<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number : 0-13496
CHARTER BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1967164
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
2600 CITADEL PLAZA DRIVE, SUITE 600, HOUSTON, TEXAS 77008
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 692-6121
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 ("Act") 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 / /
The number of shares outstanding of each class of the registrant's capital
stock as of June 30, 1994:
CLASS OF STOCK SHARES OUTSTANDING
COMMON STOCK, PAR VALUE $1.00 5,498,554
CLASS B SPECIAL COMMON STOCK, PAR VALUE $1.00 199,301
PREFERRED STOCK, $50.00 PAR VALUE, 8% PER ANNUM 14,201
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CHARTER BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
===============================================================================================================================
ASSETS 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash and due from banks $ 37,717 $ 32,745
Federal funds sold and securities purchased under
agreements to resell 93,916 39,617
Interest-bearing deposits in financial institutions 3 3
Trading account assets -- --
Securities held for investment (market value of $178,165,000 at June 30,
1994, and $141,101,000 at December 31, 1993, respectively) 183,563 139,797
Securities available for sale (market value of $117,425,000 at June 30,
1994, and $145,581,000 at December 31, 1993) 117,425 143,932
- -------------------------------------------------------------------------------------------------------------------------------
Loans 255,947 290,674
Less: allowance for credit losses (Note 2) 4,312 4,616
- -------------------------------------------------------------------------------------------------------------------------------
LOANS, NET 251,635 286,058
- -------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 13,811 13,006
Accrued interest receivable 3,738 3,687
Other real estate, net (Note 3) 1,944 2,178
Intangibles assets, net 4,407 2,220
Purchased mortgage servicing rights (Note 12) 1,438 --
Other assets 4,223 3,853
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $713,820 $667,096
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Non-interest-bearing demand $175,811 $173,862
Savings 39,464 35,356
Interest-bearing demand 91,876 98,982
Money market savings 111,354 107,665
Time over $100,000 65,527 60,182
TIME UNDER $100,000 112,409 112,707
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits 596,441 588,754
- -------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 11,338 12,941
Federal Home Loan Bank advances (Note 11) 38,000 --
Accrued interest payable 1,058 979
Other liabilities 5,163 4,843
Long-term debt (Note 10) 15,050 13,550
MANDATORY CONVERTIBLE SUBORDINATED DEBENTURES -- 257
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 667,050 621,324
- -------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Notes 5 and 6):
Preferred stock (400,000 shares authorized;
issued: 1994 and 1993 - 14,204 shares) 710 710
Common stock (12,000,000 shares authorized;
issued: 1994 - 5,660,722 shares; 1993 - 5,642,682 shares) 5,661 5,643
Class B special common stock (200,000 shares authorized;
issued: 1994 - 199,301 shares; 1993 - 199,282 shares) 199 199
Series C special common stock (50,000 shares authorized;
issued: 1994 and 1993 - 44,915 shares) 45 45
Capital surplus 31,406 31,159
Retained earnings 11,295 8,749
Unrealized appreciation (depreciation) on securities available for sale (Note 8) (1,808) --
Treasury stock at cost (1994 - 162,168 shares common and 3 preferred;
1993 - 161,529 shares common and 3 preferred) (738) (733)
- -------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 46,770 45,772
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $713,820 $667,096
===============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
2
<PAGE>
CHARTER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
=================================================================================================================================
June 30, June 30,
- ---------------------------------------------------------------------------------------------------------------------------------
1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $ 10,604 $ 10,618 $ 5,560 $ 6,259
Investment securities 8,275 8,290 4,403 4,461
Trading account assets 175 131 146 --
Federal funds sold 584 374 312 103
Securities purchased under agreements to resell 29 10 -- 3
Interest-bearing deposits 18 8 18 3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 19,685 19,431 10,439 10,829
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits:
Interest-bearing demand 792 1,243 370 614
Savings 466 364 239 213
Money market savings 1,476 1,384 757 716
Time over $100,000 1,087 1,162 585 597
Time under $100,000 1,895 1,996 971 1,041
Securities sold under agreements to repurchase 285 207 193 117
Long-term debt 547 422 273 257
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 6,548 6,778 3,388 3,555
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 13,137 12,653 7,051 7,274
Provision for credit losses (Note 2) 109 607 42 322
Net Interest Income After Provision
for Credit Losses 13,028 12,046 7,009 6,952
- ---------------------------------------------------------------------------------------------------------------------------------
