---------------- -------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
(unaudited)
Cash $ 1,000,556 683,534 259,120
Mortgage servicing rights, net 17,526,055 19,324,955 23,001,851
Other assets, primarily current 1,298,367 491,911 1,342,528
---------------- ---------------- ----------------
$ 19,824,978 20,500,400 24,603,499
================ ================ ================
Long-term debt $ 10,050,000 10,950,000 14,580,000
Other liabilities 1,050,878 479,076 813,499
Partners' capital:
CharterBank 1,799,783 1,871,398 1,900,000
Other partners 6,924,317 7,199,926 7,310,000
---------------- ---------------- ----------------
$ 19,824,978 20,500,400 24,603,499
================ ================ ================
For the Six Months
ended March 31,
-------------------------------------
2001 2000
---------------- ----------------
(unaudited)
Revenues $ 2,821,397 3,178,427
Expenses 3,168,621 3,178,427
---------------- ----------------
Net loss $ (347,224) --
================ ================
CharterBank's equity in net loss $ (71,615) --
================ ================
For the 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)
================ ================ ================
Page F-26
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended September
30, 2000, 1999, and 1998
(12) Deposits
At March 31, 2001 (unaudited) and September 30, 2000 and 1999, deposits
are summarized as follows:
March 31, 2001
--------------------------------------------------------
(unaudited)
--------------------------------------------------------
Weighted-
Range of average
interest interest
Amount rates rate
---------------- ---------------- ----------------
Demand, NOW, and money
market accounts $ 38,179,169 0.00-4.37 2.43
Savings deposits 8,327,577 1.99 1.99
Time deposits by original term:
Time deposits over $100,000 33,238,166 4.15-8.25 6.42
Other time deposits:
12 months or less 72,604,969 4.15-7.60 6.21
13-36 months 23,855,359 4.28-7.55 5.94
37 months or more 8,981,519 4.55-8.00 5.96
---------------- ----------------
Total deposits 185,186,759 5.23
================
Accrued interest payable 788,963
----------------
$ 185,975,722
================
September 30,
----------------------------------------------------------------------------------------
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
============= =============
Beginning in 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 $40,897,572 (unaudited),
$40,533,563, and $41,239,710 and of broker deposits was $-0- (unaudited),
$89,355,215, and $87,994,000 at March 31, 2001 (unaudited) and September
30, 2000 and 1999, respectively.
Page F-27
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended September
30, 2000, 1999 and 1998
At September 30, 2000, time deposits based on scheduled maturity dates 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 is summarized as follows:
March 31, Years ended September 30,
---------------------------------- --------------------------------------------------------
2001 2000 2000 1999 1998
--------------- --------------- --------------- ----------------- --------------
(unaudited)
Demand, NOW, and
money market accounts $ 437,045 358,562 765,137 449,325 400,305
Savings deposits 79,289 178,105 274,959 291,947 167,868
Time deposits 5,647,923 6,343,295 12,892,753 9,682,407 5,410,200
-------------- -------------- --------------- ----------------- ---------------
$ 6,164,257 6,879,962 13,932,849 10,423,679 5,978,373
============= ============== ============== ================ ===============
Deposits of certain officers, directors, and their associates totaled
$524,365 (unaudited), $1,123,378, and $916,501 at March 31, 2001
(unaudited) and September 30, 2000 and 1999, respectively. Such deposits
have substantially the same terms as those for comparable transactions
with other persons.
Deposits over $100,000 are not federally insured.
