Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2001
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 000-33071
Charter Financial Corporation
(Exact Name of Registrant as Specified in Its Charter)
United States 58-2659667
(State or Other Jurisdiction (I.R.S. EmployerIdentification No.)
of Incorporation or Organization)
600 Third Avenue, West Point, Georgia 31833
(Address of Principal Executive Offices, including zip code)
(706) 645-1391
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
--- ---
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 19, 2001, the registrant had 19,822,405 shares of common stock,
$.01 par value, issued and outstanding. Of such shares outstanding, 15,857,924
shares were held by First Charter, MHC the registrant's mutual holding company,
and 3,964,481 were held by the public and directors, officers and employees of
the registrant. The aggregate market value of the voting stock held by
non-affiliates of the registrant as of December 19, 2001 was $59,698,153. This
figure was based on the closing price as of December 19, 2001 on the Nasdaq
national market for a share of the registrant's common stock, which was $17.50
as reported on Bloomberg on December 19, 2001.
DOCUMENTS INCORPORATED BY REFERENCE: None.
1
CHARTER FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 2001
TABLE OF CONTENTS
ITEM PART I PAGE
1 BUSINESS 2
2 PROPERTIES 42
3 LEGAL PROCEEDINGS 43
PART II
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 43
5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 44
6 SELECTED FINANCIAL DATA 46
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 48
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 76
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 76
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 76
PART III
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 76
11 EXECUTIVE COMPENSATION 78
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 85
13 CERTAIN RELATIONSHIPS AND RELATED TRANSCTIONS 87
PART IV
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 87
2
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K 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 and results of operation 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 Annual Report on
Form 10-K 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 known or unknown
risks and uncertainties. Consequently, no forward-looking statements can be
guaranteed.
3
PART I
ITEM 1. BUSINESS
General. Charter Financial Corporation ("Charter Financial," "us," or "we")
is a federally-chartered corporation organized in 2001 and is registered as a
savings and loan holding company with the Office of Thrift Supervision ("OTS").
Charter Financial serves as the holding company for CharterBank ("Bank"). First
Charter, MHC owns 80% of the outstanding shares of Charter Financial's common
stock. Our common stock is quoted on the National Market System of the Nasdaq
Stock Market under the symbol "CHFN." Unless the context otherwise requires, all
references herein to the Bank or Charter Financial include Charter Financial and
the Bank on a consolidated basis.
On October 16, 2001, CharterBank converted from a federally-chartered
mutual savings and loan association into a two-tiered mutual holding company
structure and became a wholly-owned subsidiary of Charter Financial. Charter
Financial sold 3,964,481 shares of its common stock to the public, representing
20% of the outstanding shares, at $10.00 per share and received net proceeds of
$37.2 million. Charter Financial contributed 50% of the net proceeds from the
initial public offering to CharterBank. An additional 15,857,924 shares, or 80%
of the outstanding shares of Charter Financial, were issued to First Charter,
MHC. An Employee Stock Ownership Plan (ESOP) was established and such ESOP
acquired 317,158 shares of Charter Financial in the offering, using the proceeds
of a loan from Charter Financial for such acquisition. Such ESOP obligation will
be disclosed as unearned compensation reducing shareholders' equity of Charter
Financial. The net proceeds, adjusted for the ESOP, amounted to approximately
$34 million.
As part of our reorganization in structure, CharterBank organized First
Charter, MHC as a federally-chartered mutual holding company which is registered
as a savings and loan holding company with the OTS. First Charter, MHC's
principal assets are the shares of common stock of Charter Financial it received
in the reorganization, the $100,000 it received as its initial capitalization,
and 400,000 shares of Freddie Mac common stock, the fair value of which was $26
million as of September 30, 2001. First Charter, MHC does not engage in any
business activity other than its investment in a majority of the common stock of
Charter Financial, management of Freddie Mac common stock, and the management of
any cash dividends received from Charter Financial or Freddie Mac. Federal law
and regulations require that as long as First Charter, MHC is in existence it
must own at least a majority of Charter Financial's common stock.
All historical financial information contained herein has been adjusted
to retroactively reflect the transfer of the 400,000 shares of Freddie Mac
common stock and the $100,000 in cash to First Charter, MHC. Operating data has
also been retroactively adjusted for such effects. The following represents the
pro forma balance sheet of First Charter, MHC to reflect the reorganization:
4
Pro Forma Balance Sheet
After Reorganization
-----------------------
Assets:
Cash $ 100,000
Freddie Mac Common Stock 26,000,000
Investment in Charter Financial 270,963,643
------------
Total Assets $297,063,643
============
Liabilities - Deferred Income Taxes $ 9,816,141
Minority Interest 54,192,729
Equity:
Retained Earnings 56,727,870
Contributed Capital 16,026,597
Accumulated Other Comprehensive Income 160,300,306
------------
Total Equity 233,054,773
------------
Total Liabilities and Equity $297,063,643
============
At September 30, 2001, Charter Financial had total assets of $894.9
million, of which $224.6 million was comprised of loans receivable and $326.6
million was comprised of mortgage-backed securities and collateralized mortgage
obligations. At such date, total deposits were $200.4 million, borrowings were
$309.4 million and total equity was $236.9 million. Charter Financial owns
1,700,000 shares of Freddie Mac common stock and Charter Insurance Company, a
Hawaiian corporation which generates fee income by reinsuring a portion of
CharterBank's loan originations which carry private mortgage insurance, owns
400,000 shares of Freddie Mac common stock. Additionally, CharterBank owns
2,555,000 shares of Freddie Mac common stock.
5
CharterBank was originally founded in 1954 and currently operates five
full-service branch offices and two loan production offices in west-central
Georgia and east-central Alabama. CharterBank is a community-oriented financial
institution serving primarily consumer households and small businesses.
CharterBank is the only locally-owned and operated financial institution in the
Valley area, consisting of Lanett and Valley, Alabama and West Point, Georgia.
CharterBank is subject to extensive regulation, supervision, and examination by
the OTS, its primary regulator, and the Federal Deposit Insurance Corporation
(the "FDIC"), which insures its deposits. CharterBank's savings deposits are
insured up to the maximum allowable amount by the Savings Association Insurance
Fund of the FDIC.
CharterBank is a service-oriented bank providing retail and small
business customers with products and services designed to create a long-term,
profitable relationship. We offer numerous loan products, including residential
mortgage loans, commercial real estate loans, commercial loans, home equity
loans, second mortgages, and other products. CharterBank also offers deposit
products, including consumer and commercial checking accounts, savings accounts,
money market accounts, and certificates of deposit. CharterBank also founded The
Charter Foundation, a non-profit foundation which makes charitable contributions
in the market area.
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, a branch office in LaGrange, Georgia, and our new
branch in Auburn, Alabama. 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 built a branch in Auburn, Alabama, which
opened in November, 2001. We also operate loan production offices in Newnan and
Columbus, Georgia, and in Auburn, Alabama, which was combined into the new
branch in November. 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.
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.
The economy of our market area has historically been 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 West Point Stevens, Batson Cook, Interface, Millikin, Auburn University,
ITC Deltacom, and Intercall. Powertel Inc., which was headquartered in West
Point, Georgia, has recently been sold to VoiceStream, which is now part of
Deutsche Telekom. Unemployment in our market area is generally low and,
specifically, the
6
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 better 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. At September 30,
2001, we had total loans receivable of $229.9 million. Residential mortgage
loans comprised $129.2 million, or 56.2% of total loans at September 30, 2001.
Loans secured by mortgages on commercial real estate totaled $61.2 million at
September 30, 2001. The $61.2 million balance of these loans at September 30,
2001 was a $387,000, or 0.6%, increase from the balance of commercial real
estate loans at September 30, 2000. Management's strategy is to grow the
commercial real estate loan portfolio; however, a weakening economy impacted the
2001 growth level. During the year ended September 30, 2000, our commercial real
estate loans increased by $14.3 million from $46.5 million at September 30, 1999
to $60.8 million at September 30, 2000 We hired additional personnel in the
commercial lending area during fiscal 2000 and 2001 to strengthen our operations
in this area.
At September 30, 2001, approximately $17.5 million of total commercial
real estate loans are secured by real estate in the Atlanta metropolitan area,
approximately $18.4 million of total commercial real estate loans are secured by
real estate in the local bank market, and approximately $25.3 million of total
commercial real estate loans are secured by commercial real estate in other
parts of Georgia, Alabama and Florida. We expect continued growth in our
commercial real estate portfolio in the future.
The remaining portion of our loan portfolio at September 30, 2001
consisted of consumer loans totaling $23.5 million, real estate construction
loans of $9.1 million, and commercial loans
7
of $6.8 million. Our consumer loan portfolio at September 30, 2001 contains
about $1.5 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.
8
The following table presents the composition of our loan portfolio in
dollar amounts and in percentages of the total portfolio at the dates indicated.
At September 30
-------------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
--------- ---------- --------- ---------- -------- ----------
(Dollars in thousands)
1-4 family residential
real estate(1)............... $ 129,223 56.2% $ 152,822 58.9% $132,036 61.6%
Commercial real estate.......... 61,225 26.6 60,838 23.4 46,545 21.7
Consumer and other(2)........... 23,537 10.2 29,915 11.5 24,353 11.4
Commercial...................... 6,819 3.0 8,987 3.5 3,245 1.5
Real estate construction(3)..... 9,143 4.0 7,138 2.7 8,038 3.8
--------- -------- --------- -------- -------- ------
Total loans.................. 229,947 100.0% 259,700 100.0% 214,217 100.0%
======== ======== ======
Less:
Net deferred loan costs
(fees)....................... (66) 113 (51)
Allowance for loan losses....... (5,290) (6,346) (5,710)
--------- --------- --------
Loans receivable, net........ $ 224,591 $ 253,467 $208,456
========= ========= ========
At September 30
---------------------------------------------------
1998 1997
----------------------- ------------------------
Percent of Percent of
Amount Total Amount Total
---------- ---------- ---------- ----------
1-4 family residential
real estate(1)............... $ 116,395 69.0% $ 101,399 73.7%
Commercial real estate.......... 34,343 20.4 22,419 16.3
Consumer and other(2)........... 9,026 5.4 6,126 4.5
Commercial...................... 3,601 2.1 3,116 2.3
Real estate construction(3)..... 5,295 3.1 4,390 3.2
--------- ------- --------- ---------
Total loans.................. 168,660 100.0% 137,450 100.0%
======= =========
Less:
Net deferred loan costs
(fees)....................... (246) (348)
Allowance for loan losses....... (2,054) (1,846)
--------- ---------
Loans receivable, net........ $ 166,360 $ 135,256
========= =========
------------------
(1) Excludes loans held for sale.
(2) Includes home equity loans and second mortgage loans.
(3) Net of undisbursed proceeds on loans-in-process.
9
Loan Maturity and Repricing. The following table shows the repricing dates
or contractual maturity dates as of September 30, 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 September 30, 2001
-----------------------------------------------------------------------------------------
1-4 Family
Residential
Real Estate Commercial Consumer and Real Estate
Loans Real Estate Other Commercial Construction(1) Totals
----------- ----------- ------------ ---------- --------------- -------
(In thousands)
Amounts due or
repricing:
Within one year ............ $ 40,599 $13,221 $ 2,612 $1,827 $9,143 $ 67,402
After one year:
One to three years ....... 29,302 3,335 2,264 2,941 - 37,842
Three to five years ...... 29,965 15,030 1,542 559 - 47,096
Five to ten years ........ 5,634 16,869 7,125 279 - 29,907
Over ten years ........... 23,723 12,770 9,994 1,213 - 47,700
Total due after one year ... 88,624 48,004 20,925 4,992 - 162,545
-------- ------- ------- ------ ------ --------
Total amount due: $129,223 $61,225 $23,537 $6,819 $9,143 $229,947
======== ======= ======= ====== ====== ========
(1) Presented net of undisbursed proceeds on loans-in-process.
The following table presents, as of September 30, 2001, the dollar amount
of all loans contractually due or scheduled to reprice after September 30, 2002
and whether such loans have fixed interest rates or adjustable interest rates.
Due After September 30, 2002
-------------------------------------------
Fixed Adjustable Total
------- -------------- ---------
(In thousands)
1-4 family residential
real estate ............ $31,509 $57,115 $ 88,624
Commercial real estate ..... 28,521 19,483 48,004
Consumer and other ......... 6,946 13,979 20,925
Commercial ................. 1,545 3,447 4,992
------- ------- --------
Total loans ............ $68,521 $94,024 $162,545
======= ======= ========
10
The following table presents our loan originations, purchases, sales and
principal payments for the periods indicated.
For the Years Ended September 30,
-------------------------------------------------------
2001 2000 1999
-------------------------------------------------------
(In thousands)
Loans(1):
Balance outstanding at beginning of period......... $ 259,700 $ 214,217 $ 168,660
Originations:
1-4 family residential real estate................. 121,952 92,504 139,499
1-4 family real estate acquired
in Citizens acquisition......................... - - 8,405
Commercial real estate and commercial.............. 25,225 55,445 10,725
Commercial real estate and commercial
acquired in Citizens acquisition................ - - 9,122
Consumer and other loans........................... 5,130 15,506 10,769
Consumer and other loans acquired
through Citizens acquisition.................... - - 9,455
Real estate construction........................... 12,283 7,696 14,457
Real estate construction loans acquired
through Citizens acquisition.................... - - 369
------------- ------------- --------------
Total originations and loans acquired
through Citizens acquisition.................... 164,590 171,151 202,801
Less:
Principal repayments, unadvanced funds and
other, net...................................... 128,242 87,430 133,428
Sale of residential mortgage loans, principal
balance......................................... 63,786 36,186 23,129
Loan charge-offs and transfers
to foreclosed real estate....................... 2,315 2,052 687
------------- ------------- --------------
Total deductions................................ 194,343 125,668 157,244
Net loan activity.................................. (29,753) 45,483 45,557
-------------- ------------- --------------
Ending balance.................................. $ 229,947 $ 259,700 $ 214,217
============= ============= ==============
------------------
(1) Excludes loans held for sale.
11
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 September 30, 2001 and September 30,
2000, loans on one-to-four-family properties accounted for 56.2% 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
$122.0 million for the fiscal year ending September 30, 2001, $92.5 million for
the year ended September 30, 2000, $139.5 million for the year ended September
30, 1999. Due to the low interest rate environment, a significant portion of
loans originated in 1999 and 2001 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 year ended September 30,
2001 was $113,000, and $105,000 for the year ended September 30, 2000.
We originate new mortgage loans through dedicated mortgage originators. Our
mortgage originators develop referrals from current bank customers, 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 adjustable rates are based on a constant maturity of
one year (constant treasury maturity index and Wall Street Journal Prime Rate).
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. At September 30, 2001, 67.5%
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 of the property. The
loan-to-value ratio is commonly used by financial institutions as one measure of
potential exposure to risk.
12
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 September 30, 2001,
our portfolio contained $59.1 million of 5-1 and similar adjustable rate loans
with a weighted average rate of 8.22%. 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.
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 $1.6 million of our
non-interest income for the year ended September 30, 2001.
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 September 30, 2001,
CharterBank serviced loans for Freddie Mac with an aggregate balance of $124.2
million and serviced loans for other investors with an aggregate balance of $8.3
million.
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 similar to those applicable
to one- to four-family first mortgage loans with the exception of loan to value
ratios which may go to 100% and slightly more stringent credit to income
requirements. Starting in 1999, equity lines and second mortgages with loan to
value ratios over 80% were generally insured with lender paid mortgage
insurance. At September 30, 2001, we had $18.5 million of home equity and second
mortgage loans. We also had $4.8 million of unfunded home equity commitments at
September 30, 2001.
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. 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 September 30, 2001, we had
$61.2 million of loans in our commercial real estate portfolio. The average loan
size at September 30, 2001 is larger than the average loan size in prior years
due to several multi-million commercial loans that were closed during fiscal
2001. Our largest loan exposure is a commercial real estate construction
permanent
13
loan with a commitment of $5.6 million at September 30, 2001 with approximately
$4.3 million drawn. This loan is secured by a hotel located in Auburn, Alabama.
We also have a $8.0 million credit line secured by two properties in Florida.
CharterBank sold $3.0 million 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. A significant portion of the commercial real estate
portfolio is tied to yields on U.S. Treasury securities. The terms of such fixed
rate loans generally do not exceed 25 years.
Commercial Loans. Commercial loans generally are limited to terms of five
years or less. Whenever possible, we collateralize these loans with a lien on
commercial real estate, or alternatively, with a lien on business assets and
equipment. We also generally require the personal guarantee of the business
owner. Interest rates on commercial loans generally have higher yields than
residential or commercial real estate loans due to the risk inherent in this
type of loan.
Commercial loans are generally considered to involve a higher degree of
risk than residential or commercial real estate loans because the collateral may
be in the form of intangible assets and/or inventory subject to market
obsolescence. Commercial loans may also involve relatively large loan balances
to single borrowers or groups of related borrowers, with the repayment of such
loans typically dependent on the successful operation and income stream of the
borrower. Such risks can be significantly affected by economic conditions. In
addition, business lending generally requires substantially greater supervision
efforts by our management compared to residential or commercial real estate
lending. In this regard, we have recently hired four 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 3.0% of total loans receivable at September 30, 2001.
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:
o home equity loans-open and closed end;
14
o secured deposit loans;
o unsecured credit lines and installment loans.
At September 30, 2001, the consumer loan portfolio totaled $23.5 million,
or 10.24% 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, may be 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 September 30, 2001, we had a total of $1.5 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 $1.1 million for the year ended September 30, 2001. We make
loans for up to 90% of the amount of a borrower's savings account or
certificates of deposit balance. These savings secured loans totaled $1.0
million at September 30, 2001.
Loan Approval Procedures and Authority. Our lending policies provide that
various loan personnel and management committees may review and approve loans
and lines up to prescribed limits as follows:
o Residential mortgage loans up to conforming limits of $300,700,
effective January 1, 2002;
o Commercial real estate mortgage loans up to $500,000 that meet our
underwriting standards;
o Home equity loans or lines for owner occupied one to four properties up
to $250,000 that conform to our underwriting guidelines;
o Home equity loans or lines up to $250,000 for vacation and non-owner
occupied properties;
o Unsecured loans up to $100,000; and
15
o Commercial loans up to $500,000.
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/Loan Committee of the Board of
Directors or approval of the Board. In addition, on residential 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 CharterBank's Management
Loan Committee process. The Management Loan Committee consists of the President,
the Executive Vice President, the Chief Financial Officer and certain other
senior lending and credit officers. The Management Loan Committee has authority
to approve individual loans and modifications up to $500,000. Commercial real
estate loans less than $250,000 may be approved outside the Committee process by
an officer who has commercial real estate loan authority.
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. 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.
Nonperforming loans decreased during the year ended September 30, 2001 due to
the resolution of problem loans acquired in the Citizens acquisition.
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
16
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 September 30, 2001, 2000, and 1999, we had $2.3 million,
$2.8 million, $2.0 million, 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 $104,000 for the year ended September 30, 2001.
At September 30,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- --------- ----------
Underperforming loans - accruing
loans delinquent 90 days or more ......... $ 218 $ 159 $ - $ - $ -
======== ======== ======== ========= ==========
Total non-performing loans ............... $ 2,312 $ 2,831 $ 1,989 $ 306 $ 1,173
Foreclosed real estate, net .............. 434 630 222 130 270
-------- -------- -------- --------- ----------
Total non-performing assets .............. $ 2,746 $ 3,461 $ 2,211 $ 436 $ 1,443
======== ======== ======== ========= ==========
Non-performing loans to total loans ...... 1.01% 1.09% 0.93% 0.18% 0.85%
======== ======== ======= ========= ==========
Non-performing assets to total assets .... 0.31% 0.37% 0.24% 0.06% 0.29%
======== ======== ======= ========= ==========
17
Nonperforming assets at September 30, 2001, 2000, and 1999 were $2.7
million, $3.5 million, $2.2 million, respectively. Of these totals, $65,000,
$824,000, and $523,000, 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 may remain on nonaccrual status.
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 September 30, 2001, 2000, and 1999,
impaired loans totaled $306,000, $1.2 million, and $2.0 million, respectively.
Approximately $0, $460,000, and $500,000 of total impaired loans at September
30, 2001, 2000, and 1999, respectively, relate to loans acquired through the
Citizens acquisition. At September 30, 2001, 2000, and 1999, we had $2.6
million, $2.8 million, and $2.0 million, respectively, of portfolio 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 September 30, 2001, 2000, and 1999, respectively, we
had $434,000, $630,000 and $222,000 in foreclosed real estate.
18
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 Years Ended September 30,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- --------- --------- ----------
(Dollars in thousands)
Balance at beginning of year ....... $ 6,346 $ 5,710 $ 2,054 $ 1,846 $ 1,627
Loan loss reserve of acquired
company(1) ........................ - - 3,752 - -
Charge-offs:
1-4 residential real estate .... (132) (104) (49) (156) (37)
Commercial real estate ......... - (91) - - -
Commercial ..................... (554) (26) (133) (1) (2)
Consumer and other ............. (1,387) (713) (238) (100) (84)
Real estate construction ....... (23) (204) - - -
---------- ---------- ---------- --------- ---------
Total charge-offs .............. (2,096) (1,138) (420) (257) (123)
---------- ---------- ---------- --------- ---------
Recoveries:
1-4 residential real estate .... 119 32 1 25 -
Commercial real estate ......... 21 18 - 220 -
Commercial ..................... - 20 - - -
Consumer and other ............. 400 294 83 40 42
Real estate construction ....... - - - - -
---------- ---------- ---------- --------- ---------
Total recoveries ............... 540 364 84 285 42
---------- ---------- ---------- --------- ---------
Net (charge-offs) recoveries ....... (1,556) (774) (336) 29 (81)
Provision for loan losses .......... 500 1,410 240 180 300
---------- ---------- ---------- --------- ---------
Balance at end of year ............. $ 5,290 $ 6,346 $ 5,710 $ 2,054 $ 1,846
========== ========== ========== ========= =========
Total loans receivable (2) ......... $ 229,947 $ 259,700 $ 214,217 $ 168,660 $ 137,450
========== ========== ========== ========= =========
Average loans outstanding .......... $ 243,243 $ 242,868 $ 178,496 $ 152,728 $ 121,523
========== ========== ========== ========= =========
Allowance for loan losses
as a percent of total
loans receivable (2) ........... 2.30% 2.44% 2.67% 1.22% 1.34%
========== ========== ========== ========= =========
Net loans (charged off)
recovered as a percent
of average outstanding ......... (0.64)% (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.
19
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:
o our historical loan loss experience;
o estimated losses in the loan portfolio;
o increases in categories with higher loss potential, such as commercial
real estate loans and jumbo loans;
o credit scores and credit history;
o the estimated value of the underlying collateral; and
o 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 (the "OTS") 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 year ended September 30, 2001, we expensed a $500,000 provision for
loan losses 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 September 30, 2001. 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 nonperforming loans acquired
in 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 years ended September 30, 2001, 2000, and 1999 --
Provision for Loan Losses."