Non-Interest Income:
Service charges on deposit accounts 2,928 2,560 1,605 1,378
Other customer service fees 439 362 197 188
Trust Fees 431 224 216 135
Trading account profits (losses) (33) -- (34) --
Securities gains (losses) 7 151 1 (30)
Mortgage company fees and sales of
originated servicing rights 1,478 -- 1,478 --
Other 929 640 586 395
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 6,179 3,937 4,049 2,066
- ---------------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense:
Salaries and employee benefits 7,590 5,767 4,532 3,050
Occupancy expense 2,132 1,702 1,182 916
Advertising 386 274 188 131
Data processing 667 568 345 293
Legal fees 425 296 207 183
Losses and carrying costs of
other real estate (Note 3) 77 1,469 22 323
Deposit insurance premiums 637 655 318 349
Amortization of intangibles 129 255 109 143
Stationery and supplies 311 195 194 107
Other 1,813 1,953 1,181 1,040
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 14,167 13,134 8,278 6,535
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 5,040 2,849 2,780 2,483
Income tax expense 1,765 1,065 1,008 901
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before effect of change in acctg. principle 3,275 1,784 1,772 1,582
Cumulative effect on prior years of a change in
accounting for income taxes (Note 4) -- 2,950 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 3,275 $ 4,734 $ 1,772 $ 1,582
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings per common share (Note 6):
Primary earnings before change in acctg. principle $ 0.57 $ 0.29 $ 0.31 $ 0.27
Fully diluted earnings before change in acctg. principle 0.57 0.29 0.31 0.27
Cumulative effect of change in acctg. for income taxes -- 0.52 -- --
Primary 0.57 0.81 0.31 0.27
Fully diluted 0.57 0.81 0.31 0.27
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding:
Primary 5,734,204 5,725,227 5,742,770 5,725,227
Fully diluted 5,742,770 5,742,647 5,742,770 5,742,647
=================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
<PAGE>
CHARTER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
=========================================================================================================================
June 30, 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Preferred stock, ($50.00 par value)
Balance at beginning of year $ 710 $ 710
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of period (14,204 shares issued
and 14,201 shares outstanding) 710 710
- -------------------------------------------------------------------------------------------------------------------------
Common stock ($1.00 par value)
Balance at beginning of year 5,643 5,374
Stock dividend (268,472 shares in 1993) -- 269
Conversion of debentures (18,040 shares in 1994 and
123 shares in 1993) 18 --
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of period (5,660,722 shares
issued and 5,498,554 shares outstanding) 5,661 5,643
- -------------------------------------------------------------------------------------------------------------------------
Class B special common stock ($1.00 par value)
Balance at beginning of year 199 190
Conversion of debentures (19 shares in 1994) -- --
Stock dividend (9,484 in 1993) -- 9
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of period (199,301 shares issued and outstanding) 199 199
- -------------------------------------------------------------------------------------------------------------------------
Series C special common stock ($1.00 par value)
Balance at beginning of year 45 43
Stock dividend - common stock (2,138 shares in 1993) -- 2
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of period (44,915 shares issued and outstanding) 45 45
- -------------------------------------------------------------------------------------------------------------------------
Capital surplus
Balance at beginning of year 31,159 27,726
Conversion of debentures 247 2
Stock dividend - common stock -- 3,431
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of period 31,406 31,159
- -------------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance at beginning of year 8,749 5,326
Cash dividends - preferred stock (28) (57)
Cash dividend - common stock (701) (1,015)
Stock dividend - common stock -- (3,711)
Net earnings 3,275 8,206
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of period 11,295 8,749
- -------------------------------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) on
Securities available for sale (1,808) --
- -------------------------------------------------------------------------------------------------------------------------
Treasury stock
Balance at beginning of period (733) (733)
Treasury stock acquired through conversion of debentures (639 shares in 1994) (5) --
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of period (162,168 shares common
and 3 shares preferred) (738) (733)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (Notes 5 and 6) $ 46,770 $ 45,772
=========================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
CHARTER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
===============================================================================================================
1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities: (in thousands)
Net earnings $ 3,275 $ 4,734
Adjustments to reconcile net earnings to net cash