(13) Borrowings
At March 31, 2001 (unaudited) and September 30, 2000 and 1999, borrowings
are summarized as follows:
March 31, September 30,
----------------- ---------------------------------------
2001 2000 1999
----------------- ------------------ -----------------
(unaudited)
Federal Home Loan Bank advances $ 236,750,000 234,750,000 205,650,000
Securities sold under agreements to
Repurchase 115,554,750 117,468,500 107,216,769
----------------- ------------------ -----------------
$ 352,304,750 352,218,500 312,866,769
================= ================== =================
Page F-28
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended September
30, 2000, 1999 and 1998
Federal Home Loan Bank advances at March 31, 2001 (unaudited) and
September 30, 2000 and 1999 are summarized by year of maturity in the
table below:
March 31, 2001
(unaudited)
---------------------------------------------------------------------
Weighted-
Interest average
Due Amount rates rate
------------------------------------ --------------------- ------------------- --------------------
Less than one year $ 25,000,000 6.38% 6.38
One to two years -- -- --
Two to three years 56,000,000 4.85-6.49 5.60
Thereafter 155,750,000 5.34-6.33 5.83
--------------------- --------------------
$ 236,750,000 5.83
===================== ====================
September 30,
------------------------------------------------------------------------------------
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 $80,000,000 (unaudited) and $155,000,000 of the
Federal Home Loan Bank ("FHLB") advances at March 31, 2001 (unaudited) and
September 30, 2000 are adjusted periodically, based on short-term interest
rate indices.
At March 31, 2001 (unaudited) and 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 $147,083,737 (unaudited) and $135,227,055, respectively,
and certain mortgage-backed securities, collateralized mortgage
obligations, corporate securities, and U.S. government agency securities
with an aggregate fair value of $125,603,119 (unaudited) and $174,758,100,
respectively.
At March 31, 2001 (unaudited) and September 30, 2000, the Company had
available line of credit commitments with the FHLB totaling $280,450,000
(unaudited) and $283,896,000 of which $236,750,000 (unaudited) and
$234,750,000 was advanced and $43,700,000 (unaudited) and $49,146,000 was
available at March 31, 2001 (unaudited) and September 30, 2000,
respectively.
As of March 31, 2001 (unaudited) and September 30, 2000, the Company's
fixed rate FHLB advances include $83,750,000 (unaudited) and $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.
F-29
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended September
30, 2000, 1999 and 1998
The securities sold under agreements to repurchase at March 31, 2001
(unaudited) and 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 $121,987,872 (unaudited) and $124,395,137, respectively. All
securities sold under the agreements to repurchase are under the Company's
control. The repurchase agreements at March 31, 2001 (unaudited) and
September 30, 2000 and 1999 have maturities of less than 45 days, and
provide for the purchase of 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 $6,433,000
(unaudited) and $6,900,000 at March 31, 2001 (unaudited) and September 30,
2000, respectively.
The following summarizes pertinent data related to securities sold under
the agreements to repurchase for the six months ended March 31, 2001 and
2000 (unaudited) and years ended September 30, 2000, 1999, and 1998:
March 31, September 30,
--------------------------------------------------------------------------
2001 2000 2000 1999 1998
--------------------------------------------------------------------------
(unaudited)
Weighted-average borrowing
rate at period-end 5.45% 5.11 6.76 5.54 5.67
============== =========== =========== ========= ==========
Weighted-average borrowing
rate during the period 6.49% 6.09 6.64 5.42 5.82
============== =========== =========== ========= ==========
Average daily balance during
period $ 130,280,595 107,826,302 122,725,585 60,134,537 59,660,408
============== =========== =========== ========== ==========
Maximum month-end balance
during the period $ 157,962,635 137,127,376 153,308,116 111,320,019 127,764,875
============== =========== =========== =========== ===========
Interest expense on borrowings for the six months ended March 31, 2001 and
2000 (unaudited) and the years ended September 30, 2000, 1999, and 1998 is
summarized as follows:
March 31, September 30,
--------------------------------------------------------------------
2001 2000 2000 1999 1998
--------------------------------------------------------------------
(unaudited)
Securities sold under agreements
to repurchase $ 4,225,118 3,280,791 8,149,449 3,260,558 3,473,310
Federal Home Loan Bank advances 7,495,368 6,778,095 14,565,105 9,657,196 9,958,157