20
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,
----------------------------------------------------------------------------------------
2001 2000
--------------------------------------- ----------------------------------------
Percent of Percent of
loans in Each loans in Each
Loan Balances Category to Loan Balances Category to
Loan Category Amount by Category Total Loans Amount by Category Total Loans
------- ------------- ------------- ------ ------------- -------------
(Dollars in Thousands)
1-4 family residential
real estate ................. $ 1,841 $129,223 56.2% $ 1,228 $ 152,822 58.9%
Commercial real estate ......... 1,656 61,225 26.6 1,487 60,838 23.4
Consumer loans and
other(1) .................... 382 23,537 10.2 2,345 29,915 11.5
Commercial ..................... 359 6,819 3.0 623 8,987 3.5
Real estate construction ....... 263 9,143 4.0 236 7,138 2.7
Unallocated .................... 789 - - 427 - -
------- -------- ----- ------- --------- ------
Total allowance for loan
losses ...................... $ 5,290 $229,947 100.00% $ 6,346 $ 259,700 100.00%
======= ======== ====== ======= ========= ======
At September 30,
----------------------------------------------------------------------------------------
1999 1998
--------------------------------------- ----------------------------------------
Percent of Percent of
loans in Each loans in Each
Loan Balances Category to Loan Balances Category to
Loan Category Amount by Category Total Loans Amount by Category Total Loans
------- ------------- ------------- ------ ------------- -------------
(Dollars in Thousands)
1-4 family residential
real estate ................. $ 1,529 $132,036 61.6% $ 727 $116,395 69.0%
Commercial real estate ......... 1,448 46,545 21.7 684 34,343 20.4
Consumer loans and
other(1) .................... 2,154 24,353 11.4 248 9,026 5.4
Commercial ..................... 376 3,245 1.5 54 3,601 2.1
Real estate construction ....... 119 8,038 3.8 58 5,295 3.1
Unallocated .................... 84 - - 283 - -
------- -------- ------ --------- -------- ------
Total allowance for loan
losses ...................... $ 5,710 $214,217 100.00% $ 2,054 $168,660 100.00%
======= ======== ====== ========= ======== ======
21
At September 30,
----------------------------------------
1997
---------------------------------------
Percent of
loans in Each
Loan Balances Category to
Loan Category Amount by Category Total Loans
------- ------------- -------------
(Dollars in Thousands)
1-4 family residential
real estate ................. $ 625 $101,399 73.7%
Commercial real estate ......... 725 22,419 16.3
Consumer loans and
other(1) .................... 162 6,126 4.5
Commercial ..................... 56 3,116 2.3
Real estate construction ....... 44 4,390 3.2
Unallocated .................... 234 - -
------- -------- ------
Total allowance for loan
losses ...................... $ 1,846 $137,450 100.00%
======= ======== ======
------------------
(1) Includes home equity lines of credit, excludes loans held for sale.
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, implement 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:
o Minimize the risk of loss of principal or interest;
o Generate a favorable return without incurring undue interest rate and
credit risk;
o Manage the interest rate sensitivity of our assets and liabilities;
o Meet daily, cyclical and long term liquidity requirements while
complying with our established policies and regulatory liquidity
requirements;
o Diversify assets in stable economic regions and address specific gap
imbalances; and
o 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:
o our cash;
o cash we have in other banks;
o unpledged U.S. Government or Government Agency Securities; and
o unpledged mortgage-backed securities guaranteed by the U.S. Government
or Agencies or rated AAA.
22
We utilize borrowing lines of credit supported by available collateral,
including Freddie Mac stock, which provides a high level of liquidity. We
consider our Freddie Mac common stock as a collateral source of last resort
because of adverse income tax consequences. 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 $276.3 million, of which $211.8 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 two major categories:
o equity investments; and
o 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 non-equity
portfolio was 5.11% as of September 30, 2001. 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 September 30, 2001. For information see
"Management Discussion and Analysis - Carrying Values, Yields and Maturities."
23
Investment Portfolio. The following table sets forth the composition of our
investment securities portfolio at the dates indicated.
At September 30,
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- ---------- --------- ---------- ---------
(Dollars in thousands)
Investment Securities:
U.S. Government agencies .................. $ - $ - $ 14,449 $ 12,880 $ 31,388 $ 29,950
Other debt securities ..................... - - 1,000 1,002 1,951 1,980
--------- --------- --------- -------- --------- ---------
Total investment securities ............. - - 15,449 13,882 33,339 31,930
--------- --------- --------- -------- --------- ---------
Mortgage-backed and mortgage-related
securities:
Ginnie Mae ................................ 20,081 20,230 85,700 82,171 81,651 77,919
Fannie Mae ................................ 16,518 16,620 52,832 50,783 64,839 62,536
Freddie Mac ............................... - - 25,043 24,355 24,357 23,785
Non-agency ................................ - - - - - -
--------- -------- --------- -------- --------- ---------
Total mortgage-backed and mortgage-
related securities ................... 36,599 36,850 163,575 157,310 170,847 164,240
--------- -------- --------- -------- --------- ---------
Collateralized mortgage obligations:
Fannie Mae ................................ 74,091 73,619 78,831 77,777 61,621 60,528
Freddie Mac ............................... 140,128 139,677 70,513 69,369 60,493 59,464
Non-agency ................................ 72,417 71,430 67,198 59,946 74,288 68,950
Ginnie Mae ................................ 5,081 5,037 3,518 3,306 3,504 3,316
--------- -------- --------- -------- --------- ---------
Total collateralized mortgage
obligations.......................... 291,717 289,763 220,060 210,398 199,906 192,258
--------- -------- --------- -------- --------- ---------
Total mortgage-backed securities and
collateralized mortgage
obligations ......................... 328,316 326,613 383,635 367,708 370,753 356,498
--------- -------- --------- -------- --------- ---------
Total investment and mortgage
securities .......................... $ 328,316 $326,613 $ 399,084 $381,590 $ 404,185 $ 388,704
========= ======== ========= ======== ========= =========
Freddie Mac common stock and other
equity securities ......................... $ 6,365 $302,623 $ 6,316 $251,661 $ 6,409 $ 242,336
========= ======== ========= ========= ========= =========
Total investment and mortgage securities
and Freddie Mac common stock......... $ 334,681 $629,236 $ 405,400 $633,251 $ 410,501 $ 630.764
========= ======== ========= ======== ========= =========
24
At September 30,
---------------------------------------------------
1998 1997
---------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------------------------------------------------
(Dollars in thousands)
Investment Securities:
U.S. Government agencies .................. $ - $ - $ 5,811 $ 5,794
Other debt securities .................... 1,756 1,995 1,929 2,047
--------- --------- --------- ---------
Total investment securities ............. 1,756 1,995 7,470 7,841
--------- --------- --------- ---------
Mortgage-backed and mortgage-related
securities:
Ginnie Mae ................................ 10,564 10,547 5,074 5,057
Fannie Mae ................................ 45,591 45,602 23,280 23,247
Freddie Mac ............................... 22,498 22,667 6,423 6,426
Non-agency ................................ 1,970 1,905 - -
--------- --------- --------- ---------
Total mortgage-backed and mortgage-
related securities ................... 80,623 80,721 34,777 34,730
--------- --------- --------- ---------
Collateralized mortgage obligations:
Fannie Mae ................................ 81,894 82,682 45,672 45,805
Freddie Mac ............................... 42,180 42,660 37,941 38,138
Non-agency ................................ 44,413 44,772 10,240 10,324
Ginnie Mae ................................ - - - -
--------- --------- --------- ---------
Total collateralized mortgage
obligations .......................... 168,487 170,114 93,853 94,267
--------- --------- --------- ---------
Total mortgage-backed securities and
collateralized mortgage
obligations ......................... 249,110 250,835 128,630 128,997
--------- --------- --------- ---------
Total investment and mortgage
securities .......................... $ 250,886 $ 252,830 $ 136,370 $ 136,838
========= ========= ========= =========
Freddie Mac common stock and other
equity securities ......................... $ 7,072 $ 261,310 $ 7,072 $ 185,609
========= ========== ========= =========
Total investment and mortgage securities
and Freddie Mac common stock......... $ 257,938 $ 514,140 $ 143,442 $ 222,447
========= ========= ========= =========
25
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 September 30, 2001 At September 30, 2000
-----------------------------------------------------------------------------------
Amortized Market Unrealized Amortized Market Unrealized
Costs Value Gain/(Loss) Costs Value Gain/(Loss)
-----------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Government agencies.................... $ - $ - $ - $ 14,449 $ 12,880 ($1,569)
Fixed rate mortgage-backed and
mortgage-related securities:
Ginnie Mae ................................. 19,728 19,882 154 83,450 79,960 (3,490)
Fannie Mae ................................. 15,614 15,727 113 47,213 45,263 (1,950)
Freddie Mac ................................ - - - 4,290 4,088 (202)
-------- -------- -------- -------- -------- --------
Total fixed rate mortgage-backed and
mortgage-related securities .............. 35,342 35,609 267 134,953 129,311 (5,642)
Fixed rate collateralized mortgage
obligations:
Fannie Mae ................................. 1,604 1,606 2 15,649 15,330 (319)
Freddie Mac ................................ 12,703 12,712 9 15,714 15,092 (622)
Non-agency ................................. 61,358 60,467 (891) 68,425 61,161 (7,264)
Ginnie Mae ................................. - - - 3,518 3,306 (212)
-------- -------- -------- -------- -------- --------
Total fixed rate collateralized
mortgage obligations ............. 75,665 74,785 (880) 103,306 94,889 (8,417)
Total fixed rate mortgage-backed
securities and collateralized
mortgage obligations ............. 111,007 110,394 (613) 238,259 224,200 (14,059)
-------- -------- -------- -------- -------- --------
Total fixed rate investment and
mortgage securities............... 111,007 110,394 (613) 252,708 237,080 (15,628)
Variable rate other debt and
equity investments .................... - - - 1,000 1,003 3
Variable rate mortgage-backed and
mortgage-related securities ........... 1,257 1,241 (16) 28,622 27,998 (624)
Variable rate collateralized mortgage
obligations ........................... 216,052 214,978 (1,074) 116,754 115,509 (1,245)
-------- -------- -------- -------- -------- --------
Total variable rate investment and
mortgage securities .............. 217,357 216,267 (1,090) 146,376 144,510 (1,866)
Freddie Mac common stock and other
equity securities .......................... 6,365 302,623 296,259 6,316 251,661 245,345
-------- -------- -------- -------- -------- --------
Total investment and mortgage
securities and Freddie Mac
common stock ..................... $334,681 $629,236 $294,556 $405,400 $633,251 $ 227,841
======== ======== ======== ======== ======== =========
26
Investment Portfolio Maturities. The composition and maturities of the
investment securities portfolio (debt securities) and the mortgage-backed
securities portfolio at September 30, 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
-----------------------------------------------------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
-----------------------------------------------------------------------
(Dollars in thousands)
Investment securities available
for sale:
Federal Agencies ....................... - - - - - -
Other debt securities .................. - - - - - -
Total investment securities .......... - - - - - -
Mortgage-backed securities available
for sale:
Ginnie Mae ............................. - - - - $ - -
Fannie Mae ............................. - - - - 4,676 5.79%
Freddie Mac ............................ - - - - - -
------ ----
Total mortgage-backed securities ..... - - - - 4,676 5.79%
Collateralized mortgage obligations:
Fannie Mae ............................. - - - - - -
Freddie Mac ............................ - - - - - 0.00%
Non-agency ............................. - - - - 88 6.97%
Ginnie Mae ............................. - - - - - -
------ ----
Total collateralized mortgage
obligations ........................ - - - - 88 6.97%
------ ----
Total ..................................... - - - - $4,764 5.81%
====== ====
27
More than Ten Years Total Securities
---------------------------------------------------------------
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
---------------------------------------------------------------
(Dollars in thousands)
Investment securities available
for sale:
Federal Agencies ....................... - - - - -
Other debt securities .................. - - - - -
Total investment securities .......... - - - - -
Mortgage-backed securities available
for sale:
Ginnie Mae ............................. 20,081 6.25% 20,081 20,230 6.25%
Fannie Mae ............................. 11,842 6.50% 16,518 16,620 6.30%
Freddie Mac ............................ - - - - -
------- ----- ------- ------- -----
Total mortgage-backed securities ..... 31,923 6.34% 36,599 36,850 6.27%
Collateralized mortgage obligations:
Fannie Mae ............................. 74,091 4.29% 74,091 73,619 4.29%
Freddie Mac ............................ 140,128 4.59% 140,128 139,677 4.59%
Non-agency ............................. 72,329 6.73% 72,417 71,430 6.73%
Ginnie Mae ............................. 5,081 4.31% 5,081 5,037 4.31%
------- ----- ------- ------- -----
Total collateralized mortgage
obligations ........................ 291,629 4.96% 291,717 289,763 4.97%
------- ----- ------- ------- -----
Total ..................................... $323,552 5.10% $328,316 $326,613 5.11%
======== ===== ======== ======== =====
U.S. Agency Obligations. We did not own any U.S. Agency obligations at
September 30, 2001.
Equity Securities. As of September 30, 2001, equity securities are
primarily comprised of 4,655,000 shares of Freddie Mac common stock which had a
per share market value of $65.00 per share, a total market value of $302.6
million and a cost basis of approximately $1.36 per share. The large unrealized
pre-tax gain of approximately $296.3 million is the result of a series of
well-timed investments in Freddie Mac stock in the middle to late 1980's. 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 33.8% 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 76.8% 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.
28
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 the realization of a substantial current tax liability for
us, we have no current plans to liquidate our Freddie Mac stock investment.
However, we reallocated the Freddie Mac stock so as to more effectively manage
our investment and retail operations. In this regard, effective October 16,
2001, as part of the reorganization, 2.5 million shares of Freddie Mac stock
were 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 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 nonsecuritized 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 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 September 30, 2001, the estimated average
life of our fixed rate mortgage backed security portfolio was 7.14 years and of
our fixed rate collateralized mortgage obligation portfolio was 9.06 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.
29
Mortgage-Backed Securities and Mortgage-Related Securities. The following
table discloses the amortized cost and fair value of our mortgage-backed and
mortgage-related securities, all of which are classified as available for sale
as of the dates indicated. Since 1994, all mortgage-backed and mortgage-related
securities have been classified as available for sale.
At September 30,
-------------------------------------------------------------------------------
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...................... $ 20,081 6.12% $ 20,230 $ 85,700 22.33% $ 82,171
Fannie Mae...................... 16,518 5.03 16,620 52,832 13.77 50,783
Freddie Mac..................... - - - 25,043 6.53 24,355
Other........................... - - - - - -
Collateralized mortgage
obligations available
for sale:
Fannie Mae...................... 74,091 22.57 73,619 78,831 20.55 77,778
Freddie Mac..................... 140,128 42.68 139,677 70,513 18.38 69,369
Other........................... 72,417 22.06 71,430 67,198 17.52 59,946
Ginnie Mae...................... 5,081 1.54 5,037 3,518 0.92 3,306
--------- --------- --------- --------- --------- ---------
Total....................... $ 328,316 100.00% $ 326,613 $ 383,635 100.00% $ 367,708
========= ========= ========= ========= ========= =========
At September 30,
----------------------------------
1999
----------------------------------
Amortized Percent of Market
Cost Total Value
----------------------------------
(Dollars in thousands)
Mortgage-backed securities
available for sale:
Ginnie Mae...................... $ 81,651 22.01% $ 77,919
Fannie Mae...................... 64,839 17.49 62,536
Freddie Mac..................... 24,357 6.57 23,785
Other........................... - - -
Collateralized mortgage
obligations available
for sale:
Fannie Mae...................... 61,621 16.62 60,528
Freddie Mac..................... 60,493 16.32 59,464
Other........................... 74,288 20.04 68,950
Ginnie Mae...................... 3,504 0.95 3,316
--------- -------- --------
Total....................... $ 370,753 100.00% $356,498
========= ======== ========
At September 30,
------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------
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...................... $ 10,594 4.24% $ 10,547 $ 5,074 3.94% $ 5,057
Fannie Mae...................... 45,591 18.30 45,602 23,280 18.10 23,247
Freddie Mac..................... 22,498 9.03 22,667 6,423 4.99 6,426
Non agency...................... 1,970 0.79 1,905 - - -
Collateralized mortgage
obligations available
for sale:
Fannie Mae...................... 81,894 32.88 82,682 45,672 35.51 45,805
Freddie Mac..................... 42,180 16.93 42,660 37,941 29.50 38,138
Other........................... 44,413 17.83 44,772 10,240 7.96 10,324
-------- -------- --------- --------- -------- ---------
Total....................... $249,110 100.00% $250,835 $ 128,630 100.00% $ 128,997
======== ======== ========= ========= ======== =========
30
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
September 30, 2001, we owned approximately $11.6 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 September 30, 2001, our total deposits amounted to $200.4
million, of which $164.0 million were retail deposits and $36.4 million were
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. Wholesale deposits consist
of brokered certificates of deposit and/or funds on deposit from credit unions.
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 and products
are changed as necessary to meet customer needs and marketing objectives.
Our deposit flows are influenced by a number of factors including:
o general and local economic conditions;
o the perceived strength of the stock and stock mutual fund market;
o prevailing interest rates; and
o 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 September 30, 2001, demand deposits, NOW deposits, savings, and money
market accounts represented 33% of total retail deposits. See "Management's
Discussion and Analysis
31
of Financial Condition and Results of Operations-Analysis of Net Interest
Income" for information relating to the average balances and costs of our
deposit accounts for the years ended September 30, 2001, 2000, and 1999. We
expect that 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.
CharterBank obtains brokered deposits through major securities 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. 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 September 30, 2001. At September 30,
2000, our brokered certificates of deposit totaled $89.4 million, or 32.6% of
total deposits, with a weighted average interest rate of 5.96%.
Brokered deposits of approximately $89.3 million matured during the 2001
fiscal year. These maturing brokered deposits were funded through the sale of
mortgage securities and additional repurchase agreements. 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 wholesale 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 September 30, 2001, our credit union certificates of deposit totaled
$36.4 million, or 18.2% of total deposits. At September 30, 2000, our credit
union certificates of deposit totaled $40.5 million, or 14.8% of total deposits.
32
Deposit Distribution Weighted Average. The following table sets forth the
distribution of our deposit accounts, by account type, at the dates indicated.
At September 30,
-----------------------------------------------------------------------
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)..................... $ 9,497 4.74% -% $ 8,060 2.94% -%
NOW deposits....................... 15,465 7.72 1.25 13,962 5.09 1.95
Savings deposits................... 10,313 5.15 1.50 8,386 3.06 1.99
Money market deposits.............. 18,817 9.39 2.26 11,440 4.17 5.42
--------- ------- --------- -------
Total non-certificated accounts...... 54,092 27.00 1.43 41,848 15.25 2.53
Certificates of deposit:
Due within 1 year.................. 86,071 42.96 5.06 77,076 28.09 5.74
Over 1 year through 3 years........ 17,788 8.88 5.61 19,204 7.00 6.08
Over 3 years....................... 6,031 3.01 6.29 6,418 2.34 6.32
--------- ------- --------- -------
Total retail certificates of
deposit............................ 109,890 54.85 5.09 102,698 37.43 5.76
--------- ------- --------- -------
Total retail deposits.............. 163,982 81.85 4.14 144,546 52.68 4.83
--------- ------- --------- -------
Wholesale:
Certificates of deposit
Due within 1 year.................. 33,298 16.62 5.71 125,166 45.62 6.13
Over 1 year through 3 years........ 3,075 1.53 5.60 4,659 1.70 6.55
Over 3 years....................... - - - - - -
--------- ------- --------- -------
Total wholesale:................... 36,373 18.15 5.70 129,825 47.32 6.15
--------- ------- --------- -------
Total certificate accounts......... 146,263 73.00 5.24 232,523 84.75 5.98
--------- ------- --------- -------
Total deposit accounts............. $ 200,355 100.00% 4.21% $ 274,371 100.00% 5.37%
========= ======= ========= =======
At September 30,
----------------------------------
1999
----------------------------------
Weighted
Average
Amount Percent Rates
------- ---------- ----------
(Dollars in thousands)
Retail:
Non-certificated accounts:
Non-interest bearing demand
deposits (1)..................... $ 8,704 3.08% -%
NOW deposits....................... 14,495 5.12 2.00
Savings deposits................... 8,789 3.11 2.49
Money market deposits.............. 9,686 3.42 4.10
------- ---------
Total non-certificated accounts...... 41,674 14.73 2.17
Certificates of deposit:
Due within 1 year.................. 87,533 30.93 5.07
Over 1 year through 3 years........ 18,755 6.63 5.45
Over 3 years....................... 5,769 2.04 5.43
------- ---------
Total retail certificates of
deposit............................ 112,057 39.60 5.09
------- ---------
Total retail deposits.............. 153,731 54.33 4.30
------- ---------
Wholesale:
Certificates of deposit
Due within 1 year.................. 84,206 29.76 5.25
Over 1 year through 3 years........ 44,929 15.88 5.22
Over 3 years....................... 99 0.03 6.13
------- ---------
Total wholesale:................... 129,234 45.67 5.24
------- ---------
Total certificate accounts..... 241,291 85.27 5.17
------- ---------
Total deposit accounts......... $282,965 100.00% 4.07%
======== =========
------------------
(1) Includes mortgagors' escrow payments.
33
Deposit Flow. The following table summarizes the deposit activity of the
Bank for the periods indicated.
For the Years Ended September 30,
--------------------------------------------
2001 2000 1999
---------- ---------- ----------
(Dollars in thousands)
Balance at beginning of period............ $ 274,371 $ 282,965 $ 135,611
Net (decrease) increase before
interest credited...................... (81,969) (17,679) 142,798
Interest credited......................... 7,953 9,085 4,556
---------- ---------- ----------
Balance at end of period.................. $ 200,355 $ 274,371 $ 282,965
========== ========== ==========
Total (decrease) increase in
deposit accounts..................... $ (74,016) $ (8,594) $ 147,354
========== ========== ==========
Percentage (decrease) increase............ (26.98)% (3.04)% 108.66%
========== ========== ==========
C.D. Maturities. At September 30, 2001, we had $37.5 million in
certificates of deposits with balances of $100,000 and over maturing as follows:
Weighted
Maturity Period Amount Average Rate
---------------------------------------------- --------- ------------
(Dollars In thousands)
Retail:
Three months or less............................... $ 5,032 5.45%
Over three months through six months............... 10,240 5.34
Over six months through 12 months.................. 7,975 4.85
Over 12 months..................................... 7,498 6.26
Total.......................................... 30,745 5.46
------- -----
Wholesale:
Three months or less............................... 1,800 6.02
Over three months through six months............... 600 5.32
Over six months through 12 months.................. 3,800 5.06
Over 12 months..................................... 600 5.80
Total.......................................... 6,800 5.40
------- -----
Total.............................................. $37,545 5.45%
======= =====
34
C.D. Balances by Rates. The following table sets forth, by interest rate
ranges, information concerning our certificates of deposit at the dates
indicated.
At September 30, 2001
-------------------------------------------------------------------------------------------------
Period to Maturity
-------------------------------------------------------------------------------------------------
Less than One One to Two Two to Three More than Percent of
Year Years Years Three Years Total Total
------------- ---------- ------------ ----------- --------- ----------
(Dollars in thousands)
Retail:
4.00% and below $ 15,991 $ 841 $ 65 $ - $16,897 15.38%
4.01% to 5.00%.............. 23,142 2,325 1,221 623 27,311 24.85
5.01% to 6.00%.............. 31,445 4,441 2,074 1,148 39,108 35.59
6.01% to 7.00%.............. 13,738 4,296 583 3,306 21,923 19.95
7.01% and above............. 1,755 1,193 749 954 4,651 4.23
-------- ------- ------ ------ ------- ------
Total..................... 86,071 13,096 4,692 6,031 109,890 100.00
======== ======= ====== ====== ======= ======
Wholesale:
4.00% and below............. $ 199 - - - 199 -
4.01% to 5.00%.............. 14,141 1,090 - - 15,231 41.87%
5.01% to 6.00%.............. 5,623 397 397 - 6,417 17.64
6.01% to 7.00%.............. 4,463 1,092 - - 5,555 15.27
7.01% and above............. 8,872 99 - - 8,971 24.66
-------- ------- ------ ------ ------- ------
Total..................... $ 33,298 $ 2,678 $ 397 - $36,373 100.00%
======== ======= ====== ====== ======= ======
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 September 30, 2001,
our total borrowings were $309.4 million, as compared to $352.2 million at
September 30, 2000. Our utilization of borrowings has contributed to our
profitability and we will continue to employ borrowings as a source of funds. At
the same time, we will consider whether to undertake future borrowings as a
source of funds only after a complete review of numerous relevant factors
including:
. the potential interest spread and risks involved;
. analysis of the current and anticipated interest rate environment;
. the current and expected levels of our deposit base; and
. various other risk factors associated with using borrowings as a source of
funds.
Federal Home Loan Bank Advances. At September 30, 2001, our outstanding
FHLB advances totaled $211.8 million, as compared to $234.8 million at September
30, 2000. At September 30, 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;
35
. certain qualifying first mortgage loans with unpaid principal balances
totaling $142.5 million; and
. certain mortgage-backed securities and collateralized mortgage
obligations with an aggregate fair value of $146.8 million.
At September 30, 2001, CharterBank has available lines of credit
commitments with the FHLB totaling $276.3 million, of which $211.8 million was
advanced and $64.5 million was available.
Securities Sold Under Agreements to Repurchase. We had approximately
$97.7 million of securities sold under agreements to repurchase outstanding at
September 30, 2001, as compared to $117.5 million at September 30, 2000. The
securities sold under agreement to repurchase at September 30, 2001 are secured
by certain mortgage-backed securities and collateralized mortgage obligations
with an aggregate fair market value, including accrued interest of $102.7
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 September 30, 2001 and 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.
36
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 years indicated.
At and for the Year Ended September 30,
---------------------------------------------
2001 2000 1999
----------- ------------ -----------
(Dollars in thousands)
Federal Home Loan Bank advances:
Average balance outstanding............................ $ 239,497 $ 239,921 $ 189,030
Maximum amount outstanding at any
month-end during the period.......................... 254,000 260,500 206,900
Balance outstanding at end of
the year............................................. 211,750 234,750 205,650
Weighted average interest rate
during the year...................................... 5.97% 6.25% 4.61%
Weighted average interest rate at
end of year.......................................... 5.68% 6.32% 5.34%
Securities sold under agreements
to repurchase:
Average balance outstanding............................ $ 117,600 $ 122,726 $ 60,135
Maximum amount outstanding at any
month-end during the year............................ 157,963 153,308 111,320
Balance outstanding at end of
the year............................................. 97,674 117,469 107,217
Weighted average interest rate
during the year...................................... 5.62% 6.64% 5.42%
Weighted average interest rate at
end of year.......................................... 3.25% 6.76% 5.54%
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 opened a branch in November
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 wholesale 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, possibly including brokered
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
37
significant sources of funds include liquidity, loan repayments, maturing
investments and retained earnings.
Investment in Limited Partnerships
In 1997, CharterBank purchased interests in two limited partnerships,
for $7.0 million, which were formed to acquire mortgage servicing rights.
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 year ended September 30, 2001, CharterBank
recognized ($1,200,488) equity in the net earnings (loss) of the limited
partnership, 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 September 30, 2001 was approximately $671,000. See Note 11 of the
Notes to Consolidated Financial Statements for further discussion of the limited
partnership interest.
Personnel
As of September 30, 2001, CharterBank had 130 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.
FEDERAL AND STATE 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. However,
Charter Financial and CharterBank will file separate federal and state income
tax returns. 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 CharterBank makes "non-dividend
distributions" to Charter Financial, such distributions will be considered to
result in distributions from unrecaptured tax bad debt reserve as of December
31, 1987 ("base year reserve"), to the extent thereof and then from supplemental
reserve for losses on loans, and an amount based on the amount distributed will
be included in income. Non-dividend distributions include distributions in
excess of current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete liquidation.
Dividends paid out of current or accumulated earnings and profits will not be
included in income.
38
The amount of additional income created from a non-dividend
distribution is equal to the lesser of the 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 and Charter Insurance as a member of
the same affiliated group of corporations.
State
CharterBank currently files and will continue to file Georgia and
Alabama income tax returns. Generally, the income of financial institutions in
Georgia and Alabama, which is calculated based on federal taxable income,
subject to certain adjustments, is subject to both Alabama and Georgia tax. We
are not currently under audit with respect to our Georgia or Alabama income tax
returns and our state tax returns have not been audited for the past five years.
Charter Financial will be required to file a Georgia income tax return
and will generally be subject to a state income tax rate that is the same tax
rate as the tax rate for financial institutions in Georgia.
REGULATION OF CHARTERBANK AND CHARTER FINANCIAL
General
Charter Financial and First Charter, MHC are regulated as savings and
loan holding companies by the OTS. CharterBank, as a federal stock savings bank,
is subject to regulation, examination and supervision by the OTS. CharterBank
must file reports with the OTS concerning its activities and financial
condition. Charter Financial and First Charter, MHC are also required to file
reports with, and otherwise comply with the rules and regulations of the OTS.
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-
39
era laws restricting affiliations among banks, securities firms, insurance
companies and other financial services providers. The impact of the GLB Act on
Charter Financial, First Charter, MHC, and CharterBank where relevant, is
discussed throughout the regulation section below.
Any change in such laws and regulations, whether by the OTS, 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 OTS.
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:
. 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.
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 September 30, 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.
40
Capital Requirements. OTS 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 OTS regulations;
(2) a leverage ratio requirement of 3% of core capital to such
adjusted total assets, if a savings association has 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 OTS capital regulation based on the risks that the OTS 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, 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 ,as
defined. 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, as defined
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 September 30, 2001, CharterBank met each of its capital
requirements.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), as implemented by OTS 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 OTS, in connection with its examination of CharterBank, to assess
CharterBank's record of
41
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:
o lending test, to evaluate the institution's record of making loans
in its assessment areas;
o an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing,
and programs benefiting low or moderate income individuals and
businesses; and
o 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 OTS 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 OTS 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.
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. The regulations allow small discounts on fees
on residential mortgages for directors officers and employees. In addition,
extensions of credit in excess of certain limits must be approved by
CharterBank's Board of Directors.
Enforcement. The OTS 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.
42
Standards For Safety And Soundness. Under federal law, the OTS 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 OTS adopted regulations that authorize, but do not
require, the OTS 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 OTS 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 OTS may seek to enforce such
order in judicial proceedings and to impose civil money penalties.
Limitation on Capital Distributions. The OTS 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 OTS at least 30 days before making a capital distribution.
CharterBank must file an application for prior approval if 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. However, a savings association subsidiary of a savings and loan holding
company, such as CharterBank, will continue to have to file a notice, unless the
specific capital distribution requires an application.
The OTS may disapprove of a notice or application if:
o CharterBank would be undercapitalized following the distribution;
o the proposed capital distribution raises safety and soundness
concerns; or
o 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 OTS prompt corrective
action regulations, the OTS 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:
o well capitalized;
43
o adequately capitalized;
o undercapitalized; and
o critically undercapitalized.
At September 30, 2001, CharterBank met the criteria for being
considered "well-capitalized."
When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
federal law.
Insurance of Deposit Accounts. CharterBank is a member of the Savings
Association Insurance Fund, and CharterBank pays its deposit insurance
assessments to the SAIF. The FDIC also maintains another insurance fund, the
Bank Insurance Fund, which primarily insures the deposits of banks and state
chartered savings banks.
Under federal law, the FDIC established a risk based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information as of the quarter ending three months before the beginning
of the assessment period. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under the
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment rates
are applied. Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%.
In addition, all FDIC insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0212% of insured
deposits to fund interest payment on bonds issued by the Financing Corporation,
an agency of the federal government established to recapitalize the predecessor
to the SAIF. These assessments will continue until the Financing Corporation
bonds mature in 2017.
Federal Home Loan Bank System. CharterBank is a member of the Federal
Home Loan Bank (the "FHLB") of Atlanta, which is one of the regional FHLBs
making up the FHLB System. Each FHLB provides a central credit facility
primarily for its member institutions. CharterBank is required to acquire and
hold shares of capital stock in the FHLB 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 FHLB of Atlanta at
September 30, 2001, of $11.6 million. Any advances from a FHLB must be secured
by specified types of collateral, and all long term
44
advances may be obtained only for the purpose of providing funds for
residential housing finance.
FHLBs 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 FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, CharterBank's net interest income
would be affected.
Under the GLB Act, membership in the FHLB 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 FHLB System with a
capital structure that requires each FHLB 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. ss. 1972 on certain tying arrangements.
A depository institution is prohibited, subject to some exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or its affiliates
or not obtain services of a competitor of the institution.
Federal Reserve System
Under regulations of the Federal Reserve Board (the "FRB"), CharterBank
is required to maintain noninterest-earning reserves against its transaction
accounts. FRB regulations generally require that reserves of 3% must be
maintained against aggregate transaction accounts of $42.8 million or less,
subject to adjustment by FRB, and an initial reserve of $1.3 million plus 10%,
subject to adjustment by FRB 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 FRB, 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
noninterest-bearing account at a Federal Reserve bank or a pass-through account
as defined by FRB, 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 are savings and loan holding
companies regulated by the OTS. As such, Charter Financial and First Charter,
MHC registered with and are subject to OTS examination and supervision, as well
as certain reporting requirements. In addition, the OTS 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 OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial
45
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
was organized after May 4, 1999, under the GLB Act, it is 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:
o furnishing or performing management services for a savings
institution subsidiary of such holding company;
o conducting an insurance agency or escrow business;
o holding, managing, or liquidating assets owned or acquired from a
savings institution subsidiary of such company;
o holding or managing properties used or occupied by a savings
institution subsidiary of such company;
o acting as trustee under a deed of trust;
o any other activity (a) that the 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 OTS, 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;
o 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 OTS; and
o 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:
o lending, exchanging, transferring, investing for others or
safeguarding money or securities;
o insurance activities or providing and issuing annuities, and
acting as principal, agent or broker;
o financial, investment or economic advisory services;
46
o issuing or selling instruments representing interests in pools of assets
that a bank is permitted to hold directly;
o underwriting, dealing in, or making a market in securities;
o activities previously determined by the FRB to be closely related to
banking;
o activities that bank holding companies are permitted to engage in outside
of the U.S.; merchant banking activities; and
o portfolio investments made by an insurance company.
In addition, Charter Financial cannot be acquired or acquire a company
unless the acquirer 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:
o investing in the stock of a savings institution;
o 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;
o merging with or acquiring another holding company, one of whose
subsidiaries is a savings institution;
o 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
o 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:
o control (as defined under HOLA) of another savings institution (or a
holding company parent) without prior OTS approval;
47
. 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
OTS 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 OTS).
A savings and loan holding company may not acquire as a separate subsidiary
an insured institution that has a principal office outside of the state where
the principal office of its subsidiary institution is located, except:
. in the case of certain emergency acquisitions approved by the FDIC;
. if such holding company controls a savings institution subsidiary that
operated a home or branch office in such additional state as of March 5,
1987; or
. if the laws of the state in which the savings institution to be acquired is
located specifically authorize a savings institution chartered by that
state to be acquired by a savings institution chartered by the state where
the acquiring savings institution or savings and loan holding company is
located or by a holding company that controls such a state chartered
association.
If the savings institution subsidiary of a federal mutual holding company
fails to meet the QTL test set forth in Section 10(m) of the HOLA and
regulations of the OTS, 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.
Federal Securities Law
Our common stock is registered with the SEC under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We are subject
to information, proxy solicitation, insider trading restrictions, and other
requirements under the Exchange Act.
ITEM 2. PROPERTIES
We currently conduct our business through five full-service banking offices
and two loan production offices. As of September 30, 2001, the properties and
leasehold improvements owned by us had an aggregate net book value of $4.8
million.
48
Year of Lease
or License Deposits as of
Location Ownership Year Opened Expiration(1) September 30, 2001
---------- --------- ----------- -------------- ------------------
(In thousands)
Administrative/Main Office:
600 Third Avenue Owned 1965 - $100,498
West Point, Georgia
Branch Offices:
300 Church Street Owned 1976 - 30,043
LaGrange, Georgia
3500 20th Avenue(2) Leased 1963 7/31/08 51,313
Valley, Alabama
91 River Road(2) Owned 1989 - 11,349
Valley, Alabama
Auburn, Alabama(3) Owned 2001 - 6,952
Loan Production Offices:
15 Ruth Drive, Suite C Leased 1993 Month-to Month
Newnan, Georgia
118-C Enterprise Court Leased 1993 10/31/01
Columbus, Georgia
Airport Plaza Leased 1994 Month-to-Month
Auburn, Alabama(3)
------------------
(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) The permanent branch was opened in November of 2001 and the Loan production
office was closed with its operations being merged into the branch
operations. The loan production office was qualified as a branch office and
accepted non- cash deposits.
ITEM 3. 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.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
49
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Quarterly Operating Results
-------------------------------------------------------------------------------------
2001 2000
------------------------------------------- ----------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
quarter quarter quarter quarter quarter quarter quarter quarter
------------------------------------------- ----------------------------------------
(Dollars in thousands)
Interest and dividend income $13,484 12,535 11,411 10,641 12,707 13,197 14,110 13,935
Interest expense............... 9,541 8,344 7,205 6,556 8,075 8,864 9,638 10,071
------- -------- -------- -------- -------- -------- -------- --------
Net interest and dividend
income.................... 3,943 4,191 4,206 4,085 4,632 4,333 4,472 3,864
Provision for loan losses...... 150 150 150 50 90 90 130 1,100
Net interest and dividend
income after provision
for loan losses........... 3,793 4,041 4,056 4,035 4,542 4,243 4,342 2,764
------- -------- -------- -------- -------- -------- -------- --------
Noninterest income (loss)...... 503 793 434 (77) 397 436 422 694
Noninterest expense............ 2,794 2,980 2,581 3,061 3,183 2,936 3,089 6,734
------- -------- -------- -------- -------- -------- -------- --------
Income before provision for
income taxes.............. 1,502 1,854 1,909 897 1,756 1,743 1,675 (3,276)
------- -------- -------- -------- -------- -------- -------- --------
Income tax expense (benefit)... 360 477 478 90 487 439 422 (88)
------- -------- -------- -------- -------- -------- -------- --------
Net income.................. $ 1,142 1,377 1,431 807 1,269 1,304 1,253 (3,188)
======= ======== ======== ======== ======== ======== ======== ========
Other comprehensive income
(loss)....................... $48,184 (8,792) 8,002 (6,437) (13,867) (11,043) (10,886) 40,455
======= ======== ======== ======== ======== ======== ======== ========
Comprehensive income (loss). $49,326 (7,415) 9,433 (5,630) (12,598) (9,739) (9,633) 37,267
======= ======== ======== ======== ======== ======== ======== ========
Our common stock is listed on the Nasdaq National Market System for the
Nasdaq Stock Market under the symbol "CHFN." First Charter, MHC owns 15,857,924
shares, or 80% of our outstanding common stock. At October 16, 2001, there were
19,822,405 shares of common stock issued and outstanding, and there were
approximately 500 holders of record. The price range for the common stock for
the period from the issue date of October 16, 2001 to December 14, 2001 was as
follows:
Period High Low Dividend
------- ---- --- --------
October 16, 2001- $18.30 $10.00 -
December 14,2001
The stock price information set forth above has been provided by the
National Association of Securities Dealers, Inc. High, low, and closing prices
and daily trading volumes are reported in most major newspapers.
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.
50
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 common 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.
51
ITEM 6. SELECTED FINANCIAL DATA
The summary information presented below at or for each of the years
presented is derived in part from the consolidated financial statements of
Charter Financial. The following information is only a summary, and you should
read it in conjunction with our consolidated financial statements and notes
beginning on page F-1.
At September 30,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- -------- -------- ----------
(In thousands)
Selected Financial Data: (1)
Total assets......................... $ 894,920 $ 920,962 $ 883,686 $ 709,336 $ 483,811
Loans receivable, net(2)............. 224,591 253,467 208,456 166,360 135,256
Investment securities available
for sale(3)........................ 326,614 381,590 388,704 252,830 136,838
Freddie Mac common stock & other
equities securities................ 302,623 251,661 242,336 261,310 185,609
Retail deposits...................... 163,982 144,482 153,731 100,808 89,889
Total deposits....................... 200,355 274,371 282,965 135,611 89,889
Deferred income taxes................ 112,379 92,120 88,869 93,681 66,671
Total borrowings..................... 309,424 352,219 312,867 288,638 186,925
Total retained earnings.............. 56,058 51,029 50,157 23,127 22,652
Accumulated other
comprehensive income(4)............ 180,858 139,900 135,241 159,556 111,482
Total equity......................... 236,916 190,929 185,398 182,683 134,134
Allowance for loan losses............ 5,290 6,346 5,710 2,054 1,846
Non-performing assets................ 2,746 3,461 2,211 436 1,443
For the Years Ended September 30,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- -------- -------- ----------
(In thousands)
Selected Operating Data: (1)
Interest and dividend income............ $ 48,071 $ 53,949 $ 36,741 $ 28,991 $ 21,045
Interest expense........................ 31,645 36,647 23,341 19,409 12,757
--------- --------- ---------- --------- ---------
Net interest income.................. 16,426 17,302 13,400 9,582 8,288
Provision for loan losses............... 500 1,410 240 180 300
--------- --------- ---------- --------- ---------
Net interest and dividend income
after provision for loan losses.... 15,926 15,892 13,160 9,402 7,988
Total noninterest income (loss)......... 1,652 1,949 38,749 (3,307) 3,606
Total noninterest expenses.............. 11,416 15,943 10,749 6,622 8,326
--------- --------- ------------ --------- ---------
Income (loss) before provision for
income taxes...................... 6,162 1,898 41,160 (527) 3,268
--------- --------- ---------- --------- ---------
Income tax expense (benefit)............ 1,406 1,260 14,333 (839) 350
--------- --------- ---------- --------- ---------
Net income........................... $ 4,756 $ 638 $ 26,827 $ 312 $ 2,918
Other comprehensive income
(loss), net of tax (5)................ $ 40,958 $ 4,659 $ (24,314) $ 48,074 $ 35,378
--------- --------- ---------- --------- ---------
Comprehensive income (6)............. $ 45,714 $ 5,297 $ 2,513 $ 48,386 $ 38,296
========= ========= ========== ========= =========
------------------
(1) Reflects assets and liabilities transferred in reorganization of October
16, 2001 and income and expenses related thereto. Refer to note 21 to
consolidated financial statements.
(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).
52
At or for the Years Ended September 30,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- -------- -------- ----------
Selected Financial Ratios and Other Data(7):
Performance:
Return on Realized Assets(8)............. 0.76% 0.09% 5.41% 0.08% 1.16%
Return on average assets................. 0.52 0.07 3.46 0.05 0.71
Comprehensive return on average
assets(9).............................. 4.98 0.59 0.32 7.99 8.57
Return on realized equity(8)............. 8.61 1.18 68.01 1.15% 19.22
Return on average equity................. 2.08 0.38 12.70 0.19 2.54
Comprehensive return on average
equity(10)............................. 19.98 3.13 1.19 29.57 30.79
Average equity to average assets......... 24.92 18.90 27.25 27.01 27.82
Equity to total assets at end of period.. 26.47 20.73 20.98 25.75 27.72
Average interest rate spread(11)......... (0.34) 0.37 (0.42) (0.65) (0.21)
Net interest margin(11)(12).............. 1.83 1.99 1.75 1.63 2.05
Average interest-earning assets..........
to average interest-bearing
liabilities............................ 1.61x 1.38x 1.71x 1.69x 1.71x
Total noninterest expense to average
assets.................................. 1.24% 1.78% 1.39% 1.09% 2.02%
Efficiency ratio(13)...................... 63.15 82.27 54.33 120.21 87.32
Regulatory Capital Ratios:
Tangible capital......................... 9.44 7.49 7.02 5.20 7.24
Core capital............................. 9.44 7.49 7.02 5.20 7.24
Risk-based capital....................... 29.94 26.45 36.66 11.86 15.42
Asset Quality Ratios:
Non-performing loans as a percent
of total loans....................... 1.01 1.09 0.93 0.18 0.85
Non-performing assets as a percent
of total assets................... 0.31 0.38 0.25 0.06 0.30
Allowance for loan losses as a percent
of total loans.......................... 2.30 2.44 2.67 1.22 1.34
Allowance for loan losses as a ratio
of non-performing loans............. 2.28x 2.24x 2.87x 6.71x 1.57x
Number of:
Full-time equivalent employees........... 130 126 129 92 82
---------------
(7) Asset quality ratios and regulatory capital ratios are end of period
ratios.
(8) Realized assets and equity exclude unrealized gains on Freddie Mac stock.
(9) 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 Charter Financial's
comprehensive income is in the form of other comprehensive income instead
of net income, therefore comprehensive return on average assets provides
useful information. This information is relevant because of Charter
Financial's significant investment in Freddie Mac common stock.
(10) 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 Charter Financial's
comprehensive income is in the form of other comprehensive income instead
of net income, therefore comprehensive return on average equity provides
useful information. This information is relevant because of Charter
Financial's significant investment in Freddie Mac common stock.
(11) The net interest spread and net interest margin are significantly impacted
by the large balances of Freddie Mac stock and the low dividend yield on
that stock. Please see the net interest margin discussion in MD&A for a
discussion of this impact
(12) 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.
(13) The efficiency ratio represents the ratio of operating expenses (excluding
certain elements of charitable contributions which relate to appreciation
of donated stock) divided by the sum of net interest income and noninterest
income less gain on sales of investments.
53
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 related 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
FHLB of Atlanta. Our balance sheet at September 30, 2001 also contains
non-interest bearing liabilities of approximately $148.2 million of which $112.4
million represents deferred taxes, principally relating to the unrealized gain
on our Freddie Mac stock. Our results of operations also depend on our provision
for loan losses, noninterest income and our non-interest expense. Non-interest
expense includes salaries and employee benefits, occupancy expenses and other
general and administrative expenses. Noninterest income includes gains on sale
of loans, 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
product lines and services, expanding delivery systems for our customers, and
extending our branch network. More specifically, we seek to:
o continue to focus on expanding our residential lending and retail
banking franchise, and increasing the number of households served
within our market area;
54
o 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;
o increase convenience to customers as a means to compete for an
increased share of our customers' financial service business; and
o 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 FHLB 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.
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.
55
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, FHLB
advances, repurchase agreements and wholesale deposits. Retail deposits consist
primarily of certificates of deposit, which have shorter terms to maturity than
the loan portfolio, and transaction accounts. Recently, we have employed several
strategies to manage the interest rate risk inherent in the asset/liability mix,
including but not limited to:
o Selling a majority of the 30 year and 15 year fixed-rate
mortgages we originate to the secondary market, generally on a
servicing released basis;
o 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
o Emphasizing investments with adjustable interest rates.
o Increased fixed rate borrowings from the FHLB.
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 year ended September 30,
2001, CharterBank reduced its fixed rate mortgage related investment securities
by $126.7 million and replaced them with variable rate mortgage related
investments. In addition, we replaced variable rate borrowings with fixed rate
borrowings in 2001 in order to take advantage of the lower interest rate
environment.
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. With certain
interest rates currently below 3.00% a down 300 calculation does not provide
meaningful information.