------------ ----------- ----------- ---------- ----------
$ 11,720,486 10,058,886 22,714,554 12,917,754 13,431,467
============ =========== =========== ========== ==========
Page F-30
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended September
30, 2000, 1999 and 1998
(14) Income Taxes
Income tax expense (benefit) attributable to income from continuing
operations for the six months ended March 31, 2001 and 2000 (unaudited)
and the years ended September 30, 2000, 1999, and 1998 consists of:
March 31, September 30,
----------------------------------- ------------------------------------------------------
2001 2000 2000 1999 1998
--------------- --------------- -------------- --------------- -----------------
(unaudited)
Federal:
Current $ 5,142,388 739,070 926,667 5,594,643 1,107,751
Deferred (4,422,473) 136,900 273,850 6,657,139 (1,814,696)
State:
Current 760,695 41,164 41,118 932,753 100,042
Deferred (626,056) 24,100 48,327 1,174,789 (211,013)
--------------- --------------- -------------- --------------- -----------------
$ 854,554 941,234 1,289,962 14,359,324 (817,916)
=============== =============== ============== =============== =================
The difference between the actual total provision for Federal and state
income taxes and Federal income taxes computed at the statutory rate of
34% for the six months ended March 31, 2001 and 2000 (unaudited) and 34%,
35%, and 34% for the years ended September 30, 2000, 1999, and 1998,
respectively, is summarized as follows:
March 31,
------------------------------------
2001 2000
---------------- ---------------
(unaudited)
Computed "expected" tax expense $ 1,191,095 1,233,399
Increase (decrease) in tax expense resulting from:
Dividends received deduction (445,143) (386,524)
State income taxes, net of Federal tax effect 88,862 43,074
Change in the deferred tax asset valuation
allowance -- (133,000)
Goodwill amortization and impairment -- 161,500
Other, net 19,740 22,785
--------------- ---------------
$ 854,554 941,234
=============== ===============
September 30,
--------------------------------------------------------
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-31
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended September
30, 2000, 1999 and 1998
The effective tax rate for the six months ended March 31, 2001 and 2000
(unaudited) and for the years ended September 30, 2000, 1999, and 1998 was
24.39% (unaudited), 25.95% (unaudited), 59.66%, 34.69%, and benefit of
238.46%, respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
March 31, 2001 (unaudited) and September 30, 2000 and 1999 are presented
below:
March 31, September 30,
---------------- ------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
(unaudited)
Deferred tax assets:
Georgia business credit carryforward $ -- 180,483 --
Allowance for loan losses 1,095,682 1,436,582 1,144,257
Deferred compensation 195,054 195,054 223,430
Alternative minimum tax credit carryforward 175,848 175,848 96,058
Self-insurance reserve 102,563 55,099 23,846
Charitable contributions carryforward 652,225 652,225 828,569
Investment in limited partnership 603,957 603,957 580,925
Pension expenses -- -- 195,327
Real estate acquired through foreclosure 119,525 119,525 200,752
Net operating loss carryforward 877,644 899,684 1,157,628
Other 269,588 148,659 230,798
---------------- ---------------- ----------------
Total gross deferred tax assets 4,092,086 4,467,116 4,681,590
Less valuation allowance 941,000 941,000 1,207,554
---------------- ---------------- ----------------
Net deferred tax assets 3,151,086 3,526,116 3,474,036
---------------- ---------------- ----------------
Deferred tax liabilities:
Deferred loan fees, net 522,193 539,482 282,454
Mortgage servicing rights 362,599 413,896 498,221
Net unrealized holding gains on securities
available for sale 122,504,617 96,077,613 92,830,453
Investment securities market adjustment
for tax reporting 1,265,837 6,598,770 6,108,444
Federal Home Loan Bank stock dividends 45,862 45,862 52,553
Other 75,629 97,669 379,750
---------------- ---------------- ----------------
Total gross deferred tax liabilities 124,776,737 103,773,292 100,151,875
---------------- ---------------- ----------------
Net deferred tax liabilities $ 121,625,651 100,247,176 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 March 31, 2001
(unaudited) and September 30, 2000. The Company has net operating loss
carryforwards of approximately $2,400,000 which begin to expire in 2018.
The
F-32
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
valuation allowance of $941,000 at March 31, 2001 (unaudited) and
September 30, 2000 relates to a portion of the charitable contributions
and net operating loss carryforwards. The charitable contribution
carryforward begins to expire in 2002.
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.