56
The table below sets forth, as of, September 30, 2001, the estimated
changes in net portfolio value that would result from changes in interest rates
as indicated over the applicable twelve-month period.
Net Portfolio Value
Change Post Shock
In Rates $ Amount $ Change % Change Capital Ratio
---------- ---------- ---------- ---------- ---------------
(Dollars in thousands)
+300 bp 213,384 (20,753) 8.86% 25.10%
+200 bp 220,606 (13,531) 5.78% 25.49%
+100 bp 227,248 (6,889) 2.94% 25.75%
0 bp 234,137 - 0.00% 25.94%
-100 bp 227,751 (6,386) 2.73% 25.02%
-200 bp 206,247 (27,890) 11.91% 22.80%
-300 bp N/A N/A N/A N/A
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. The net portfolio value decreases
as interest rates decrease because fixed rate loans and fixed rate debt
securities have a borrower option to prepay and so the assets do not gain value
with the reduction in interest rates. At September 30, 2001, fixed rate
investment and mortgage securities comprised $110.4 million or 33.8% of our
total portfolio of investment and mortgage securities of $326.6 million. The
disparate results on net portfolio value of interest rate increases versus
interest rate decreases is sometimes referred to as negative convexity. The post
shock capital ratio is the post shock net portfolio value as a percent of total
assets.
The effects of interest rates on net portfolio value and net interest
income are not predictable. Nevertheless, CharterBank's management does not
expect current interest rates to have a material adverse effect on CharterBank's
net portfolio value or net interest income in the near future. Computations of
prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, prepayments,
and deposit run-offs, and should not be relied upon as indicative of actual
results. Certain shortcomings are inherent in these computations. Although some
assets and liabilities may have similar maturity or periods of repricing, they
may react at different times and in different degrees to changes in the market
interest rates. Rates on other types of assets and liabilities may lag behind
changes in market interest rates. Assets, such as adjustable rate mortgages,
generally have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. After a change in interest rates,
prepayments and early withdrawal levels could deviate significantly from those
assumed in making calculations set forth above. Additionally, an increased
credit risk may result if our borrowers are unable to meet their repayment
obligations as interest rates increase.
Average Balance Sheet and Analysis of Net Interest Income. The following
tables depict the significant effect of the Freddie Mac stock on our traditional
bank ratios, such as net interest income, net interest rate spread, and net
interest margin. The tables show these measures with and without the effects of
the Freddie Mac stock. Freddie Mac stock had a dividend return on
57
cost basis of approximately 56.5% at September 30, 2001. However, the dividend
yield on the market value of the Freddie Mac stock is only 1.2%. The
appreciation in the market value of the Freddie Mac stock has created our strong
comprehensive income.
Overall, ratios have weakened slightly for the year ended September 30,
2001, as compared to the year ended September 30, 2000, due to the effects of
the falling interest rate environment during this time period on our wholesale
investment strategy and a 43 basis point increase in the average cost of time
deposits as we attempted to grow our core deposit base. We locked in $125.8
million in fixed rate advances to take advantage of the lower interest rate
environment during 2001, which helped to decrease the average cost of borrowings
by 36 basis points from 2000. However, the lower interest rate environment also
increased loan prepayments and lowered the yield on mortgage-related investments
by 75 basis points in 2001. The yield on loans receivable increased 5 basis
points during the year ended September 30, 2001 compared to the year ended
September 30, 2000. This slight increase reflects the shift in the allocation of
the loan portfolio as 1-4 family mortgage loans decreased and higher-yielding
commercial real estate loans increased from 2000. The cost of deposits increased
9 basis points from 5.30% to 5.39% in comparing 2000 to the year ended September
30, 2001. The increase in the cost of deposits during a time period of falling
interest rates is due to our deposit pricing strategy implemented during 2001
that pays higher rates to customers maintaining larger balances. The combination
of these rate changes reduced the overall net interest margin by 16 basis points
from 1.99% for the year ended September 30, 2000 to 1.83% for the year ended
September 30, 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
the recognition of certain fees over the lives of the underlying loans.
58
At September 30, 2001
--------------------------
Actual
Balance Yield/Cost
------------ -----------
Assets:
Interest-earning assets:
Interest-bearing deposits in other financial
institutions................................... $ 5,367 3.00%
FHLB common stock................................ 11,636 6.75%
Mortgage-backed securities and collateralized
mortgage obligations available for sale........ 326,613 5.11%
Loans receivable................................. 224,591 8.62%
---------
Total interest-earning assets excluding
Freddie Mac common stock ...................... 568,207 6.51%
Freddie Mac common stock and other
investment securities available for sale..... 302,623 1.23%
---------
Total interest-earning assets including
Freddie Mac common stock....................... 870,830 4.68%
Total non-interest earning assets.............. 24,090 -
Total assets................................... $ 894,920 4.55%
=========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts..................................... $ 14,505 1.25%
Savings accounts................................. 10,313 1.49%
Money market deposit accounts.................... 18,817 2.26%
Certificates of deposit accounts................. 149,263 5.35%
---------
Total interest-bearing deposits................ 189,898 4.52%
Borrowed funds................................... 309,424 4.87%
---------
Total interest-bearing liabilities............. 499,322 4.74%
Noninterest-bearing deposits..................... 10,457 -
Other noninterest-bearing liabilities............ 148,225 -
---------
Total noninterest-bearing liabilities.......... 158,682 -
Total liabilities.............................. 658,004 3.59%
Total equity................................... 236,916
---------
Total liabilities and equity................... $ 894,920
=========
59
For the Years Ended September 30,
----------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Interest-bearing deposits in other
financial institutions....................... $ 7,213 $ 344 4.77% $ 2,625 $ 159 6.06%
FHLB common stock and other equity............. 12,486 899 7.20 12,660 971 7.67
Mortgage-backed securities and collateralized
mortgage obligations available for sale..... 328,648 21,150 6.44 381,924 27,477 7.19
Other investment securities available for sale. 9,866 652 6.61 18,152 1,194 6.58
Loans receivable............................... 243,243 21,442 8.82 240,401 21,076 8.77
--------- ---------- --------- ----------
Total interest-earning assets excluding
Freddie Mac common stock............... 601,455 44,487 7.40 655,762 50,877 7.76
Freddie Mac common stock....................... 297,834 3,584 1.20 214,076 3,072 1.44
--------- -------- --------- --------
Total interest-earning assets including
Freddie Mac common stock.................... 899,289 48,071 5.35 869,838 53,949 6.20
Total non-interest earning assets............ 18,690 - - 22,656 - -
--------- -------- --------- --------
Total assets................................. $ 917,980 $ 48,071 $ 892,494 $ 53,949
========= ======== ========= ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts................................... 14,512 249 1.72 13,717 282 2.06
Savings accounts............................... 8,261 161 1.95 8,585 275 3.20
Money market deposit accounts.................. 14,254 565 3.96 10,063 483 4.80
Certificates of deposit accounts............... 162,222 9,762 6.02 230,482 12,892 5.59
--------- -------- --------- --------
Total interest-bearing deposits.............. 199,249 10,737 5.39 262,847 13,932 5.30
Borrowed funds................................. 357,098 20,908 5.85 365,745 22,715 6.21
--------- -------- --------- --------
Total interest-bearing liabilities........... 556,347 31,645 5.69 628,592 36,647 5.83
Noninterest-bearing deposits................... 8,516 - - 8,472 - -
Other noninterest-bearing liabilities.......... 124,365 - - 86,297 - -
--------- -------- --------- --------
Total noninterest-bearing liabilities........ 132,881 - - 94,769 - -
--------- -------- --------- --------
Total liabilities............................ 689,228 31,645 4.59 723,361 36,647 5.02
Total equity................................. 228,752 - 169,133 -
--------- -------- --------- --------
Total liabilities and equity................. $ 917,980 $ 31,645 $ 892,494 $ 36,647
========= ======== ========= ========
Net interest income, including Freddie Mac
common stock................................. $ 16,426 $ 17,302
======== ========
Net interest rate spread, including Freddie Mac
common stock(1).............................. (0.34%) 0.37%
Net interest margin, including Freddie Mac
common stock(2).............................. 1.83% 1.99%
Ratio of interest-earning assets to average
interest-bearing liabilities, including......
Freddie Mac common stock.................... 161.64% 138.38%
Net interest income excluding
Freddie Mac common stock dividends........... $ 12,842 $ 14,230
======== ========
Net interest rate spread excluding
Freddie Mac common stock(3).................. 1.71% 1.93%
Net interest rate margin excluding
Freddie Mac common stock (4)................. 2.14% 2.17%
Ratio of interest-earning assets to average
interest-bearing liabilities, excluding......
Freddie Mac common stock..................... 108.11% 104.32%
For the Years Ended September 30,
-------------------------------------
1999
-------------------------------------
Average
Average Yield/
Balance Interest Cost
--------- ---------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Interest-bearing deposits in other
financial institutions....................... $ 3,053 $ 148 4.85%
FHLB common stock and other equity............. 10,059 736 7.32
Mortgage-backed securities and collateralized
mortgage obligations available for sale..... 261,272 16,592 6.35
Other investment securities available for sale. 26,218 1,524 5.81
Loans receivable............................... 180,772 15,015 8.31
-------- --------
Total interest-earning assets excluding
Freddie Mac common stock............... 481,374 34,015 7.07
Freddie Mac common stock....................... 283,504 2,726 0.96
-------- --------
Total interest-earning assets including
Freddie Mac common stock.................... 764,878 36,741 4.83
Total non-interest earning assets............ 10,582 - -
-------- --------
Total assets................................. $ 775,460 $ 36,741
========= ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts................................... 6,601 128 1.94
Savings accounts............................... 6,503 292 4.49
Money market deposit accounts.................. 8,189 321 3.92
Certificates of deposit accounts............... 177,416 9,682 5.46
--------- --------
Total interest-bearing deposits.............. 198,709 10,423 5.25
Borrowed funds................................. 247,914 12,918 5.21
--------- --------
Total interest-bearing liabilities........... 446,623 23,341 5.23
Noninterest-bearing deposits................... 3,411 - -
Other noninterest-bearing liabilities.......... 114,127 - -
--------- --------
Total noninterest-bearing liabilities........ 117,538 - -
--------- --------
Total liabilities............................ 564,161 23,341 4.08
Total equity................................. 211,299 -
--------- --------
Total liabilities and equity................. $ 775,460 $ 23,341
========= ========
Net interest income, including Freddie Mac
common stock................................. $ 13,400
========
Net interest rate spread, including Freddie Mac
common stock(1).............................. (0.42)%
Net interest margin, including Freddie Mac
common stock(2).............................. 1.72%
Ratio of interest-earning assets to average
interest-bearing liabilities, including......
Freddie Mac common stock.................... 176.38%
Net interest income excluding
Freddie Mac common stock dividends........... $ 10,674
========
Net interest rate spread excluding
Freddie Mac common stock(3).................. 1.84%
Net interest rate margin excluding
Freddie Mac common stock (4)................. 2.22%
Ratio of interest-earning assets to average
interest-bearing liabilities, excluding......
Freddie Mac common stock..................... 107.78%
(footnotes on following page)
60
------------------
(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.
61
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.
62
Year Ended September 30, 2001
Compared to Year Ended
September 30, 2000
Increase/(Decrease)
--------------------------------------------
Due to
---------------------------------
Volume Rate Combined Net
--------- --------- ---------- ---------
(In thousands)
Interest-earning assets:
Interest-bearing deposits in
other financial institutions.... $ 278 $ (34) $ 59 $ 185
FHLB common stock and other
equity securities............... (13) (59) -- (72)
Mortgage-backed securities and
collateralized mortgage
obligations available
for sale........................ (3,831) (2,882) (386) (6,327)
Other investment securities
available for sale.............. (548) 5 (2) (542)
Loans receivable.................. 249 109 8 366
-------- ------- -------- -------
Total interest-earning assets..... (3,862) (2,861) 333 (6,390)
Freddie Mac common stock.......... 1,039 (514) (13) 512
-------- -------- -------- --------
Total interest-earning assets... $ (2,823) $(3,375) $ 320 $ (5,878)
-------- ------- -------- --------
Interest-bearing liabilities:
NOW accounts...................... $ 6 $ (47) $ (2) $ (33)
Savings accounts.................. (10) (107) 3 (114)
Money market deposit accounts..... 201 (84) 35 82
Certificates of deposit........... (4,108) 986 (312) (3,130)
-------- ------- -------- --------
Total interest-bearing
deposits..................... (3,804) 7,486 (346) (3,195)
Borrowed funds.................... (537) (1,298) (28) (1,807)
-------- ------- -------- --------
Total interest-bearing
liabilities..................... $ (4,134) $ (550) $ (318) $ (5,002)
-------- ------- -------- --------
Change in net interest income........ $ 1,311 $(2,825) $ 638 $ (876)
======== ======= ======== ========
63
Year Ended September 30, 2000 Year Ended September 30, 1999
Compared to Year Ended Compared to Year Ended
September 30, 1999 September 30, 1998
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............ $ (21) $ 37 $ (5) $ 11 $ 65 $ (36) $ 16 $ 45
FHLB common stock and other
equity securities................. 190 35 (10) 235 52 13 (1) 64
Mortgage-backed securities and
collateralized mortgage
obligations available for sale ... 7,661 2,195 1,029 10,885 4,661 (322) 90 4,429
Other investment securities
available for sale ............... (469) 202 (63) (330) 1,103 (213) 154 1,044
Loans receivable ................... 4,995 832 (275) 6,061 2,181 (373) 80 1,862
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets ...... 12,316 3,301 1,245 16,862 8,062 (931) 314 7,444
Freddie Mac common stock ........... (750) 1,361 (265) 346 526 (272) 52 306
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets .... $11,366 $4,662 $980 $17,208 $8,710 $(1,353) $392 $ 7,750
------- ------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW accounts ....................... $138 $ 8 $ 8 $ 154 $ 29 $ (31) $ 7 $ 5
Savings accounts ................... 93 84 (26) (17) 7 120 (3) 124
Money market deposit accounts ...... 73 72 17 162 65 (26) 5 44
Certificates of deposit ............ 2,909 231 70 3,210 4,530 (484) 226 4,272
------- ------- ------ ------- ------ ------- ------- -------
Total interest-bearing deposits .. 3,213 227 69 3,509 4,630 (421) 236 4,445
Borrowed funds ..................... 6,139 2,479 1,179 9,797 645 (1,218) 61 (513)
------- ------- ------ ------- ------ ------- ------- -------
Total interest-bearing liabilities . $ 9,352 $ 2,706 $1,248 $13,306 $5,274 $(1,639) $ 297 $ 3,932
------- ------- ------ ------- ------ ------- ------- -------
Change in net interest income $ 2,214 $ 1,956 $ (268) $ 3,902 $3,436 $ 286 $ 96 $ 3,818
======= ======= ====== ======= ====== ======= ======= =======
64
Comparison of Financial Condition at September 30, 2001 and 2000
Our total assets decreased $26.0 million, or 2.91%, to $894.9 million at
September 30, 2001 from $920.9 million at September 30, 2000. The decrease was
primarily due to reductions in the 1-4 family residential loan portfolio,
consumer loan portfolio and the mortgage backed securities and collateralized
mortgage obligations. An increase in the market value of our Freddie Mac stock
from $251.7 million at September 30, 2000 to $302.6 million at September 30,
2001 partially offset the decline in portfolio loans and mortgage-related
investments.
Total loans decreased $29.7 million, or 11.46%, to $229.9 million at
September 30, 2001 compared to $259.7 million at September 30, 2000. The 1-4
family residential real estate portfolio decreased by $23.6 million, or 15.44%
from $152.8 million at September 30, 2000 to $129.2 million at September 30,
2001. With the present strategy of selling fixed rate loans to the secondary
market and the refinances that took place late in fiscal year 2001 we were not
able to keep the refinanced loans in portfolio, causing the decline in the
overall 1-4 family residential real estate. The consumer and other loan
portfolio decreased $6.3 million or 21.32% from $29.9 million at September 30,
2000 to $23.5 million at September 30, 2001. The decrease in the consumer
portfolio was primarily due to runoff of the loans acquired in the Citizen's
acquisition.
Mortgage-backed securities and collateralized mortgage obligations
decreased from $367.7 million to $326.6 million for a decrease of $41.1 million
or 11.18%. The market value of Freddie Mac stock increased $50.9 million, or
20.2%, from $251.7 million to $302.6 million.
Total deposits declined from $274.4 million at September 30, 2000 to $200.3
million at September 30, 2001 mainly due to $89.3 million in brokered deposits
that matured during the year and were not renewed. This decrease was partially
offset by an increase of $19.4 million in retail deposits. In light of the
difficulty raising new retail deposits and the magnitude of the CharterBank's
funding needs, management will continue to rely on borrowings, especially
Federal Home Loan Bank advances. With overall asset growth declining, borrowings
declined from $352.2 million at September 30, 2000 to $309.4 million at
September 30, 2001, a 12.15% decrease.
Our total equity, which is comprised of retained earnings and accumulated
other comprehensive income, increased $46.0 million, or 24%, to $236.9 million
at September 30, 2001. Accumulated other comprehensive income at Charter
Financial is comprised of net unrealized holding gains on securities available
for sale. The balance of accumulated other comprehensive income at September 30,
2001 was $180.8 million, a $40.9 million increase from the balance at September
30, 2000 of $139.9 million. The increase in accumulated other comprehensive
income is mainly attributable to the increase in the market value of our Freddie
Mac stock investment.
65
Comparison of Operating Results for Years Ended September 30, 2001 and 2000
General
Net income of $4.7 million for the year ended September 30, 2001 represents
a $4.1 million increase from net income of $638,161 for the year ended September
30, 2000. This increase was due primarily to the recording of an impairment loss
of $3.6 million in addition to the scheduled amortization of $930,000 for
intangible assets associated with the Citizens acquisition during the year ended
September 30, 2000.
Net interest income after provision for loan losses during the year ended
September 30, 2001 increased slightly due to a $910,000 decrease in provision
for loan loss. Noninterest expenses for the year ended September 30, 2001
decreased as compared to September 30, 2000 due to the previous year having the
charge of $4.5 million for amortization and impairment of intangible assets
resulting from the Citizens acquisition, an overall decrease in the noninterest
expenses in this year except for an increase of $1.3 million 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 Auburn,
Alabama branch.
Ratio Analysis
The Company believes its return on equity can be measured in three ways. The
first is the traditional return on total equity which is net income divided by
average total equity. The second is return on realized equity which is net
income divided by realized equity which excludes unrealized gains from equity.
The third is comprehensive return on equity which is comprehensive income
divided by total equity.
Year Ended September 30,
------------------------
2001 2000
---- ----
Return on total equity 2.08% 0.38%
Return on realized equity 8.61 1.18
Comprehensive Return on equity 19.98 3.13
Each of these measures has its strengths and weaknesses. The return on total
equity is the traditional measure. However, in the Company's case the total
equity measure shows a low result because it does not reflect unrealized gains
on Freddie Mac stock in net income. The return on realized equity excludes gains
on Freddie Mac stock from both net income and equity. The comprehensive return
on equity reflects the overall increase in value as reflected by the stock price
of Freddie Mac which is a reasonable long-term measure but exhibits high levels
of volatility in short time periods.
There are similar issues in the return on assets measures as shown below.
Year Ended September 30,
------------------------
2001 2000
---- ----
Return on average total assets 0.52% 0.07%
Return on realized assets 0.76 0.09
Comprehensive Return on assets 4.98 0.59
66
Comprehensive Income
Other comprehensive income for the year ended September 30, 2001 was $41.0
million compared to $4.6 million for the year ended September 30, 2000. The per
share price of Freddie Mac stock increased from $54.0625 at September 30, 2000
to $65.00 at September 30, 2001, resulting in an after tax increase in our
Freddie Mac investment of $31.3 million. Other comprehensive income relating to
mortgage securities and other investments increased by $9.7 million as a result
of the lower interest rate environment which increased the fair value of our
fixed-rate mortgage securities. Other comprehensive income for the year ended
September 30, 2000 was relatively low in 2000 due to a $1.2 million
comprehensive loss relating to mortgage and other securities. This comprehensive
loss was offset by the net unrealized gains on Freddie Mac stock which increased
during fiscal year 2000 because of an increase in the price per share of Freddie
Mac common stock from $52.00 at September 30, 1999 to $54.0625 at September 30,
2000. 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 at September 30, 2000.
Year Ended September 30, 2001
-----------------------------------------------------------------------
Market Price Total Market Unrealized Gain,
Shares Per Share Value Net of Tax
---------- -------------- ------------ ------------------
September 30, 2000................. 4,655,000 $54.0625 $251,660,938 $150,641,464
September 30, 2001................. 4,655,000 65.0000 302,575,000 181,902,699
-------- ------------
Change in Freddie Mac stock........ 10.9375 31,261,235
Other comprehensive
income related to
mortgage securities
and other investments............ 9,696,208
------------
Total other comprehensive income... $ 40,957,443
============
Year Ended September 30, 2000
-----------------------------------------------------------------------
Market Price Total Market Unrealized Gain,
Shares Per Share Value Net of Tax
---------- -------------- ------------ ------------------
September 30, 1999 ................ 4,655,000 $52.0000 $242,060,000 $144,746,489
September 30, 2000 ................ 4,655,000 54.0625 251,660,938 150,641,464
-------- ------------
Change in Freddie Mac stock ....... -- 2.0625 5,894,975
Other comprehensive
loss related to
mortgage securities
and other investments .......... (1,236,353)
------------
Total other comprehensive income... $ 4,658,622
============
67
Interest Income
Total interest and dividend income excluding Freddie Mac stock was $44.5
million for the year ended September 30, 2001, a 12.6% decrease over interest
and dividend income excluding Freddie Mac stock of $50.9 million for the year
ended September 30, 2000. Interest on loans increased $365,000, or 1.73%, to
$21.4 million from $21.1 million for the year ended September 30, 2000. The
average balance of loans receivable increased $2.8 million from $240.4 million
for the year ended September 30, 2000 to $243.2 million for the year ended
September 30, 2001. Interest on investment debt securities available for sale
decreased $542,000 to $652,000 for the year ended September 30, 2001 from $1.2
million for the year ended September 30, 2000 due to an $8.3 million reduction
in the average balance of investment debt securities over the same time period.
Dividend income on Freddie Mac stock increased by $500,000 to $3.6 million for
the year ended September 30, 2001 from $3.1 million for the year ended September
30, 2000 due to the increase in quarterly dividends of Freddie Mac stock from
$0.17 per share to $0.20 per share. Interest on mortgage-backed securities and
collateralized mortgage obligations decreased by $6.4 million to $21.1 million
for the year ended September 30, 2001 from $27.5 million for the year ended
September 30, 2000. The decrease was due to a combination of lower yields and a
$53.3 million decrease in the average balance of mortgage related securities.
CharterBank reduced its investment in fixed-rate mortgage securities during the
year ended September 30, 2001.
The yield on interest-earning assets excluding Freddie Mac stock decreased
36 basis points and total interest-earning assets excluding Freddie Mac stock
averaged $601.4 million for the year ended September 30, 2001, down from $655.8
million from the comparable 2000 period, a 9.04% decrease. The average yield on
loans, net, increased 5 basis points to 8.82%, while the yield on
mortgage-related securities decreased from 7.19% for the year ended September
30, 2000 to 6.44% for the year ended September 30, 2001 reflecting the declining
interest rate environment during this time period.
Interest Expense
Total interest expense for the year ended September 30, 2001 was $31.6
million, a $5.0 million, or 15.82%, decrease from the year ended September 30,
2000. The decrease is attributable to a 14 basis point decrease in the average
cost and a $72.3 million decrease in the average balance of interest-bearing
liabilities from $628.6 million for the year ended September 30, 2000 to $556.3
million for the year ended September 30, 2001. The majority of the decline in
the average balance of interest-bearing liabilities from the prior year was due
to decreases in wholesale certificates of deposit and borrowings. The decrease
in average cost was primarily due to the 36 basis point decrease in the cost of
borrowed funds as compared to the year ended September 30, 2000. The decrease
reflects the lower interest rate environment that prevailed during 2001 compared
to 2000 and the rate-sensitive nature of our liabilities.
68
Interest expense on deposits decreased $3.2 million, or 29.7%, to $10.7
million for the year ended September 30, 2001 compared with $13.9 million for
the year ended September 30, 2000. The average balance of certificates of
deposit decreased $68.3 million to $162.2 million for the year ended September
30, 2001 from $230.5 million for the year ended September 30, 2000 because of
our wholesale deposit strategy. Despite the declining interest rate environment
during this period, the average cost of interest-bearing deposits increased 9
basis points during the year ended September 30, 2001. Interest expense on money
market balances increased $82,000 from the year ended September 30, 2000 to the
year ended September 30, 2001, as the average balance of these accounts
increased $4.2 million and the cost decreased 84 basis points.
Interest expense on borrowed funds decreased $1.8 million as a result of
the $8.6 million decrease in the average balance of borrowed funds and the 36
basis point decrease in the average cost of borrowed funds. The decrease in the
average balance of borrowed funds is attributable to our reduced need for
borrowed funds due to the sales of mortgage related securities and loan
repayments during the year. The decrease in the average cost was attributed to
the declining interest rate environment.
Net Interest Income
Net interest income excluding the effects of Freddie Mac stock decreased
$1.4 million, or 9.8%, to $12.8 million for the year ended September 30, 2001
compared with $14.2 million for the year ended September 30, 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 - fell by 71 basis points as the yield on interest-earning assets
excluding Freddie Mac common stock decreased at a higher rate than the average
cost of interest-bearing liabilities. The net interest margin - net interest
income divided by average total interest-earning assets - decreased 3 basis
points. 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 56%.
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 net interest
income. Net interest income including Freddie Mac stock dividends for the year
ended September 30, 2001 decreased $876,000, or 6.2%, to $16.4 million compared
with $17.3 million for the year ended September 30, 2000. The net interest rate
spread including Freddie Mac stock decreased 71 basis points to negative 0.34%
for the year ended September 30, 2001 from positive 0.37% for the prior year.
The decrease was attributable to the higher market value of the Freddie Mac
stock during the year. Traditional bank measures such as net interest rate
spread and 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 $297.8 million for the year ended September
30, 2001 as compared to $214.1 million for the year ended September 30, 2000.
The net interest margin, which is net interest income including dividends on
Freddie Mac stock divided by average total interest-earning assets, decreased 16
basis points to 1.8% for the year ended September 30, 2001.
69
Provision for Loan Losses and Asset Quality
For the year ended September 30, 2001, we recorded a $500,000 provision for
loan losses, compared to $1.4 million for the year ended September 30, 2000.
Gross charge-offs totaled $2.1 million for the year ended September 30, 2001 as
compared to the prior year total of $1.1 million. These charge-offs in 2001
primarily relate to the auto and commercial loans acquired in the Citizens
acquisition. The lower provision in 2001 reflects:
(1) lower levels of non-performing loans - Net charge-offs for the year
ended September 30, 2001 were $1.6 million compared to net charge-offs
of $774,000 for the year ended September 30, 2000. Non-performing
loans at September 30, 2001 were $2.3 million compared to $2.8 million
at September 30, 2000. The largest components of this change were a
$707,000 increase in 1-4 family residential loans offset by a $782,000
decrease in nonaccrual auto loans and a $114,000 decrease in
nonaccrual nonresidential loans. Charge-offs in 1-4 family loans as a
percentage of total loans are generally a lesser percentage of the
loan balance than most other types of loans.
(2) a decline in the overall loan portfolio of $29.7 million -
CharterBank's reserve methodology 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, 2001 was 2.3% of total
loans compared with 2.4% at the end of the comparable 2000 period. The decrease
in the coverage ratio reflects the fiscal 2001 charge-offs of the portfolio
acquired in the Citizens acquisition and the resulting higher quality of the
portfolio after these charge-offs. 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, 2001 September 30, 2000
------------------ ------------------
(In thousands)
Underperforming loans...................... $ 218 $ 159
====== ======
Total non-performing loans................. 2,312 2,831
Foreclosed real estate, net................ 434 630
------ ------
Total non-performing assets................ $2,746 $3,461
====== ======
Non-performing loans to total loans........ 1.01% 1.09%
Non-performing assets to total assets...... 0.31% 0.37%
70
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. 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.
Noninterest Income
Noninterest income decreased to $1.7 million for the year ended September
30, 2001 compared with $1.9 million in the prior year, a 15.8% decline. The
primary cause of the decrease was that non-interest in for the year ended
September 30, 2001 was a $1.2 million equity loss in a limited partnership. The
limited partnership invested 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 2001 adversely
affected our equity in earnings of limited partnerships. The loss on the
partnership was partially offset by $1.6 million in gains on the sale of loans
and servicing released loan fees. The lower interest rate environment and
related refinancing associated with such periods during 2001 was a major
catalyst in our significant increase in gain on the sale of loans and servicing
released loan fees from the prior year. These gains increased $850,000, or
116.3%, to $1.6 million for the year ended September 30, 2001 from $730,000 for
the year ended September 30, 2000.
Loss on sale of mortgage-backed securities was $1,000 for the year ended
September 30, 2001 as compared to a gain of $128,000 for the same period in
2000, a difference of $127,000 in income for the year ended September 30, 2001.
The losses resulted on these sales during 2001 as CharterBank sought to decrease
its investment in fixed rate mortgage related securities.
Noninterest Expense
Total noninterest expense decreased $4.5 million, or 28.4%, to $11.4
million for the year ended September 30, 2001 compared with $15.9 million for
the prior year. The primary causes of the decrease were the $4.5 million
amortization and impairment of intangible assets recorded in fiscal 2000 versus
none in fiscal 2001.
71
Salaries and employee benefits expense increased $1.3 million from $4.9
million for the year ended September 30, 2000 compared to $6.2 million for the
same time period in 2001. The major factor in the increase of compensation
expense was the addition of new personnel employed in both the residential and
commercial real estate portions of CharterBank.
Occupancy and equipment expenses decreased $364,000, or 18.7%, for the year
ended September 30, 2001 as compared to the same period in 2000 due to the
closure of one branch office in October 2000. Our new full-service branch in
Auburn opened in November 2001 so its impact on noninterest expense will affect
2002.
Legal and professional expense decreased to $640,000 for the year ended
September 30, 2001 from $1.5 million for the year ended September 30, 2000. The
high level of professional fees and expenses in fiscal 2000 was attributable to
expenses related to the application to reorganize CharterBank into a non-stock
mutual holding company. This application was subsequently withdrawn and replaced
with the application for a mutual holding company with a stock issue.
Income Taxes
Income taxes increased from $1.3 million for the year ended September 30,
2000 to $1.4 million for the year ended September 30, 2001. The effective tax
rate was 22.82% in 2001 and 66.38% in 2000. 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 2001 and fiscal 2000,
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 Financial Condition at September 30, 2000 and 1999
Our total assets increased $37.2 million, or 4.2%, to $921.0 million at
September 30, 2000 from $883.7 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 $9.3 million, or 3.8%,
from $242.3 million to $251.7 million. Management recorded an impairment loss of
$3.6 million in addition to the scheduled amortization of $930,000 for
intangible assets associated with the Citizens acquisition. The impairment was
determined based on an analysis that indicated that the undiscounted future cash
flows associated with the purchase of assets and the assumption of liabilities
would be negative, and therefore insufficient to recover the carrying amount of
the related intangible assets.
72
Asset growth was funded primarily by a $39.4 million increase in
borrowings, which grew from $312.9 million at September 30, 1999 to $352.2
million at September 30, 2000, a 12.6% increase. Management placed increased
reliance on borrowings, especially Federal Home Loan Bank advances, in light of
the limited capacity to raise significant new retail deposits. Accordingly,
total deposits fell from $283.0 million to $274.4 million.
Our total equity, which is comprised of retained earnings and accumulated
other comprehensive income, increased $5.5 million, or 2.9%, to $190.9 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
$139.9 million, a $4.7 million increase from the balance at September 30, 1999
of $135.2 million.
Comparison of Operating Results for the Years Ended September 30, 2000 and 1999
General
Net income of $638,000 for the year ended September 30, 2000 represents a
$26.2 million decrease from net income of $26.8 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 $4.6
million compared to a loss of $24.3 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 $5.9 million. Other comprehensive loss
relating to mortgage securities and other investments was $1.2 million as a
result of higher interest rates. Other comprehensive loss for the year ended
September 30, 1999
73
was $24.3 million which was a result of comprehensive loss relating to mortgage
and other securities of $10.7 million and the net unrealized gains on Freddie
Mac stock which decreased during fiscal year 1999 because of the sale and
donation of 605,000 shares. The comprehensive loss relating to mortgage
securities and other investments resulted from increasing interest rates on the
fair market value of fixed rate securities in our portfolio.
Year Ended September 30, 2000
----------------------------------------------------------------------------
Market Price Total Market Unrealized Gain,
Shares Per Share Value Net of Tax
----------------------------------------------------------------------------
September 30, 1999 ............... 4,655,000 $52.0000 $242,060,000 $144,746,489
September 30, 2000 ............... 4,655,000 54.0625 251,660,938 150,641,464
------------- ---------- ------------
Change in Freddie Mac stock ...... --- 2.0625 5,894,975
Other comprehensive
loss related to
mortgage securities
and other investments ......... (1,236,353)
------------
Total other comprehensive income.. $4,658,622
============
Year Ended September 30, 1999
----------------------------------------------------------------------------
Market Price Total Market Unrealized Gain,
Shares Per Share Value Net of Tax
----------------------------------------------------------------------------
September 30, 1998................ 5,260,000 $ 49.625 $261,027,500 $158,333,183
September 30, 1999................ 4,655,000 52.000 242,060,000 144,746,489
----------- --------- ------------
Change in Freddie Mac stock (605,000) 2.375 (13,586,694)
Other comprehensive
loss related to
mortgage securities
and other investments.......... (10,727,875)
------------
Total other comprehensive loss.... $(24,314,569)
============
Interest Income
The total interest and dividend income excluding Freddie Mac stock was
$50.9 million for the year ended September 30, 2000, a 49.7% 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 $340,000 to $3.1 million for the year ended September 31,
2000 from $2.7 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
74
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 for the year ended September 30, 2000 were
$240.4 million compared to $180.8 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 $655.8 million for the year ended September 30, 2000, up from $481.4
million for 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
75
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 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 29.1%, to $17.3 million
compared with $13.4 million for the year ended September 30, 1999. The net
interest rate spread including Freddie Mac stock increased 79 basis points to
0.37% for the year ended September 30, 2000 from negative 0.42% for the prior
year. The increase was attributable to the lower market value of the Freddie Mac
stock during the year and an increase in 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
$214.1 million for the year ended September 30, 2000 as compared to $283.5
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 27 basis points to 1.99% for the year
ended September 30, 2000.
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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 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 $245,000
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, was recently acquired 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 the applicable 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.
77
The table below shows under-performing and non-performing assets:
September 30, 2000 September 30, 1999
-------------------- -------------------
(In thousands)
Underperforming loans ............................ $159 $-
======= =======
otal 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. 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.
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 noninterest 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, noninterest 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. Despite an increased volume of sales, gains in fiscal 2000 declined as a
result of declining margins in the
78
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 lending 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.
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;
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. actual and projected non-interest 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 expenses 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 $14.3 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 66.4% 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.
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 FHLB based on eligible collateral
of loans and securities up to a limit of 30% of assets. At September 30, 2001
and 2000, our maximum borrowing capacity from the FHLB is approximately $268.5
million and $276.3 million, respectively. At September 30, 2001 and 2000, we had
outstanding borrowings of $211.8 million and $234.8 million with unused
borrowing capacity of $56.7 million and $41.5 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.
80
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 FHLB,
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 September 30, 2001, repurchase agreements totaled $97.7 million, a $19.8
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 $36.4 million at
September 30, 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.
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 year ended September
30, 2001, we originated approximately $164.6 million in total loans. Residential
mortgage loans accounted for 74.1% of the originations, construction loans
accounted for 7.5% of the originations, and commercial real estate for 15.3% of
the originations during the year ended September 30, 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 $183.8 million for the year ended
September 30, 2001, $124.1 million for the year ended September 30, 2000, and
$474.3 million for the year ended September 30, 1999. At September 30, 2001 and
2000, CharterBank had loan commitments to borrowers of approximately $1.0
million and $5.1 million, respectively, and available home equity and unadvanced
lines of credit of approximately $10.3 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 $200.4 million at September 30, 2001, as compared to $274.3 million 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
81
as compared to fiscal 1999, as retail certificates of deposits obtained through
the Citizens acquisition matured and some were not renewed. Time deposit
accounts scheduled to mature within one year were $119.4 million and $202.2
million at September 30, 2001 and 2000, respectively. While CharterBank has
experienced deposit run-off, we anticipate that a significant portion of these
certificates of deposit will remain on deposit.
CharterBank has traditionally been a well-capitalized savings bank, due,
among other factors, to the unrealized gains on Freddie Mac stock. At September
30, 2001 and 2000, we exceeded each of the applicable regulatory capital
requirements. Our tier 1 capital was $56.7 million and $51.7 million at
September 30, 2001 and 2000, respectively. Tier 1 capital represented 15.0% and
13.2% of risk-weighted assets at September 30, 2001 and 2000, respectively. Tier
1 capital represented 9.4% and 7.5% of total regulatory assets at September 30,
2001 and 2000 which exceeds the well capitalized requirements of 5.0%. At
September 30, 2001 and 2000, respectively, we had a risk-based total capital of
$113.5 million and $103.4 million and a risk-based capital ratio of 29.9% 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.
Capital expenses in connection with the construction of the Auburn branch
during fiscal year 2001 totaled $1.6 million. 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. We are implementing an
imaging system which we anticipate will require capital expenditures of about
$100,000 and additional expense of about the same for imaging existing loan
files. 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 2002. 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
82
statement generally provides for matching the timing of the recognition of the
gain or loss of the hedging instrument with the recognition of the changes in
the fair value of the item being hedged. Depending on the type of hedge, such
recognition will be in either net income or other comprehensive income. For a
derivative not designated as a hedging instrument, changes in fair value are
recognized in net income in the period of change. The effective date of SFAS No.
133 was delayed until fiscal years beginning after June 15, 2000 with the
issuance of SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133. In June
2000, the Financial Accounting Standards Board issued SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities an amendment
of FASB Statement No. 133. SFAS No. 138 amends the accounting and reporting
standards of Statement No. 133 for certain derivative instruments and certain
hedging activities. CharterBank adopted SFAS No. 133 and its related amendments
on October 1, 2000 and, accordingly, conducted an assessment of the nature of
its derivative instruments including an assessment of its embedded derivatives,
which were determined to be clearly and closely related to its investment and
debt instruments. SFAS No. 133 and its related amendments did not have a
material impact on CharterBank's financial statement presentations.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, which amends SFAS No. 65,
Accounting for Certain Mortgage Banking Activities. This statement requires that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. CharterBank's adoption of this statement on October 1, 1998, did
not have a material impact on our financial position or results of operation.
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 did not 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 Generally Accepted Accounting Principles
("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.
83
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, pages 51 to 53, for a discussion of Quantitative and
Qualitative Disclosures About Market Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-42 following the signature page of this Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 2002, 2003 and 2004, 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 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 September 30, 2001, the years when they began serving as
directors and the years when their current terms of office as directors will
expire:
CharterBank Current
Director Term
---------------------------
Directors Age(1) Position Since Expires
---------------------------------------------------------------------------------------------------------------------------
John W. Johnson, Jr. 81 Chairman of the Board, Director 1954 2004
Robert L. Johnson 48 President, Chief Executive Officer and Director 1986 2002
David Z. Cauble, III 49 Director 1996 2002
Jane W. Darden 51 Director 1988 2003
William B. Hudson 72 Director 1975 2004
Thomas M. Lane 47 Director 1996 2003
R. Terry Taunton 52 Director 1977 2002
------------------
(1) At November 30, 2001.
84
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.
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
85
Corporation, a real estate development corporation established in 1973. Mr.
Taunton graduated from Auburn University with a degree in Business
Administration.
Executive Officers Who are Not Directors
Curtis R. Kollar. Mr. 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.
William C. Gladden. Mr. 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.
Lee Washam. Mr. Washam, 39, has been a Vice President and Senior Credit
Officer of CharterBank since April 2000 and was named Executive Vice President
in January of 2001. Mr. Washam is the former Executive Vice President of First
Flag Bank, LaGrange, Georgia, and has over 17 years of banking experience. Mr.
Washam received his B.S. in Business Administration from LaGrange College in
1983 and is a 1995 graduate of The Graduate School of Banking at Louisiana State
University. Mr. Washam's current affiliations include: LaGrange Noon Lions Club,
the Georgia Community Bankers Association, Highland Country Club, and New
Community Church.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Exchange Act requires that our directors, executive
officers, and any person holding more than ten percent of our common stock file
with the SEC reports of ownership changes, and that such individuals furnish
Charter Financial with copies of the reports.
Based solely on our review of the copies of such forms received by it, or
written representations from certain reporting persons, we believe that all of
our executive officers and directors complied with all Section 16(a) filing
requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
Meeting Fees.
86
CharterBank pays each director an annual retainer of $8,000, plus $500 for each
Board meeting attended. The CharterBank maintains five standing committees. The
Chairman of the Board of Directors and each committee chairs receive an annual
chairmanship retainer of $1,000. Attendance fees are paid to non-employee
directors equal to $100 per meeting attended if the meeting is held in
conjunction with another Board or committee meeting or $200 if the meeting
stands alone. CharterBank paid fees totaling $97,150 to its non-employee
directors for the year ended September 30, 2001.
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 be
paid the director's fees discussed above. Charter Financial will pay its
directors an annual retainer of $2,000 and an attendance fee of $100 if the
meeting is held in conjunction with another meeting of CharterBank, Charter
Financial, or First Charter, MHC or $200 when the meeting stands alone. In
addition, Charter Financial maintains an Audit Committee and pays an attendance
fee of $100 or $200 depending upon whether the meeting is, respectively, in
conjunction with another meeting or stands alone. First Charter, MHC meets at
least quarterly and pays a fee of $500 per meeting attended.
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 years 2001 or 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., 2001 $130,164 $34,873 - $44,030 $6,160
Chairman ............................ 2000 $120,000 $38,380 - $46,313 $5,410
Robert L. Johnson, President 2001 $173,357 $69,415 - $67,281 $6,742
and Chief Executive Officer ......... 2000 $135,000 $47,629 - $46,313 $5,515
Lee Washam, Executive Vice 2001 $104,427 $31,791 - $ 3,208 $3,698
President -CharterBank .............. 2000 $34,462 $17,376 - - -
Curtis R. Kollar, Chief 2001 $85,423 $20,577 - $27,294 $4,880
Financial Officer ................... 2000 $72,896 $17,376 - $20,097 $2,802
------------------
(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 2001 and 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 for fiscal 2001 and 2000: (1) employer
matching contributions to the CharterBank 401(k) Plan: Mr. John Johnson,
$5,250 and 4,537; Mr. Robert Johnson, $5,250 and $4,978, Mr. Lee Washam,
$3,654 and $0; and Mr. Curtis Kollar, $4,694 and $2,538; and (2) dollar
value of premium payments for life insurance coverage provided by
CharterBank: Mr. John Johnson, $618 and $873; Mr. Robert Johnson, $265 and
$383, Mr. Lee Washam, $0 and $44; and Mr. Curtis R Kollar , $186 and $264.
87
Employment Agreements
Charter Financial and CharterBank intend to enter into parallel employment
agreements with Mr. Robert Johnson to secure his services as President and Chief
Executive Officer. The employment agreements will 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, Charter Financial and
CharterBank 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:
o a loss of title, office, or membership on the board of directors;
o 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
o other material breach of contract by Charter Financial or CharterBank
which is not cured within 30 days.
The employment agreements will 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.
88
Change of Control Agreements
CharterBank intends to 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, 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 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 2001 the
limit was $10,500). Under the 401(k) Plan, CharterBank makes a matching
contribution equal to 50% of the first 8% of compensation deferred by the
participant Effective January 1, 2002 CharterBank will not make any matching
contributions.
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
89
Charter Financial common stock. Participants 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
took effect at the completion of the reorganization. Charter Financial lent the
ESOP money to purchase up to 8% of the shares sold in the initial offering to
persons other than First Charter, MHC, or 317,158 shares.
Although contributions to this plan are discretionary, CharterBank intends
to contribute enough money each year to make the required principal and interest
payments on the loan from Charter Financial. This loan is for a term of 30 years
and calls for level annual payments of principal and interest. The plan pledges
the shares it purchases as collateral for the loan and holds them in a suspense
account.
The plan will not distribute the pledged shares right away. Instead, it
will release a portion of the pledged shares annually. Assuming the plan repays
its loan as scheduled over a 30-year term, we expect that 1/30th of the shares
will be released annually in years 2001 through 2031. Although the repayment
period of the ESOP loan is scheduled over a 30-year term, we anticipate that we
may prepay a portion of the principal which would trigger the release of
additional ESOP shares. The plan will allocate the shares released each year
among the accounts of participants in proportion to their compensation for the
year. For example, if a participant's compensation for a year represents 1% of
the total compensation of all participants for the year, the plan would allocate
to that participant 1% of the shares released for the year. Participants direct
the voting of shares allocated to their accounts. Shares in the suspense account
will usually be voted in a way that mirrors the votes which participants cast
for shares in their individual accounts.
This plan may purchase additional shares in the future, and may do so using
borrowed funds, cash dividends, periodic employer contributions, or other cash
flow.
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
90
noncommissioned 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 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 the amount of the compensation reduction
divided by 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.
Compensation Committee Report on Executive Compensation.
The Personnel and Compensation Committee is composed of Directors Hudson,
Darden, Taunton, Lane, and Cauble with Director Hudson serving as Chair. None of
the members of the Compensation Committee were officers or employees of Charter
Financial or its subsidiaries during 2001 or in prior years.
The following Report of Charter Financial's Personnel and Compensation
Committee is provided in accordance with the rules and regulations of the SEC.
Pursuant to such rules and regulations, this Report shall not be deemed
"soliciting material," filed with the SEC subject to Regulation 14A or 14C of
the SEC or subject to the liabilities of Section 18 of the Exchange Act.
91
On October 16, 2001, Charter Financial became the holding company for
CharterBank upon completion of Charter Bank's reorganization into a two-tiered
mutual holding company structure.
The Personnel and Compensation Committee provides advice and
recommendations to the Board of Directors in the areas of employee salaries and
benefit programs. Compensation of the Chairman and Chief Executive Officer and
other executive officers for the fiscal year ended 2001 was paid by CharterBank
and determined by the Board of Directors of CharterBank upon the recommendation
of the Personnel and Compensation Committee.
The Committee reviews the compensation and benefits programs for all
executive officers on an annual basis. Recommendations and rationale of
CharterBank's Chairman and Chief Executive Officer are taken into consideration
during such review. The Chairman and Chief Executive Officer do not participate
in the Committee's decision regarding their own compensation review and
recommendation.