F-33
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
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)
---------------- ----------------
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 (recovery) expense $ (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
F-34
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
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 $111,777 (unaudited) and $59,862 (unaudited) in the six months
ended March 31, 2001 and 2000 (unaudited), respectively. The Company made
contributions to the Plan of $96,934, $27,040, and $33,298 in the years
ended September 30, 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 six months ended
March 31, 2001 and 2000 (unaudited) and the years ended September 30,
2000, 1999, and 1998, the Company expensed $469,709 (unaudited), $431,356
(unaudited), $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 was self-insured for employee medical and health care claims
up to a maximum of $10,000 per year per employee until February 28, 2001.
Claims above the self-insured maximum amounts were covered under an
insurance policy up to a maximum of $990,000. Total employee medical and
health care claims paid by the Company were $226,276, $192,956, and
$199,438 for the years ended September 30, 2000, 1999, and 1998,
respectively. At March 31, 2001 (unaudited) and September 30, 2000 and
1999, the Company has accrued $270,978 (unaudited), $146,074 and $63,219,
respectively, for employee medical and health care claims previously
reported and not paid as well as medical and health care claims incurred
but not reported.
(17) Fair Value of Financial Instruments
SFAS 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 March 31, 2001 (unaudited) and September 30, 2000 and 1999 was
$637,239,434 (unaudited), $654,876,216, and $651,564,566,
respectively (see notes 4 and 5).
F-35
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
(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 March 31, 2001
(unaudited) and September 30, 2000 and 1999:
March 31, 2001
-------------------------------------------
Carrying Estimated
amount fair value
------------------- ------------------
(unaudited)
1-4 family residential real estate $ 153,319,783 155,454,644
Commercial real estate 59,194,455 59,312,878
Commercial 7,096,270 6,796,518
Real estate construction 6,002,615 6,021,888
Other loans 26,718,132 26,696,161
Unamortized loan origination costs, net 43,079 42,131
Allowance for loan losses (5,375,458) (5,375,458)
---------------- ---------------
$ 246,998,876 248,948,762
================ ===============
Loans held for sale $ 410,000 411,995
================ ===============
September 30,
---------------------------------------------------------------------------------------
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 8,986,583 8,698,016 3,244,785 3,082,546
Real estate construction 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
================== ================== =================== ==================
Page F-36
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
(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.
(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 March 31, 2001 (unaudited) and
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 March 31, 2001 (unaudited) and September 30, 2000 and
1999:
March 31, 2001
------------------------------------------
Carrying Estimated
amount fair value
------------------ ------------------
(unaudited)
Demand, NOW, and money market accounts $ 38,179,169 38,179,169
Savings deposits 8,327,577 8,327,577
Time deposits 138,680,013 140,131,712
----------------- -----------------
$ 185,186,759 186,638,458
================= =================
September 30,
------------------------------------------------------------------------------------
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-37
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
(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 March
31, 2001 (unaudited) and September 30, 2000 and 1999:
March 31, 2001
------------------------------------
Carrying Estimated
amount fair value
---------------- ----------------
(unaudited)
Federal Home Loan Bank advances $ 236,750,000 236,751,651
Securities sold under agreements to repurchase 115,554,750 115,597,903
---------------- --------------
$ 352,304,750 352,349,554
================ ==============
September 30,
---------------------------------------------------------------------------------
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.
(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.
F-38
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
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 March
31, 2001 (unaudited) and September 30, 2000 and 1999 to satisfy the
regulatory requirement were $530,852, $512,634, and $549,796,
respectively.
Under OTS 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 March 31, 2001
(unaudited) and 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.
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.
F-39
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
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.
As of September 30, 2000, the most recent notification from the OTS
categorized the Company as well-capitalized under the regulatory framework
for prompt corrective action. To be categorized as well-capitalized, the
Company must maintain minimum total risk-based, Tier 1 risk-based, and
core/leverage ratios as set forth in the following table. Management is
not aware of the existence of any conditions or events occurring
subsequent to September 30, 2000, which would affect the Company's well-
capitalized classification.