The Committee strives to provide a compensation program that assures both
the motivation and retention of the executive officers, proper alignment with
the financial interests of Charter Financial's stockholders, and competitiveness
with the external marketplace. To this end, the Committee reviewed the
compensation practices of a peer group of companies with similar size and
business mix to that of CharterBank in order to develop recommendations for
CharterBank's executive officers.
CharterBank's compensation program for executive officers consists of: base
salary, and short-term and long-term incentive awards.
Base Salaries. Salary levels recommended by the Committee are intended to
be competitive with salary levels of the companies in CharterBank's peer group,
commensurate with the executive officers' respective duties and
responsibilities, and reflect the financial performance of CharterBank. After a
comprehensive review, base salaries for the fiscal year ended 2001 were
increased 25.5% on average for the covered executive officers, a level deemed
appropriate using the above criteria.
Incentive Compensation Plan. CharterBank maintains an incentive
compensation plan with short term and long term components. The short term
component includes all employees not covered by another incentive compensation
plan. A target bonus award has been set for each employee expressed in a cash
amount, which varies based on the employee's salary grade in CharterBank's
salary grade system During the first quarter of 2001, the Board of Directors set
Balanced Scorecard goals, which include credit, marketing productivity as well
as financial targets for achievement under the plan. The short term incentive
also consists of individual and business line components. Attainment on these
components as well as the corporate goals represented by the Balanced Scorecard
determines the payout for each individual covered by the Incentive Compensation
Plan. CharterBank typically pays these bonuses in cash shortly after the end of
the fiscal year, but payment may be deferred to a later date at the election of
the participant. The long term Incentive component is a phantom stock
appreciation type plan
92
which rewards improvement in CharterBank's equity over a three year period. All
CharterBank officers participate in the Long Term Incentive Plan.
Chief Executive Officer and Chairman. The Compensation Committee recognizes
the significant additional efforts required of the Chief Executive Officer and
other Executive officers in bringing about CharterBank's successful mutual
holding company reorganization and CharterBank's initial public offering.
The Committee developed the following recommendations for Mr. Robert L.
Johnson's compensation in 2001 as Chief Executive Officer. Base salary was
increased to $183,000, representing a 35.5% increase from 2000. Under the
criteria of the short-term incentive component, the Committee awarded the Chief
Executive Officer a bonus in the amount of $69,415.
CharterBank
Compensation Committee
William B. Hudson, Chairman
Jane W. Darden
R. Terry Taunton
Thomas M. Lane
David Z. Cauble, III
Compensation Committee Interlocks and Insider Participation.
None of the executive officers of Charter Financial served as a member of
another entity's Board of Directors or as a member of the Compensation Committee
(or other board committee performing equivalent functions) during 2001, which
entity had an executive officer serving on the Board of Directors or as a member
of the Compensation Committee of Charter Financial. Consequently, there are no
interlocking relationships between Charter Financial and other entities that
might affect the determination of the compensation of our executive officers.
Performance Graph.
A performance graph is not included due to the fact that the reorganization
took place on October 16, 2001 and therefore no data was available at September
30, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders of Charter Financial.
The following table contains common stock ownership information for persons
known to Charter Financial to "beneficially own" 5% or more of Charter
Financial's common stock as of September 30, 2001. In general, beneficial
ownership includes those shares that a person has the power to vote, sell, or
otherwise dispose of. Beneficial ownership also includes that number of shares
which an individual has the right to acquire within 60 days (such as stock
options) of the
93
date this table was prepared. Two or more persons may be considered the
beneficial owner of the same shares. Charter Financial obtained the information
provided in the following table from filings with the SEC and from Charter
Financial. In this Annual Report on Form 10-K, "voting power" is the power to
vote or direct the voting of shares, and "investment power" includes the power
to dispose or direct the disposition of shares.
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent
-------------- ---------------- -------------------- -------
Common Stock First Charter, MHC 15,857,924 80%
600 Third Avenue
West Point, Georgia 31833
Security Ownership of Management.
The following table shows the number of shares of Charter Financial's
common stock beneficially owned by each director, and all directors and
executive officers of Charter Financial as a group, as of December 1, 2001.
Except as otherwise indicated, each person and each group shown in the table has
sole voting and investment power with respect to the shares of common stock
listed next to his or her name.
Position with Charter Amount and Nature of Percent of Common
Name Financial Beneficial Ownership Stock Outstanding
David Z. Cauble, III Director 11,000(3) *
Jane W. Darden Director 15,000(4) *
William B. Hudson Director 10,000 *
John W. Johnson, Jr. Chairman of the Board 50,000(5) *
and Director
Robert L. Johnson President, Chief Executive 42,500(6) *
Officer, and Director
Thomas M. Lane Director 10,000(7) *
R. Terry Taunton Director 10,000(8) *
Lee Washam Executive Vice President- 32,500(9) *
CharterBank
Curtis R. Kollar Chief Financial Officer 50,000(10) *
All Executive Officers and 553,158(11) 2.8%
Directors as a Group
(11 Persons)
------------------
* Less than one percent of the total outstanding shares of common stock.
(1) See "Principal Shareholders of Charter Financial" for definition of
"beneficial ownership."
94
(2) Based on a total of 19,822,405 shares of Charter Financial's Common Stock
outstanding as of September 30, 2001.
(3) Includes 1,000 shares jointly held in connection with Mr. Cauble's son.
(4) Includes 5,000 shares held directly by Ms. Darden's spouse.
(5) These shares are held in Mr. Johnson's Individual Retirement Account.
(6) Includes 7,500 shares held in Mr. Johnson's Individual Retirement
Account, 7,500 shares held by Mr. Johnson's 401(k) account, and 2,500
shares held in his spouse's Individual Retirement Account.
(7) These shares are held jointly with Mr. Lane's spouse.
(8) Includes 2,401 shares jointly held with Mr. Taunton's spouse, 6,085 held
in Mr. Taunton's Individual Retirement Account, and 1,514 shares held in
Mr. Taunton's spouse's Individual Retirement Account.
(9) Includes 11,000 shares held in Mr. Washam's Individual Retirement
Account.
(10) Includes 13,800 shares held in Mr. Kollar's 401k and 7,200 shares in Mr.
Kollar's Individual Retirement Accounts
(11) The figures shown for each of the executive officers named in the table
do not include 317,158 shares held in trust pursuant
to the ESOP that have not been allocated as of September 30, 2001 to
any individual's account and as to which each of the executive officers
named in the table share voting powers with the other ESOP
participants. The figure shown for all directors and executive officers
as a group includes 317,158 as to which members of CharterBank's
Compensation Committee (consisting of Messrs Hudson, Taunton, Lane,
Cauble and Ms Darden) may be deemed to have sole investment power,
except in limited circumstances, thereby causing each such member to be
deemed a beneficial owner of such shares. Each of the members of the
Compensation Committee disclaims beneficial ownership of such shares
and, accordingly, such shares are not attributed to the members of the
Compensation Committee individually. See "Benefit Plans-Employee Stock
Ownership Plan".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We make loans to our directors and executive officers. We offer discounted
loans to all of our employees through an employee loan program. At September 30,
2001, loans to executive officers, directors and their associates totaled
$445,574. 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 CharterBank in
real estate and commercial loan closings and other matters, wherein
CharterBank's borrower typically pays the legal fees and expenses. CharterBank
paid the law firm $93,178 for the year ended September 30, 2001.
CharterBank leases its Shawmut branch, which is located at 3500 20th
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 $53,028 for the year ended September 30, 2001 for the lease of
Shawmut Branch.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Listed below are all financial statements and exhibits field as part of
this report:
a. Financial Statements, Schedules, and Exhibits
95
(1) The consolidated statements of assets and liabilities
transferred in reorganization of Charter Financial Corporation
and subsidiaries as of September 30, 2001 and 2000 and the
related consolidated statements of income and comprehensive
income, relating to assets and liabilities transferred in
reorganization, changes in equity transferred in
reorganization and cash flows of assets and liabilities
transferred in reorganization for each of the years in the
three-year period ended September 30, 2001, together with
the related notes and independent auditors' report of
KPMG LLP, independent certified public accountants.
(2) Schedules omitted as they are not applicable.
(3) See Exhibit Index.
b. Reports on Form 8-K - none.
Exhibit Description
2.1 CharterBank Amended Plan of Reorganization from Mutual Savings Bank to
Mutual Holding Company and Stock Issuance*
3.1 Federal Stock Charter of Charter Financial Corporation*
3.2 Bylaws of Charter Financial Corporation*
4.1 Federal Stock Charter of Charter Financial Corporation (See Exhibit
3.1)*
4.2 Bylaws of Charter Financial Corporation (See Exhibit 3.2)*
4.3 Form of Stock Certificate of Charter Financial Corporation*
10.1 Form of Employee Stock Ownership Plan of Charter Financial Corporation*
10.2 Form of Benefit Restoration Plan of Charter Financial Corporation*
10.3 Form of Employment Agreement by and among Robert L. Johnson and
Charter Financial Corporation*
10.4 Form of One Year Change in Control Agreement by and among certain
officers, Charter Financial Corporation and CharterBank *
10.5 Form of Two Year Change in Control Agreement by and among certain
officers, Charter Financial Corporation and CharterBank *
10.6 CharterBank 401(k) Plan and Adoption Agreement **
21.1 Form of Subsidiaries of the Registrant*
23.1 Consent of KPMG LLP
* Incorporated herein by reference to the Registration Statement No.
333-57684, on Form S-1 of Charter Financial filed with the SEC on March
27, 2001, as amended.
** Incorporated herein by reference to the Registration Statement No.
333-67402, on Form S-8, filed with the SEC on August 13, 2001, as
amended.
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on December 21, 2001.
CHARTER FINANCIAL CORPORATION
By: /s/ Robert L. Johnson
-------------------------------------
Robert L. Johnson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, and
any rules and regulations promulgated thereunder, this Annual Report on Form
10-K, has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
---- ----- ----
/s/ John W. Johnson, Jr. Chairman of the Board December 21, 2001
-------------------------------------
John W. Johnson, Jr.
/s/ Robert L. Johnson President, Chief Executive Officer and December 21, 2001
------------------------------------- Director (principal executive officer)
Robert L. Johnson
/s/ David Z. Cauble, III Director December 21, 2001
-------------------------------------
David Z. Cauble, III
/s/ Jane W. Darden Director December 21, 2001
-------------------------------------
Jane W. Darden
/s/ William B. Hudson Director December 21, 2001
-------------------------------------
William B. Hudson
Director December 21, 2001
/s/ Thomas M. Lane
-------------------------------------
Thomas M. Lane
Director December 21, 2001
/s/ R. Terry Taunton
-------------------------------------
R. Terry Taunton
/s/ Curtis R. Kollar Chief Financial Officer, Vice December 21, 2001
------------------------------------- President and Treasurer (principal
Curtis R. Kollar accounting officer)
97
Independent Auditors' Report
The Board of Directors
Charter Financial Corporation:
We have audited the accompanying consolidated statements of assets and
liabilities transferred in reorganization of Charter Financial Corporation and
subsidiaries (the "Company") as of September 30, 2001 and 2000, and the related
consolidated statements of income and comprehensive income relating to assets
and liabilities transferred in reorganization, changes in equity transferred in
reorganization, and cash flows of assets and liabilities transferred in
reorganization for each of the years in the three-year period ended September
30, 2001. 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 Charter Financial
Corporation and subsidiaries as of September 30, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
November 16, 2001
Atlanta, Georgia KPMG LLP
F-1
CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Assets and Liabilities Transferred
in Reorganization
September 30, 2001 and 2000
Assets 2001 2000
------------- -------------
Cash and amounts due from depository institutions (note 18) $ 10,761,296 5,562,675
Interest-bearing deposits in other financial institutions 5,367,428 2,629,767
------------- -------------
Cash and cash equivalents 16,128,724 8,192,442
------------- -------------
Loans held for sale, market value of $1,300,000 and $839,000
at September 30, 2001 and 2000, respectively 1,299,913 832,526
Freddie Mac common stock and other equity securities (note 4) 302,623,174 251,660,938
Mortgage-backed securities and collateralized mortgage
obligations available for sale (notes 5 and 13) 326,613,736 367,707,904
Other investment securities available for sale (note 4) -- 13,882,374
Federal Home Loan Bank stock (notes 4 and 13) 11,587,500 12,587,500
Loans receivable 229,946,625 259,699,417
Unamortized loan origination (fees) costs, net (66,025) 113,317
Allowance for loan losses (5,289,778) (6,346,001)
------------- -------------
Loans receivable, net (notes 6 and 13) 224,590,822 253,466,733
------------- -------------
Real estate owned (note 7) 434,142 629,993
Accrued interest and dividends receivable (note 8) 3,175,819 4,476,844
Premises and equipment, net (note 9) 4,825,304 3,534,071
Other assets (notes 9, 10, and 11) 3,640,791 3,990,493
------------- -------------
Total assets $ 894,919,925 920,961,818
============= =============
Liabilities and Equity
Liabilities:
Deposits (note 12) $ 200,354,967 274,370,643
Borrowings (note 13) 309,424,000 352,218,500
Advance payments by borrowers for taxes and insurance 1,794,285 1,998,777
Deferred income taxes (note 14) 112,378,627 92,119,785
Offering proceeds in escrow (note 21) 19,978,915 --
Other liabilities (note 6) 14,073,306 9,324,980
------------- -------------
Total liabilities 658,004,100 730,032,685
------------- -------------
Equity (note 18):
Retained earnings 56,058,287 51,029,038
Accumulated other comprehensive income - net
unrealized holding gains on securities available
for sale 180,857,538 139,900,095
------------- -------------
Total equity 236,915,825 190,929,133
Commitments and contingencies (notes 6, 16, and 19)
------------- -------------
Total liabilities and equity $ 894,919,925 920,961,818
============= =============
See accompanying notes to consolidated financial statements
F-2
CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Relating to Assets and Liabilities Transferred in Reorganization
Years ended September 30, 2001, 2000, and 1999
2001 2000 1999
--------------- -------------- -------------
Interest and dividend income:
Debt securities $ 651,936 1,194,033 1,524,095
Equity securities 4,483,643 4,043,513 3,461,704
Mortgage-backed securities and collateralized
mortgage obligations 21,150,446 27,476,406 16,592,249
Loans receivable 21,441,540 21,075,913 15,015,066
Interest-bearing deposits in other financial institutions 343,910 159,089 148,332
--------------- -------------- -------------
Total interest and dividend income 48,071,475 53,948,954 36,741,446
--------------- -------------- -------------
Interest expense:
Deposits (note 12) 10,737,520 13,932,849 10,423,679
Borrowings (note 13) 20,908,272 22,714,554 12,917,754
--------------- -------------- -------------
Total interest expense 31,645,792 36,647,403 23,341,433
--------------- -------------- -------------
Net interest income 16,425,683 17,301,551 13,400,013
Provision for loan losses (note 6) 500,000 1,410,000 240,000
--------------- -------------- -------------
Net interest income after provision for loan losses 15,925,683 15,891,551 13,160,013
--------------- -------------- -------------
Noninterest income:
Loan servicing fees 411,040 410,468 290,615
Service charges on deposit accounts 681,464 700,568 377,717
Gain on sale of loans and servicing released loan fees 1,580,257 730,457 1,133,050
(Loss) gain on sale of mortgage-backed securities, collateralized
mortgage obligations, and other investments (notes 4 and 5) (1,023) (127,636) 395,645
Gain on disposition of Freddie Mac common stock (note 4) -- -- 35,865,650
Equity in (loss) earnings of limited partnership (note 11) (1,200,488) (28,602) 448,000
Other 181,344 263,787 239,217
--------------- -------------- -------------
Total noninterest income 1,652,594 1,949,042 38,749,894
--------------- -------------- -------------
Noninterest expenses:
Salaries and employee benefits (note 15) 6,244,988 4,956,345 4,193,329
Occupancy 1,578,354 1,942,041 1,252,843
Furniture and equipment 398,788 419,208 379,188
Net cost of operations of real estate owned 144,245 106,785 18,718
Federal insurance premiums and other regulatory fees 222,249 267,498 259,828
Marketing 448,408 375,787 315,327
Charitable contributions (note 4) 28,218 61,689 2,181,656
Legal and professional 639,882 1,455,120 752,677
Amortization and impairment of intangibles (note 3) -- 4,533,333 66,667
Other 1,711,070 1,824,538 1,328,991
--------------- -------------- -------------
Total noninterest expenses 11,416,202 15,942,344 10,749,224
--------------- -------------- -------------
Income before income taxes, carried forward $ 6,162,075 1,898,249 41,160,683
=============== ============== =============
F-3
CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Relating to Assets and Liabilities Transferred in Reorganization
Years ended September 30, 2001, 2000 and 1999
2001 2000 1999
--------------- ----------- -----------
Income before income taxes, brought forward $ 6,162,075 1,898,249 41,160,683
Income tax expense (note 14) 1,405,973 1,260,088 14,332,922
--------------- ----------- -----------
Net income 4,756,102 638,161 26,827,761
--------------- ----------- -----------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during the
year, net of income taxes of $25,748,085, $2,879,443,
and $(20,904,507) for 2001, 2000, and 1999, respectively 40,956,815 4,580,253 (2,050,134)
Less reclassification adjustment for (losses) gains
included in net income, net of income taxes
of $(395), $(49,267), and $10,296,426 for 2001,
2000 and 1999, respectively (628) (78,369) 22,264,435
--------------- ----------- -----------
Total other comprehensive income (loss) 40,957,443 4,658,622 (24,314,569)
--------------- ----------- -----------
Comprehensive income $ 45,713,545 5,296,783 2,513,192
=============== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES
Consoldated Statements of Changes in Equity Transferred
in Reorganization
Years ended September 30, 2001, 2000, and 1999
Accumulated other
comprehensive income -
net unrealized holding
Retained gains on securities Total
earnings available for sale equity
------------ -------------------- ------------
Balance at September 30, 1998 $ 23,127,392 159,556,042 182,683,434
Net income 26,827,761 -- 26,827,761
Capital contribution 201,598 -- 201,598
Change in net unrealized holding gains
on securities, net of income taxes of
$ 10,608,081 -- (24,314,569) (24,314,569)
------------ ------------ ------------
Balance at September 30, 1999 50,156,751 135,241,473 185,398,224
Net income 638,161 -- 638,161
Capital contribution 234,126 -- 234,126
Change in net unrealized holding gains on
securities, net of income taxes of $2,928,710 -- 4,658,622 4,658,622
------------ ------------ ------------
Balance at September 30, 2000 51,029,038 139,900,095 190,929,133
Net income 4,756,102 -- 4,756,102
Capital contribution 273,147 -- 273,147
Change in net unrealized holding gains
on securities, net of income taxes of
$ 25,748,480 -- 40,957,443 40,957,443
------------ ------------ ------------
Balance at September 30, 2001 $ 56,058,287 180,857,538 236,915,825
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows of Assets and Liabilities
Transferred in Reorganization
Years ended September 30, 2001, 2000, and 1999
2001 2000 1999
-------------- -------------- --------------
Cash flows from operating activities:
Net income $ 4,756,102 638,161 26,827,761
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 500,000 1,410,000 240,000
Depreciation and amortization 736,700 1,378,240 731,851
Provision for asset impairment -- 3,803,333 --
Deferred income tax (benefit) expense (5,489,648) 322,177 7,831,928
Equity in loss (earnings) of limited partnerships 1,200,488 28,602 (448,000)
(Accretion) amortization of premiums and discounts, net (2,972,099) (454,812) 136,024
Gain on sale of loans (1,580,257) (730,457) (1,133,050)
Proceeds from sale of loans 65,366,632 36,916,233 24,261,833
Originations and purchases of loans held for sale (64,253,762) (34,121,504) (22,435,402)
Loss (gain) on sales of mortgage-backed securities, collateralized
mortgage obligations, and other investments 1,023 127,636 (395,645)
Donation of FNMA stock -- 25,633 --
Gain on disposition of stock -- -- (35,865,650)
Loss on sales of real estate owned 122,266 69,353 15,248
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 1,301,025 (81,691) (1,096,608)
Decrease (increase) in income tax refunds receivable -- 3,145,376 (3,145,376)
(Increase) decrease in other assets (1,136,640) 1,050,627 (223,465)
Increase (decrease) in other liabilities 4,748,326 (2,226,803) 2,872,043
-------------- -------------- --------------
Net cash provided by operating activities 3,300,156 11,317,104 325,992
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities and
collateralized mortgage obligations available for sale 189,420,664 67,269,563 260,278,302
Principal collections on mortgage-backed securities and
collateralized mortgage obligations available for sale 52,471,823 40,206,702 41,812,636
Purchases of mortgage-backed securities and collateralized
mortgage obligations available for sale (183,717,769) (120,209,208) (422,174,802)
Purchases of equity securities and other investment
securities available for sale (48,174) (3,892,500) (52,103,423)
Principal collections on other investment securities available for sale -- 16,712,500 --
Proceeds from sale of other investment securities available for sale 15,564,771 3,135,170 28,149,121
Proceeds from redemption of FHLB stock 1,000,000 -- --
Proceeds from sale of Freddie Mac stock -- -- 34,468,568
Net decrease (increase) in loans receivable, exclusive of loan sales 27,618,347 (47,698,339) (9,694,763)
Proceeds from sale of real estate owned 831,149 783,655 303,487
Purchases of premises and equipment, net of dispositions (1,742,079) (529,882) (459,310)
Purchase of loans -- -- (8,271,001)
Acquisition of Citizens Bancgroup, Inc., net of cash paid -- -- 1,404,425
-------------- -------------- --------------
Net cash provided by (used in) investing activities 101,398,732 (44,222,339) (126,286,760)
-------------- -------------- --------------
F-6
CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows of Assets and Liabilities
Transferred in Reorganization
Years ended September 30, 2001, 2000, and 1999
2001 2000 1999
-------------- -------------- --------------
)
Cash flows from financing activities:
Offering proceeds in escrow $ 19,978,915 -- --
Net increase in savings and demand
deposit accounts 12,243,390 175,114 4,521,548
Net (decrease) increase in time deposits (86,259,066) (8,769,849) 100,791,763
Proceeds from Federal Home Loan Bank advances 434,935,014 676,853,978 367,600,000
Principal payments on advances from Federal Home
Loan Bank (457,935,014) (647,753,978) (358,950,000)
Proceeds from other borrowings 1,471,021,087 1,505,184,509 862,308,219
Principal payments on other borrowings (1,490,815,587) (1,494,932,778) (846,729,450)
Net (decrease) increase in advance payments by borrowers
for taxes and insurance (204,492) (35,925) 292,410
Capital contribution 273,147 234,126 201,598
--------------- -------------- --------------
Net cash (used in) provided by financing activities (96,762,606) 30,955,197 130,036,088
--------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents 7,936,282 (1,950,038) 4,075,320
Cash and cash equivalents at beginning of year 8,192,442 10,142,480 6,067,160
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 16,128,724 8,192,442 10,142,480
=============== ============== ==============
Supplemental disclosures of cash flow information:
Interest paid $ 32,688,743 36,872,174 25,104,646
=============== ============== ==============
Income taxes paid $ 2,947,150 -- 11,192,000
=============== ============== ==============
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 $ 757,564 1,277,793 351,305
=============== ============== ==============
Contribution of real estate acquired for sale to charity $ -- 17,002 --
=============== ============== ==============
See accompanying notes to consolidated financial statements.