The table of compliance with minimum capital requirements is presented
below at March 31, 2001 (unaudited) and September 30, 2000 and 1999 (in
thousands):
March 31, 2001
---------------------------------------------------
Tier 1 Total
Core/ risk- risk-
Tangible leverage based based
capital capital capital capital
---------- ---------- ------------ --------
(unaudited)
Total equity $ 249,212 249,212 249,212 249,212
General valuation allowances -- -- -- 4,794
Allowable unrealized gains -- -- -- 49,553
Accumulated comprehensive income (194,865) (194,865) (194,865) (194,865)
---------- ---------- ---------- --------
Regulatory capital $ 54,347 54,347 54,347 108,694
========== ========== ========== ========
Total assets $ 934,828 934,828 934,828 934,828
========== ========== ========== ========
Regulatory total assets $ 617,464 617,464
========== ==========
Risk-weighted assets $ 383,139 383,139
========== ========
Capital ratio 8.80% 8.80 14.18 28.37
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 $ 45,085 35,823 N/A 78,043
========== ========== ========== ========
Adequately capitalized or minimum FDICIA
requirement equal to or greater than 4.00% 4.00 8.00
Capital exceeding requirement $ 29,648 39,021 78,043
========== ========== ========
Well capitalized, equal to or greater than 5.00% 6.00 10.00
Capital exceeding requirement $ 23,474 31,359 70,380
========== ========== ========
F-40
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
September 30, 2000
---------------------------------------------------
Tier 1 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
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
=========== ========== =========
F-41
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
September 30, 1999
---------------------------------------------------
Tier 1 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
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. For the six months ended March 31, 2001 and 2000
(unaudited) and the years ended September 30, 2000 and 1999, lease expense
relating to these leases was $27,881 (unaudited), $16,000 (unaudited),
$40,000, and $8,000, respectively.
F-42
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000, 1999, and 1998
Future minimum lease payments for the branch facility lease are as
follows:
Year ending September 30,
-------------------------
2001 $ 42,000
2002 42,000
2003 42,000
2004 42,000
2005 42,000
Thereafter 119,000
--------------
$ 329,000
==============
(20) Formation of Insurance Subsidiary
On November 18, 1999, the Company submitted an application to the 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 commenced
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 OTS, the bank's Federal
banking regulator. If approved by the OTS, 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.
A liquidation account will not be established since the Company members
retain their rights as members of the mutual holding company.
After the reorganization, the Company will be limited in the amount of
dividends it can pay to Charter Financial Corp. The Company can pay its
current year income and any undistributed income from the two prior years.
The Company may apply to the OTS to pay distributions in amounts larger
than such restriction. The Company must also remain well capitalized after
any capital distribution.
F-43
CHARTERBANK
Notes to Consolidated Financial Statements - (Continued)
Six Months ended March 31, 2001 and 2000 (unaudited) and Years ended
September 30, 2000 and 1999, and 1998
Reorganization costs will be treated as reductions in the offering
proceeds and thus as a reduction of the capital raised. If the offering is
not successfully completed, the costs will be expensed in the period the
reorganization is terminated. Reorganization costs through March 31, 2001
totaled $483,960 (unaudited).
(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. In
light of regulatory concerns regarding certain distributions related to
the accrual, on March 22, 2001, the Board of Directors rescinded its
approval of such special management incentive bonus accrual and instructed
members of executive management to repay the $200,000 which was disbursed
in December 2000 related to this accrual. Accordingly, the Board of
Directors of the Company has determined to restate its consolidated
financial statements at and for the year ended September 30, 2000 for the
effects of the clarification regarding the regulatory authorities'
position.
The effects of the adjustments to the September 30, 2000 consolidated
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, deferred income taxes by $450,000,
retained earnings by $750,000, and to decrease previously recorded other
liabilities by $1,200,000.
F-44
Independent Auditors' Report
The Board of Directors
CharterBank:
We have audited the accompanying consolidated statements of financial condition
of CharterBank (the "Company") as of September 30, 2000 and 1999, and the
related consolidated 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 consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CharterBank at
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 consolidated statement of financial condition as of
September 30, 2000, and the related consolidated statements of income and
comprehensive income, equity, and cash flows for the year ended September 30,
2000 have been restated.
/s/ KPMG LLP
Atlanta, Georgia
December 1, 2000, except as to
note 22, as to which the
date is March 22, 2001
F-45
________________________________________________________________________________
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 6,083,500 Shares of Common Stock
______
PROSPECTUS
Sandler O'Neill & Partners, L.P.
August 10, 2001
Until the later of September 14, 2001 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.
________________________________________________________________________________