F-7
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(1) Summary of Significant Accounting Policies
The consolidated financial statements of Charter Financial Corporation and
subsidiaries (the "Company") include the financial statements of Charter
Financial Corporation and the following wholly owned subsidiaries:
CharterBank (the "Bank") and Charter Insurance Company. All intercompany
accounts and transactions have been eliminated in consolidation.
Charter Financial Corporation was formed through the reorganization of
CharterBank in October 2001. The consolidated financial statements of
Charter Financial Corporation and subsidiaries reflect the assets and
liabilities transferred in such reorganization and the related earnings
thereon. Refer to note 21 for further discussion of this reorganization.
The consolidated financial statements of Charter Financial Corporation and
subsidiaries reflect the assets and liabilities transferred to the Company
in the reorganization. Specifically, historical financial information is
the of the predecessor entity, CharterBank and subsidiary, adjusted to
retroactively reflect the transfer of the 400,000 shares of Freddie Mac
common stock and the $100,000 in cash to First Charter, MHC. Operating data
has also been retroactively adjusted for such effects; furthermore, for the
years ended September 30, 2000, and 1999, the Company has reflected the
retention of the net capital resulting from the dividend income on such
400,000 shares of Freddie Mac common stock, net of income taxes, as
contributed capital in its equity.
CharterBank was organized as a federally chartered mutual savings and loan
association in 1954. CharterBank 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 five full-service branch offices located in LaGrange, Georgia,
Auburn, Alabama, and Valley, Alabama. 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 statement of
financial condition and revenue and expenses for the period. Actual
results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan
losses, the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans, and mortgage loan
prepayment assumptions used to determine the amount of revenue
recognition on mortgage-backed securities and collateralized mortgage
obligations. In connection with the determination of the allowance
for loan losses and the value of real estate owned, management
obtains independent appraisals for significant properties. In
connection with the determination of revenue recognition on
mortgage-backed securities and collateralized mortgage obligations,
management obtains independent estimates of mortgage loan prepayment
assumptions, which are based partly on historical prepayments and
current interest rates.
A substantial portion of the Company's loans are secured by real
estate located in its market area. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan
portfolio is susceptible to changes in the real estate market
conditions of this market area.
(Continued)
F-8
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(b) Cash Equivalents
Cash equivalents, as presented in the consolidated financial
statements, include amounts due from other depository institutions
and interest-bearing deposits in other financial institutions.
Generally, interest-bearing deposits in other financial
institutions are for one-day periods.
(c) Investments, Mortgage-Backed Securities, and Collateralized
Mortgage Obligations
Investments, mortgage-backed securities, and collateralized
mortgage obligations available for sale are reported at fair
value, as determined by independent quotations. Investment in
stock of a Federal Home Loan Bank is required of every federally
insured financial institution who utilizes its services.
Generally, the Federal Home Loan Bank will repurchase excess stock
at cost; accordingly, the investment in Federal Home Loan Bank
stock is carried at cost which approximates its fair value.
Purchase premiums and discounts on investment securities are
amortized and accreted to interest income using a method which
approximates a level yield over the period to maturity of the
related securities. Purchase premiums and discounts on
mortgage-backed securities and collateralized mortgage obligations
are amortized and accreted to interest income using 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.
A decline in the market value of any available for sale security
below cost that is deemed other than temporary results in a charge
to earnings and the establishment of a new cost basis for that
security. At September 30, 2001, the Company did not have any
securities with other than temporary impairment.
(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.
(Continued)
F-9
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
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.
Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, 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
No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures, which amends the requirements of SFAS
No. 114 regarding interest income recognition and related
disclosure requirements. Under the provisions of SFAS No. 114 and
SFAS No. 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 No. 114 do not
apply to large pools of smaller balance homogeneous loans, such as
consumer and installment loans, which are collectively evaluated
for impairment. Impairment losses are included in the allowance
for loan losses through a charge to the provision for loan losses.
Cash receipts on impaired loans which are accruing interest are
applied to principal and interest under the contractual terms of
the loan agreement. Cash receipts on impaired loans for which the
accrual of interest has been discontinued are applied to reduce
the principal amount of such loans until the principal has been
recovered and are recognized as interest income thereafter.
Gains or losses on the sale of mortgage loans are recognized at
settlement dates and are computed as the difference between the
sales proceeds received and the net book value of the mortgage
loans sold. At the time of sale, a servicing asset is recorded if
expected servicing revenues exceed an amount approximating
adequate servicing compensation. For sales of the SBA guaranteed
portion of loans, the basis in the portion of the loan sold is
determined by allocating the loan carrying value to the portion
sold, portion retained, and servicing asset, if any, based on
their relative fair values. The servicing asset, included in other
assets, is amortized 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, adequacy of collateral, loan concentrations, specific
problem loans, and economic conditions that may affect the
borrowers' ability to pay.
(Continued)
F-10
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
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 in an amount sufficient to restore the
allowance to an adequate level. Gains recognized on the disposition of
the properties are recorded in other income.
Costs of improvements to real estate are capitalized, while costs
associated with holding the real estate are charged to operations.
(g) Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation which is computed using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives of
the assets range from 20 to 50 years for buildings and improvements
and three to 15 years for furniture, fixtures, and equipment.
(h) Mortgage Banking Activities
In September 2000, the Financial Accounting Standards Board (FASB)
issued SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 140
amended SFAS No. 125. 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.
F-11
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
Mortgage loan servicing rights are included in other assets. Mortgage
servicing rights are stated at cost, less accumulated amortization and
impairment valuation allowance. The Company recognizes, as separate
assets, rights to service mortgage loans for others, either purchased
or through Company originations. 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
and purchased 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. 140, the Company periodically assesses its
capitalized mortgage servicing rights for impairment based upon the
fair value of those rights. To measure the fair value of its mortgage
servicing rights, the Company uses discounted cash flow analyses
taking into consideration appropriate assumptions for servicing fee
income, servicing fee costs, prepayment rates, and discount rates. The
Company stratifies its capitalized mortgage servicing rights for the
purpose of evaluating impairment, taking into consideration relevant
risk characteristics, including loan type, note rate, and note term.
If the recorded amount of the mortgage servicing rights exceeds the
fair value, the amount of the impairment is recognized through a
valuation allowance, with a corresponding charge to operations.
Additionally, the Company will prospectively accelerate future
amortization if a reduction in expected future net servicing income is
estimated.
Fees for servicing loans for investors are based on the outstanding
principal balance of the loans serviced and are recognized as income
when earned.
(i) Insurance
At September 30, 2001, the Company was covered under a $5,000,000
banker's blanket bond policy and a $1,000,000 errors and omissions
policy. The Company is also covered with a $10,000,000 umbrella
policy.
(j) Investment in Limited Partnerships
The carrying value of the Company's share (based on its underlying
ownership interest) of limited partnerships is based on the Company's
original investment adjusted for its pro rata share of the
partnerships' net income or losses.
F-12
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(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 and losses 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 were
amortized using the straight-line method over five years.
The Company examines the carrying value of its intangible assets to
determine whether there are any impairment losses. If indicators of
impairment were present in intangible assets used in operations and
undiscounted future cash flows were not expected to be sufficient to
recover the assets' carrying amount, an impairment loss would be
charged to expense in the period identified.
(n) Accounting Pronouncements
In June 1998, the 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.
F-13
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
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 the Company beginning in its 2001 fiscal year.
SFAS No. 140 addresses implementation issues that were identified in
applying SFAS No. 125. SFAS No. 140 has not materially impacted the
Company.
(2) Business Combination
Effective August 18, 1999, the Company acquired all of the issued and
outstanding shares of Citizens Bancgroup, Inc. ("CNB"), Valley, Alabama,
and its wholly owned banking subsidiary, Citizens National Bank, for a
purchase price of approximately $2,250,000 in cash. The acquisition has
been accounted for using the purchase method of accounting and, hence, the
results of operations of CNB have been included in the consolidated
financial statements from the aforementioned effective date. The assets and
liabilities of CNB, including purchase accounting adjustments, as of the
date of the acquisition, were as follows:
Loans, net $ 24,722,000
Other earning assets 10,458,000
Other assets 4,908,000
Goodwill and other intangibles 4,600,000
------------
44,688,000
Deposits 42,041,000
Other liabilities 397,000
------------
Purchase price $ 2,250,000
============
The following summarizes the unaudited pro forma consolidated results of
operations assuming CNB was acquired in a purchase accounting transaction
on October 1, 1998:
1999
------------
Interest income $ 41,787,000
============
Net interest income $ 16,150,000
============
Noninterest income $ 39,404,000
============
Net income $ 23,807,000
============
F-14
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(3) Goodwill and Other Intangible Assets
Goodwill and other intangible assets at September 30, 2000 consists of the
following:
Goodwill $ 3,125,000
Deposit premium 1,475,000
-------------
4,600,000
Accumulated amortization and allowance
for impairment (4,600,000)
-------------
Goodwill and other intangible
assets, net $ -
=============
The Company examined the carrying amount of its intangible assets to
determine whether there are any impairment losses. The analysis for the
year ended September 30, 2000 indicated that undiscounted future cash flows
associated with the purchase of assets and assumption of liabilities of CNB
would be negative and therefore insufficient to recover the carrying amount
of the related intangible assets primarily due to charge-offs of loans
purchased. Accordingly, the Company recorded an impairment loss of
$3,603,333 in addition to scheduled amortization of $930,000 for the year
ended September 30, 2000.
(4) Investment Securities
Investment securities available for sale are summarized as follows:
September 30, 2001
---------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
-------------- ----------------- ------------- -------------
Freddie Mac common stock $ 6,316,533 296,258,467 -- 302,575,000
Other equity securities
available for sale 48,174 -- -- 48,174
------------ ------------ ------------ ------------
$ 6,364,707 296,258,467 -- 302,623,174
============ ============ ============ ============
September 30, 2000
---------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
-------------- ----------------- ------------- --------------
Freddie Mac common stock $ 6,316,533 245,344,405 - 251,660,938
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
------------- ------------ ----------- -----------
$ 21,765,522 245,346,905 1,569,115 265,543,312
============= ============ =========== ===========
F-15
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The Company's investment in Federal Home Loan Bank stock was $11,587,500
and $12,587,500 at September 30, 2001 and 2000, 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 September 30, 2001 and
2000.
Proceeds from sales of investment securities during 2001, 2000, and 1999
were $15,564,771, $3,135,170, and $28,149,121, respectively. Gross gains of
$-0-, $185,337, and $148,097, were realized on those sales for 2001, 2000,
and 1999, respectively, and gross realized losses on sales of investment
securities for 2001, 2000, and 1999 were $42,229, $22,072, and $12,968,
respectively.
During 2000, the Company donated 425 shares of Fannie Mae stock with a fair
value of $25,633 to LaGrange College. The Company recognized a gain on the
disposition of the stock of $16,694 and recorded contribution expense for
the total fair value in 2000.
During 1999, the Company donated 35,000 shares of Freddie Mac common stock
with a fair value of $2,152,500 to a charitable foundation formed by the
Company. The Company recognized a gain on the disposition of the stock of
$2,117,365 and recorded contribution expense for the total fair value in
1999.
During the year ended September 30, 1999, the Company sold 570,000 shares
of Freddie Mac common stock with a fair value of $34,468,568. The Company
recognized a gain on the disposition of the stock of $33,748,285.
No investment securities were pledged to secure Federal Home Loan Bank
advances or to collateralize securities sold under agreements to repurchase
at September 30, 2001. Investment securities with an aggregate carrying
amount of $13,882,374 at September 30, 2000 were pledged to secure Federal
Home Loan Bank advances and to collateralize securities sold under
agreements to repurchase.
(5) Mortgage-Backed Securities and Collateralized Mortgage Obligations
Mortgage-backed securities and collateralized mortgage obligations
available for sale are summarized as follows:
September 30, 2001
-----------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
-------------- ----------------- ------------- -------------
Mortgage-backed securities:
FNMA certificates $ 16,517,781 113,178 10,755 16,620,204
GNMA certificates 20,080,715 166,945 17,857 20,229,803
Collateralized mortgage obligations:
FNMA 74,091,232 67,105 539,076 73,619,261
GNMA 5,081,497 -- 44,309 5,037,188
FHLMC 140,128,049 186,436 637,338 139,677,147
Other 72,416,679 121,982 1,108,528 71,430,133
--------------- ------------- ------------- -------------
$ 328,315,953 655,646 2,357,863 326,613,736
=============== ============= ============= =============
F-16
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
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
============= =========== ============ =============
Proceeds from sales of mortgage-backed securities and collateralized
mortgage obligations during 2001, 2000, and 1999 were $189,420,664,
$67,269,563, and $260,278,302, respectively. Gross gains of $704,315,
$38,957, and $757,275 and gross losses of $663,109, $346,552, and $496,759
were realized on those sales for 2001, 2000, and 1999, respectively.
Mortgage-backed securities and collateralized mortgage obligations with an
aggregate carrying amount of $244,334,385 and $284,469,404 at September 30,
2001 and 2000, 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 September 30, 2001 and 2000, the Company did not
hold any derivative financial instruments for trading purposes. For
derivative financial instruments held or issued for purposes other than
trading, it requires disclosure about those purposes, about how the
instruments are reported in the financial statements, and, if the purpose
is hedging anticipated transactions, about the anticipated transactions,
the classes of derivative financial instruments used to hedge those
transactions, the amounts of hedging gains and losses deferred, and the
transactions or other events that result in recognition of the deferred
gains or losses in income. At September 30, 2001 and 2000, the Company did
not hold any derivative financial instruments with the purpose of hedging
transactions. The Company held collateralized mortgage obligations at
September 30, 2001 and 2000. These investments are classified as available
for sale and are carried at fair value in the Company's financial
statements.
F-17
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The following table shows additional information related to the
collateralized mortgage obligations held by the Company:
September 30, 2001
-------------------------------------------------------------------
Weighted- Net unrealized
Fair value average life Yield loss
--------------- --------------- ----------- --------------
Fixed rate $ 74,785,226 9.06 years 6.978% $ (879,737)
Variable rate 214,978,503 10.58 years 4.301 (1,073,991)
--------------- -------------- ---------- -------------
Total $ 289,763,729 10.19 years 4.992% $ (1,953,728)
=============== ============== ========== =============
September 30, 2000
---------------------------------------------------------------------
Weighted- Net unrealized
Fair value average 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 15.83 years 7.439% (9,661,522)
=============== =============== ========== =============
(6) Loans Receivable
Loans receivable are summarized as follows:
September 30,
------------------------------------------
2001 2000
-------------------- -------------------
1-4 family residential real estate mortgage $ 129,222,817 152,821,962
Commercial real estate 61,225,358 60,837,874
Commercial 6,818,800 8,986,583
Real estate construction 13,590,439 16,018,366
Consumer and other 23,536,627 29,914,580
Undisbursed proceeds of loans in process (4,447,416) (8,879,948)
--------------- ---------------
Loans receivable, net of undisbursed proceeds
of loans in process 229,946,625 259,699,417
Less:
Unamortized loan origination fees (costs), net 66,025 (113,317)
Allowance for loan losses 5,289,778 6,346,001
--------------- ---------------
$ 224,590,822 253,466,733
=============== ===============
In addition to the above, the Company was servicing loans primarily for the
Federal Home Loan Mortgage Corporation with aggregate principal balances of
$132,506,482, $171,532,909, and $165,057,335 at September 30, 2001, 2000,
and 1999, respectively.
F-18
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
Loans to certain executive officers, directors, and their associates
totaled $445,574 and $883,886 at September 30, 2001 and 2000, respectively.
Such loans were made in the ordinary course of business on substantially
the same terms, including interest rate and collateral, as those prevailing
at the time for comparable transactions with other persons, and did not
involve more than the normal credit risk nor present other unfavorable
features. The following is a summary of activity during 2001 with respect
to such aggregate loans to these individuals and their associates and
affiliated companies:
Balance at September 30, 2000 $ 883,886
New loans 69,320
Repayments (507,632)
-----------
Balance at September 30, 2001 $ 445,574
===========
At September 30, 2001 and 2000, the Company had $2,311,821 and $2,830,774,
respectively, of nonperforming loans. The following is a summary of
interest income relating to nonperforming loans for the years ended
September 30, 2001, 2000, and 1999.
2001 2000 1999
---------- ---------- ----------
Interest income at contractual rate $ 246,086 303,990 44,937
Interest income actually recorded (141,609) (127,679) (16,195)
---------- ---------- ---------
Reduction of interest income $ 104,477 176,311 28,742
========== ========== =========
The following is a summary of transactions in the allowance for loan
losses:
2001 2000 1999
---------- ---------- ----------
Balance at beginning of year $6,346,001 5,709,802 2,054,288
Loan loss reserve of acquired
company - - 3,751,796
Loans charged off (2,096,532) (1,137,938) (420,101)
Recoveries on loans previously
charged off 540,309 364,137 83,819
Provision for loan losses charged to
operations 500,000 1,410,000 240,000
---------- ---------- ---------
Balance at end of year $5,289,778 6,346,001 5,709,802
========== ========== =========
At September 30, 2001 and 2000, pursuant to the definition within SFAS No.
114, the Company had impaired loans of approximately $306,000 and
$1,200,000 with related amounts included in the allowance for loan losses
of approximately $64,000 and $715,000, respectively.
The average recorded investment in impaired loans for the years ended
September 30, 2001, 2000, and 1999 was approximately $753,000, $740,000,
and $500,000, respectively. Interest income recognized on impaired loans
for the years ended September 30, 2001, 2000, and 1999, was not
significant.
F-19
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the financial
statements. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss, in the event of nonperformance by
the customer for commitments to extend credit is represented by the
contractual or notional amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as
it does for recorded loans.
A summary of the Company's financial instruments with off-balance sheet
risk at September 30, 2001 and 2000 is as follows:
2001 2000
----------- -----------
Financial instruments whose contract amounts
represent credit risk - commitments:
Mortgage loans $ 1,047,550 5,109,000
Open-end consumer loans 6,611,399 6,953,873
Open-end commercial loans 3,699,589 456,254
Construction loans 4,447,416 8,879,948
----------- -----------
Total commitments $15,805,954 21,399,075
=========== ===========
The Company was also committed to sell loans of approximately $299,300 and
$1,349,000 at September 30, 2001 and 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.
F-20
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The following summarizes the Company's commitments to fund fixed rate loans
at September 30, 2001 and 2000:
Range
Amount of rates
-------------------- --------------------
September 30, 2001 $ 777,500 6.00-10.00%
==================== ====================
September 30, 2000 $ 1,188,000 7.63-10.50%
==================== ====================
In the origination of mortgage loans, the Company enters into adjustable
interest rate contracts with caps and floors written with the intent of
managing its interest rate exposure. Interest rate caps and floors enable
customers and the Company to transfer, modify, or reduce their interest
rate risk. At September 30, 2001 and 2000, adjustable rate mortgage loans
with interest rate caps and floors amounted to $83,673,000 and
$117,758,166, respectively.
The Company has sold loans and has the obligation to repurchase any loan or
loans that became 90 days or more delinquent. At September 30, 2001 and
2000, the balance of these loans was $5,357,265 and $7,602,761,
respectively, with a related recourse reserve in other liabilities of
$69,644 and $163,454 at September 30, 2001 and 2000, respectively.
(7) Real Estate Owned
At September 30, 2001 and 2000, real estate owned is summarized as follows:
2001 2000
------------ ----------
Real estate acquired through foreclosure $ 434,142 629,993
============ ==========
(8) Accrued Interest and Dividends Receivable
At September 30, 2001 and 2000, accrued interest and dividends receivable
are summarized as follows:
2001 2000
--------------- -------------
Loans............................. $ 1,458,198 1,791,634
Mortgage-backed securities and
collateralized mortgage
obligations..................... 1,509,566 2,265,767
Investment securities............. -- 170,011
Other............................. 208,055 249,432
-------------- -------------
$ 3,175,819 4,476,844
============== =============
F-21 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(9) Premises and Equipment
Premises and equipment at September 30, 2001 and 2000 is summarized as
follows:
2001 2000
-------------- ------------
Land.............................. $ 1,152,232 1,152,232
Buildings and improvements........ 3,452,319 3,359,995
Furniture, fixtures, and equipment 2,898,163 2,519,319
Construction in progress.......... 1,308,671 101,035
------------- ----------
8,811,385 7,132,581
Less accumulated depreciation..... 3,986,081 3,598,510
------------- ----------
$ 4,825,304 3,534,071
============= ==========
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 September 30, 2001 and 2000.
(10) Mortgage Servicing Rights
Activity in mortgage servicing rights (which are included in other assets)
for the years ended September 30, 2001 and 2000 consists of the following:
2001 2000
---------------- ------------
Balance at beginning of year..... $ 1,097,284 1,320,840
Capitalized during the year...... 4,554 107,877
Amortization expense............. (285,854) (331,433)
-------------- -----------
Balance at end of year........... $ 815,984 1,097,284
============== ===========
There was no valuation allowance at September 30, 2001 and 2000.
(11) Investment in Limited Partnership
During 1997, the Company purchased an interest in a limited partnership,
which was formed to acquire mortgage servicing rights, for $5,000,000.
The Company is allocated approximately 21% of the respective earnings or
losses of this partnership. As discussed in note 1, the Company uses the
equity method of accounting for its investment in this limited
partnership because it exercises significant influence over the
partnership. Accordingly, the Company recognized equity in the net (loss)
earnings of the limited partnership of $(1,200,488) during 2001,
$(28,602) during 2000, and $448,000 during 1999. An independent valuation
of the mortgage servicing rights of the limited partnership is performed
quarterly.
F-22 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
Financial information (unaudited), including balance sheets as of September
30, 2001 and 2000 and the income statements for the years ended September
30, 2001, 2000, and 1999 for the partnership, is as follows:
2001 2000
------------- ------------
Cash.................................. $ 395,350 683,534
Mortgage servicing rights, net........ 13,270,960 19,324,955
Other assets, primarily current....... 39,442 491,911
------------ -------------
$ 13,705,752 20,500,400
============ =============
Long-term debt....................... $ 8,325,000 10,950,000
Other liabilities.................... 1,120,630 479,076
Partners' capital:
CharterBank........................ 670,910 1,871,398
Other partners..................... 3,589,212 7,199,926
------------ -------------
$ 13,705,752 20,500,400
============ =============
Years ended September 30,
------------------------------------------------------
2001 2000 1999
----------------- --------------- ---------------
Revenues............................... $ 3,486,090 6,211,819 7,627,343
Expenses............................... 9,306,638 6,350,495 5,466,224
--------------- -------------- --------------
Net (loss) income...................... $ (5,820,548) (138,676) 2,161,119
=============== ============== ==============
CharterBank's equity in net (loss)
income............................... $ (1,200,488) (28,602) 448,000
=============== ============== ==============
F-23 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(12) Deposits
At September 30, 2001 and 2000, deposits are summarized as follows:
2001 2000
------------------------------------------- -----------------------------------------------
Weighted- Weighted-
Range of average Range of average
Amount interest rates interest rate Amount interest rates interest rate
------------- -------------- ------------- ------------- -------------- -------------
Demand, NOW, and money
market accounts....... $ 43,778,812 0.00-2.47% 1.45% $ 33,462,598 0.00-5.73 2.66%
Savings deposits.......... 10,313,336 1.50 1.50 8,386,160 1.99 1.99
Time deposits by original
term:
Time deposits over
$100,000............ 37,545,550 3.49-8.25 5.45 20,282,757 4.57-8.25 6.09
Other time deposits:
12 months or less... 89,922,322 3.26-7.03 5.24 132,630,681 4.15-7.60 6.31
13-36 months........ 14,572,856 3.39-7.35 5.41 57,547,631 4.23-7.55 5.40
37 months or more... 4,222,091 4.07-8.25 6.12 22,060,816 4.15-8.00 5.78
------------- ----- ------------ ------
Total deposits.... 200,354,967 4.21 274,370,643 6.01%
===== ======
Accrued interest payable.. 896,967 1,710,488
------------- ------------
$ 201,251,934 $ 276,081,131
============= ============
During 2001 and 2000, the Company actively pursued out of market time
deposits from various credit unions and/or brokers as a source of funds.
The balance of the credit union deposits was $36,372,594 and $40,533,563
and of broker deposits was $-0- and $89,355,215 at September 30, 2001 and
2000, respectively.
At September 30, 2001, scheduled maturities of time deposits are as
follows:
Year ending September 30,
-------------------------
2002................ $ 119,368,890
2003................ 15,882,146
2004................ 4,982,199
2005................ 4,305,586
2006................ 1,496,850
2007 and thereafter. 227,148
--------------
$ 146,262,819
==============
F-24 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
Interest expense on deposits for the years ended September 30, 2001, 2000,
and 1999 is summarized as follows:
2001 2000 1999
-------------- --------------- --------------
Demand, NOW, and money
market accounts.............. $ 814,627 765,137 449,325
Savings deposits............... 160,912 274,959 291,947
Time deposits.................. 9,761,981 12,892,753 9,682,407
------------- ------------- -------------
$ 10,737,520 13,932,849 10,423,679
============= ============= =============
Deposits of certain officers, directors, and their associates totaled
$1,684,861 and $1,123,378 at September 30, 2001 and 2000, respectively.
Such deposits have substantially the same terms as those for comparable
transactions with other persons.
(13) Borrowings
At September 30, 2001 and 2000, borrowings are summarized as follows:
2001 2000
------------------ -----------------
Federal Home Loan Bank advances................... $ 211,750,000 234,750,000
Securities sold under agreements to repurchase.... 97,674,000 117,468,500
--------------- ---------------
$ 309,424,000 352,218,500
=============== ===============
Federal Home Loan Bank advances at September 30, 2001 and 2000 are
summarized by year of maturity in the table below:
2001 2000
----------------------------------------------- --------------------------------------------
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
One to two years........ 31,000,000 5.58-6.49 5.59 -- -- --
Two to three years...... 53,750,000 5.73 5.73 31,000,000 6.46-6.49 6.46
Thereafter.............. 127,000,000 5.40-6.14 5.64 78,750,000 4.85-6.48 5.83
------------- ------ -------------- -------
$ 211,750,000 5.61 $ 234,750,000 6.32
============= ====== ============== =======
At September 30, 2001, the Company has pledged, under a specific collateral
lien with the Federal Home Loan Bank (FHLB), all stock of the FHLB, certain
qualifying first mortgage loans with unpaid principal balances totaling
$142,454,621 and certain mortgage-backed securities and collateralized
mortgage obligations with an aggregate fair value of $146,848,288.
The Company has $55,000,000 in adjustable rate advances and $156,750,000 in
fixed rate advances from the FHLB at September 30, 2001.
F-25 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
At September 30, 2001, the Company had available line of credit commitments
with the FHLB totaling $276,305,977 of which $211,750,000 was advanced and
$64,555,977 was available at September 30, 2001. As of September 30, 2001,
the Company's fixed rate FHLB advances include $125,750,000 of advances
that are callable by the FHLB under certain circumstances. As of September
30, 2001, the Company's adjustable rate advances include $55,000,000 of
advances which adjust periodically based on short-term rate indices, and
have periodic floors.
The securities sold under agreements to repurchase at September 30, 2001
are secured by certain mortgage-backed securities and collateralized
mortgage obligations with an aggregate fair value of $102,650,319. All
securities sold under the agreements to repurchase are under the Company's
control. The repurchase agreements at September 30, 2001 and 2000 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 $4,976,319 at September 30, 2001.
The following summarizes pertinent data related to securities sold under
the agreements to repurchase for the years ended September 30, 2001, 2000,
and 1999:
2001 2000 1999
-------------------- ------------------- -------------------
Weighted-average borrowing rate
at year-end................... 3.25% 6.76 5.54
==================== =================== ===================
Weighted-average borrowing rate
during the year............... 5.62% 6.64 5.42
==================== =================== ===================
Average daily balance during year. $ 117,600,366 122,725,585 60,134,537
==================== =================== ===================
Maximum month-end balance during
the year...................... $ 157,962,635 153,308,116 111,320,019
==================== =================== ===================
Interest expense on borrowings for the years ended September 30, 2001,
2000, and 1999 is summarized as follows:
2001 2000 1999
------------------ ------------------ -----------------
Securities sold under agreements to
repurchase..................... $ 6,603,468 8,149,449 3,260,558
Federal Home Loan Bank advances.... 14,304,804 14,565,105 9,657,196
---------------- ---------------- ----------------
$ 20,908,272 22,714,554 12,917,754
================ ================ ================
F-26 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(14) Income Taxes
Income tax expense (benefit) attributable to income from continuing
operations for the years ended September 30, 2001, 2000, and 1999 consists
of:
2001 2000 1999
----------------- ----------------- -----------------
Federal:
Current................... $ 6,061,491 901,256 5,603,904
Deferred.................. (4,847,991) 273,850 6,657,139
State:
Current................... 834,120 36,655 897,090
Deferred.................. (641,647) 48,327 1,174,789
---------------- ---------------- ----------------
$ 1,405,973 1,260,088 14,332,922
================ ================ ================
The difference between the actual total provision for Federal and state
income taxes and Federal income taxes computed at the statutory rate of 35%
for the years ended September 30, 2001 and 1999 and 34% for the year ended
September 30, 2000 is summarized as follows:
2001 2000 1999
------------------ ------------------- -------------------
Computed "expected" tax expense $ 2,156,726 645,405 14,406,239
Increase (decrease) in tax expense
resulting from:
Dividends received deduction (879,263) (733,344) (669,257)
Gain on disposition of stock -- (5,676) (741,078)
State income taxes, net of
Federal tax effect 125,107 56,088 1,346,721
Change in the deferred tax asset
valuation allowance (85,278) (266,554) (35,518)
Goodwill amortization and
impairment -- 1,541,333 --
Other, net 88,681 22,836 25,815
-------------- ------------- --------------
$ 1,405,973 1,260,088 14,332,922
============== ============= ==============
The effective tax rate for the years ended September 30, 2001, 2000, and
1999 was 22.82%, 66.38%, and 34.82%, respectively.
F-27 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
September 30, 2001 and 2000 are presented below:
2001 2000
------------------- -------------------
Deferred tax assets:
Georgia business credit carryforward $ -- 180,483
Allowance for loan losses 1,000,239 1,436,582
Deferred compensation 225,264 195,054
Alternative minimum tax credit carryforward -- 175,848
Self-insurance reserve 9,266 55,099
Charitable contributions carryforward -- 652,225
Investment in limited partnership 907,772 603,957
Real estate acquired through foreclosure 78,616 119,525
Net operating loss carryforward -- 43,962
Other 313,735 148,659
------------------- -------------------
Total gross deferred tax assets 2,534,892 3,611,394
Less valuation allowance -- 85,278
------------------- -------------------
Net deferred tax assets 2,534,892 3,526,116
------------------- -------------------
Deferred tax liabilities:
Deferred loan fees, net 106,192 539,482
Mortgage servicing rights 307,789 413,896
Net unrealized holding gains on securities
available for sale 113,698,702 87,950,222
Investment securities market adjustment for tax
reporting 647,391 6,598,770
Federal Home Loan Bank stock dividends 41,845 45,862
Other 111,600 97,669
------------------- -------------------
Total gross deferred tax liabilities 114,913,519 95,645,901
------------------- -------------------
Net deferred tax liabilities $ 112,378,627 92,119,785
=================== ===================
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.
F-28 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company
will realize the benefits of these deductible differences, net of the
existing valuation allowances at September 30, 2001.
(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.
The following table sets forth the funded status of the plan at
September 30, 2001 and 2000:
September 30,
------------------------------------------
2001 2000
-------------------- -------------------
Change in benefit obligation:
Projected benefit obligation at beginning of period $ 576,498 1,557,877
Service cost -- 51,322
Interest cost -- 76,493
Amendments -- 576,498
Actuarial loss -- 493,970
Benefits paid (576,498) --
Curtailment -- (1,028,063)
Settlement -- (1,151,599)
-------------------- -------------------
Projected benefit obligation at end of period $ -- 576,498
==================== ===================
Change in plan assets:
Fair value of plan assets at beginning of period $ 576,498 1,493,849
Actual return on plan assets -- 114,439
Benefits paid (576,498) --
Settlement -- (1,031,790)
-------------------- -------------------
Fair value of plan assets at end of period $ -- 576,498
==================== ===================
F-29 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The components of net pension expense (recovery) for the years ended September
30, 2000 and 1999 are as follows:
2000 1999
------------------- -------------------
Service cost for benefits earned during the year $ 51,322 255,682
Interest cost on projected benefit obligations 76,493 109,215
Actual return on plan assets (114,439) (99,071)
Net amortization and deferral (4,610) (1,164)
Curtailment and settlement (546,740) --
------------------- -------------------
Net pension (recovery) expense $ (537,974) 264,662
=================== ===================
Assumptions used to determine the actuarial present
value of the accumulated and projected benefit
obligations were:
Discount rate 7.75% 7.75
Expected long-term rate of return on assets 8.00 8.00
Rate of increase in future compensation levels N/A 4.50
The Company has a 401(k) Profit Sharing Plan and Trust (Plan) which
covers substantially all of its employees. Charter Financial Corporation
may match up to 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 $228,531,
$96,934, and $27,040 in 2001, 2000, and 1999, respectively.
During 1996, the Company implemented a short-term incentive plan which
covers substantially all employees. The Company also implemented a
long-term incentive plan which covers key employees and is based on the
Company's comprehensive earnings, as defined. For the years ended
September 30, 2001, 2000, and 1999, the Company expensed $1,023,783,
$946,027, and $830,325, 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.
F-30 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(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) Investments and Mortgage-Backed Securities and Collateralized
Mortgage Obligations Available for Sale
The fair value of investments and mortgage-backed securities and
collateralized mortgage obligations available for sale is
estimated based on bid quotations received from securities
dealers.
The following table presents the fair value at September 30, 2001
and 2000:
2001 2000
------------------- -------------------
Freddie Mac common stock and other equity securities $ 302,623,174 251,660,938
Investment securities -- 13,882,374
Mortgage-backed securities and collateralized
mortgage obligations 326,613,736 367,707,904
Federal Home Loan Bank stock 11,587,500 12,587,500
------------------- -------------------
$ 640,824,410 645,838,716
=================== ===================
(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.
F-31 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The following table presents information for loans at September 30, 2001
and 2000:
2001 2000
---------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------------- -------------- ---------------- ---------------
1-4 family residential real
estate $ 129,222,817 129,840,513 152,821,962 150,438,834
Commercial real estate 61,225,358 63,919,492 60,837,874 59,889,168
Commercial other 6,818,800 6,846,956 8,986,583 8,698,016
Real estate construction
loans 9,143,023 9,154,254 7,138,418 7,027,102
Other loans 23,536,627 23,728,414 29,914,580 30,169,131
Unamortized loan
origination (fees)
costs, net (66,025) (66,025) 113,317 113,317
Allowance for loan losses (5,289,778) (5,289,778) (6,346,001) (6,346,001)
----------------- -------------- --------------- ---------------
$ 224,590,822 228,133,826 253,466,733 249,989,567
================= ============== =============== ===============
Loans held for sale $ 1,299,913 1,300,000 832,526 839,000
================= ============== =============== ===============
(d) Mortgage Servicing Rights
The fair value of mortgage servicing rights approximates its
carrying value due to the Company's evaluation of the underlying
loan portfolio and subsequent adjustment for loan prepayments and
other market conditions.
(e) Deposits
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, savings,
NOW accounts, and money market and checking accounts, is equal to
the amount payable on demand as of September 30, 2001 and 2000.
The fair value of time deposits is based on the discounted value
of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining
maturities. The following table presents information for deposits
at September 30, 2001 and 2000:
2001 2000
---------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
---------------- -------------- ------------- --------------
Demand, NOW, and money
market accounts $ 43,778,812 43,778,812 33,462,598 33,462,598
Savings deposits 10,313,336 10,313,336 8,386,160 8,386,160
Time deposits 146,262,819 148,911,391 232,521,885 233,066,063
---------------- -------------- ------------- --------------
$ 200,354,967 203,003,539 274,370,643 274,914,821
================ ============== ============= ==============
F-32 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(f) Borrowings
The fair value of the Company's borrowings is estimated based on
the discounted value of contractual cash flows. The discount rate
is estimated using rates quoted for the same or similar issues or
on the current rates offered to the Company for debt of the same
remaining maturities. The following presents information for
borrowings at September 30, 2001 and 2000:
2001 2000
---------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
---------------- -------------- ------------- --------------
Federal Home Loan Bank
advances $ 211,750,000 224,721,988 234,750,000 233,557,186
Securities sold under
agreements to repurchase 97,674,000 97,674,000 117,468,500 117,468,500
--------------- -------------- -------------- --------------
$ 309,424,000 322,395,988 352,218,500 351,025,686
=============== ============== ============== ==============
(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).
F-33 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(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. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate
settlement of the instrument. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off balance
sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Other
significant assets and liabilities that are not considered
financial assets or liabilities include deferred tax liabilities
and premises and equipment. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not
been considered in any of the estimates.
(18) Regulatory Matters
The Company is required to maintain noninterest-bearing cash reserve
balances. The aggregate average cash reserve balances maintained at
September 30, 2001 and 2000 to satisfy the regulatory requirement were
$600,124 and $512,634, respectively.
Under Office of Thrift Supervision regulations, the Company is required
to measure its interest rate risk and maintain the interest rate risk
within limits the Company establishes. Based on its asset/liability
structure at September 30, 2001, the Company's earnings may be
negatively impacted if interest rates fall 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.
F-34 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") was
signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19,
1992. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and regulatory environment for
insured depository institutions, including reductions in insurance
coverage for certain kinds of deposits, increased supervision by the
Federal regulatory agencies, increased reporting requirements for insured
institutions, and new regulations concerning internal controls,
accounting, and operations.
The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Institutions categorized as
"undercapitalized" or worse are subject to certain restrictions,
including the requirement to file a capital plan with its primary Federal
regulator, prohibitions on the payment of dividends and management fees,
restrictions on executive compensation, and increased supervisory
monitoring, among other things. Other restrictions may be imposed on the
institution either by its primary Federal regulator or by the FDIC,
including requirements to raise additional capital, sell assets, or sell
the entire institution. Once an institution becomes "critically
undercapitalized," it must generally be placed in receivership or
conservatorship within 90 days.
To be considered "adequately capitalized," an institution must generally
have a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio
of at least 4%, and a total risk-based capital ratio of at least 8%. An
institution is deemed to be "critically undercapitalized" if it has a
tangible equity ratio of 2% or less.
As of September 30, 2001, the most recent notification from the OTS
categorized CharterBank as well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as
well-capitalized, CharterBank 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, 2001 which would affect
CharterBank's well-capitalized classification.
F-35 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The table of compliance with minimum capital requirements for
CharterBank, prior to the reorganization, is presented below at
September 30, 2001 and 2000 (in thousands):
2001
----------------------------------------------------------------
Core/ Tier I Total
Tangible leverage risk-based risk-based
capital capital capital capital
------------- ------------- ------------- ------------
Total equity $ 253,200 253,200 253,200 253,200
General valuation allowances -- -- -- 4,741
Allowable unrealized gains -- -- -- 51,987
Accumulated comprehensive income (196,472) (196,472) (196,472) (196,472)
------------- ------------- ------------- ------------
Regulatory capital $ 56,728 56,728 56,728 113,456
============= ============= ============= ============
Total assets $ 921,020 921,020 921,020 921,020
============= ============= ============= ============
Regulatory total assets $ 601,035 601,035
============= =============
Risk-weighted assets 378,934 378,934
============= ============
Capital ratio 9.44% 9.44 14.97 29.94
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 $ 47,712 38,697 N/A 83,141
============= ============= ============= ============
Adequately capitalized or minimum FDICIA
requirement equal to or greater than 4.00% 4.00 8.00
Capital exceeding requirement $ 32,687 41,571 83,141
============= ============= ============
Well capitalized, equal to or greater than 5.00% 6.00 10.00
Capital exceeding requirement $ 26,676 33,992 75,563
============== ============= ============
F-36 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
2000
----------------------------------------------------------------
Core/ Tier I Total
Tangible leverage risk-based risk-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
============= ============= ============
(19) Lease Commitments
The Company assumed leases of a branch facility and parking lot in
connection with the Citizens National Bank acquisition. The leases are
from a partnership in which a Company executive, a Board Member, and
other related parties are partners. The facility lease expires July 31,
2008 and the parking lot lease expired as of January 31, 1998. The
parking lot lease is presently being paid month-to-month and is in the
process of being renewed. During the years ended September 2001 and 2000,
lease expense relating to these leases was $86,304 and $40,000,
respectively.
F-37 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
Future minimum lease payments for the branch facility lease are as
follows:
2002 $ 48,804
2003 47,604
2004 47,604
2005 47,604
2006 47,604
Thereafter 95,208
----------------
$ 334,428
================
(20) Formation of Insurance Subsidiary
On November 30, 2000, the Company capitalized its wholly owned insurance
subsidiary with a capital contribution of $450,000. Operations commenced
in December 2000. The following represents condensed financial
information of the insurance subsidiary - Charter Insurance Company.
Condensed Balance Sheet
Assets September 30, 2001
------------------
Cash $ 426,357
Interest-bearing deposits in other banks 6,943
Other assets 1,579
------------------
$ 434,879
==================
Liabilities and Stockholder's Equity
Liabilities - accrued expenses $ 19,899
Stockholder's equity:
Common stock 1,000
Additional paid-in capital 449,000
Accumulated deficit (35,020)
------------------
Total stockholder's equity 414,980
------------------
$ 434,879
==================
F-38 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
Condensed Statement of Income
Period ended
September 30, 2001
-------------------
Income:
Interest income $ 13,675
Other income 1,885
-------------------
Total operating income 15,560
-------------------
Expenses:
Professional fees 49,056
Other operating expense 1,524
-------------------
Total operating expenses 50,580
-------------------
Net loss $ (35,020)
===================
Condensed Statement of Cash Flows
Period ended
September 30, 2001
-------------------
Cash flows from operating activities:
Net loss $ (35,020)
Adjustments to reconcile net loss to net cash used in operating activities:
Increase in other assets (1,579)
Increase in other liabilities 19,899
-------------------
Net cash used in activities (16,700)
Cash flows from financing activities - capital contribution 450,000
-------------------
Net increase in cash 433,300
Cash and cash equivalents at beginning of period --
-------------------
Cash and cash equivalents at end of period $ 433,300
===================
F-39 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(21) Subsequent Event
On October 16, 2001, CharterBank completed a reorganization into a
two-level holding company structure with a sale of 20% of the stock of
the mid-tier holding company--Charter Financial Corporation. CharterBank
converted its charter into a mutual holding company charter and changed
its name to First Charter, MHC which then contributed all its assets
except $100,000 cash and 400,000 shares of Freddie Mac common stock to a
newly formed mid-tier holding company, Charter Financial Corporation, in
exchange for 80% of the stock in Charter Financial Corporation. Charter
Financial Corporation sold 20% of its stock in a minority stock offering
for net proceeds of $37,219,398 ($19,978,915 of which had been received
by September 30, 2001 and included in offering proceeds in escrow),
including proceeds for 317,158 shares purchased by Charter Financial
Corporation for its Employee Stock Ownership Plan (ESOP). Charter
Financial Corporation then contributed 2,555,000 shares of Freddie Mac
common stock, 50% of the net proceeds of the offering and the banking
assets and liabilities to its newly formed, wholly owned thrift
subsidiary, CharterBank. Charter Financial Corporation also contributed
400,000 shares of Freddie Mac common stock to its wholly owned insurance
subsidiary, Charter Insurance Company. Charter Financial Corporation
retained the stock of Charter Insurance Company, 1,700,000 shares of
Freddie Mac common stock, and 50% of the net proceeds of the stock
offering. Management believes that CharterBank has continued its
classification as "well capitalized" under the regulatory framework for
prompt corrective action, following this reorganization.
The consolidated financial statements of Charter Financial Corporation
and subsidiaries reflect the assets and liabilities transferred to the
Company in the reorganization. Specifically, historical financial
information is that of the predecessor entity, CharterBank and
subsidiary, adjusted to retroactively reflect the transfer of the
400,000 shares of Freddie Mac common stock and the $100,000 in cash to
First Charter, MHC. Operating data has also been retroactively
adjusted for such effects; furthermore, for the years ended September
30, 2001, 2000, and 1999, the Company has reflected the retention of
the net capital resulting from the dividend income on such 400,000
shares of Freddie Mac common stock, net of income taxes, as
contributed capital in its equity.
F-40 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The following table represents the pro forma adjustments to reflect the
reorganization of Charter Financial Corporation and subsidiaries:
Pro forma balance
Balance at Pro forma after
September 30, 2001 adjustments reorganization
------------------- ------------------- --------------------
Assets:
Cash and cash equivalents $ 16,128,724 14,068,903 30,197,627
Freddie Mac common stock and other equity
securities 302,623,174 -- 302,623,174
Mortgage-backed securities and
collateralized mortgage obligations
available for sale 326,613,736 -- 326,613,736
Loans receivable, net 224,590,822 -- 224,590,822
Other assets 24,963,469 -- 24,963,469
------------------- ------------------- --------------------
Total assets $ 894,919,925 14,068,903 908,988,828
=================== =================== ====================
Liabilities:
Deposits $ 200,354,967 -- 200,354,967
Borrowings 309,424,000 -- 309,424,000
Deferred income taxes 112,378,627 -- 112,378,627
Offering proceeds in escrow 19,978,915 (19,978,915) --
Other liabilities 15,867,591 -- 15,867,591
------------------- ------------------- --------------------
Total liabilities 658,004,100 (19,978,915) 638,025,185
------------------- ------------------- --------------------
Equity:
Common stock -- 198,224 198,224
Additional paid-in capital -- 37,021,174 37,021,174
Unearned compensation - ESOP -- (3,171,580) (3,171,580)
Retained earnings 56,058,287 -- 56,058,287
Accumulated other comprehensive income 180,857,538 -- 180,857,538
------------------- ------------------- --------------------
Total equity 236,915,825 34,047,818 270,963,643
------------------- ------------------- --------------------
Total liabilities and equity $ 894,919,925 14,068,903 908,988,828
=================== =================== ====================
F-41 (Continued)
CHARTER FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
The following represents the pro forma balance sheet of First Charter,
MHC to reflect the reorganization:
Pro forma balance
after
reorganization
-------------------
Assets:
Cash and cash equivalents $ 100,000
Freddie Mac common stock 26,000,000
Investment in Charter Financial Corporation 270,963,643
-------------------
Total assets $ 297,063,643
===================
Liabilities - deferred income taxes $ 9,816,141
Minority interest 54,192,729
Equity:
Retained earnings 56,727,870
Contributed capital 16,026,597
Accumulated other comprehensive income 160,300,306
-------------------
Total equity 233,054,773
-------------------
Total liabilities and equity $ 297,063,643
===================
F-42