provided by operating activities: --
Depreciation and amortization 948 752
Amortization of intangibles 129 255
Net amortization of premiums and --
discounts on securities 1,695 1,779
Provision for credit losses 109 607
Provision for other real estate losses -- 1,354
Net gain on sales of securities (7) (211)
Writedown of securities -- 60
Net trading account activity 33 --
Net gain on sales of fixed assets, other real
estate and collateral acquired (21) (8)
Net (increase) decrease in other assets and interest receivable (200) 172
Net increase in other liabilities and interest payable 373 732
Net (increase) decrease in deferred tax asset 370 (2,552)
Increase (decrease) in outstanding expense and interest checks 221 10
- ---------------------------------------------------------------------------------------------------------------
Total Adjustments 3,650 2,950
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 6,925 7,684
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in interest-bearing deposits -- 686
Proceeds from sales of securities 6,113 3,482
Proceeds from maturities and prepayments of securities 63,135 62,085
Purchase of securities (90,611) (67,516)
Net (increase) decrease in loans 34,540 (20,667)
Capital expenditures (1,212) (312)
Proceeds from sales of other real estate 354 649
Purchase of mortgage company, net of acquired cash equivalents (3,359) --
Purchase of banking branches, net of acquired cash equivalents 19,317 --
Purchase of banking organization, net of acquired cash equivalents -- 4,433
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 28,277 (17,160)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net decrease in non-interest-bearing, demand,
savings, interest-bearing demand and money market accounts (11,049) (8,923)
Net decrease in certificate of deposits (2,050) (19,857)
Net increase (decrease) in securities sold under agreements to repurchase (1,603) 2,367
Net increase in Federal Home Loan Bank advances 38,000 --
Payment of long-term debt (1,000) (1,361)
Payment of common dividends (701) (445)
Payment of preferred dividends (28) (28)
Increase in long-term debt 2,500 7,500
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 24,069 (20,747)
- --------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 59,271 (30,223)
- --------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period 72,362 81,603
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 131,633 $ 51,380
==============================================================================================================
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 6,364 $ 6,833
Taxes paid 20 1,205
==============================================================================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Other real estate and collateral acquired $ 262 $ 749
Loans made to finance sales of other real estate -- 341
==============================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
<PAGE>
CHARTER BANCSHARES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accounting and reporting policies of Charter Bancshares, Inc.
("Charter" or "the Company") conform to generally accepted accounting
principles and to general practices within the banking industry. The
accompanying consolidated financial statements include the accounts of
Charter and its subsidiaries. All significant intercompany balances and
transactions have been eliminated upon consolidation. Certain amounts have
been reclassified in the accompanying consolidated financial statements
from those previously reported for the quarter ended June 30, 1993 to
conform to current year financial statement classifications.
The accompanying consolidated financial statements were not audited by
independent certified public accountants, but in the opinion of management
reflect all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of same.
NOTE 2 - ALLOWANCE FOR CREDIT LOSSES
The following table is an analysis of the activity in the allowance for
credit losses for the six months ended June 30, 1994 and 1993:
1994 1993
(in thousands)
======================================================================
Balance at beginning of period $ 4,616 $ 3,792
Provision charged to operating expenses 109 607
Allowance of acquired bank -- 522
Loans charged off (723) (370)
Less recoveries on loans previously charged off 310 12
- ----------------------------------------------------------------------
Net loan charge-offs (413) (244)
- ----------------------------------------------------------------------
Balance at end of period $ 4,312 $ 4,677
======================================================================
NOTE 3 - ALLOWANCE FOR OTHER REAL ESTATE LOSSES
Other real estate ("ORE") is reflected on the consolidated balance
sheets net of an allowance for anticipated losses on other real estate. The
following table is an analysis of activity in the allowance for anticipated
losses on other real estate for the six months ended June 30, 1994 and
1993:
1994 1993
======================================================================
(in thousands)
Balance at beginning of period $ 2,418 $ 3,569
Provision charged to operating expenses -- 1,353
Allowance of acquired bank -- 10
- ----------------------------------------------------------------------
Reductions (38) (844)
- ----------------------------------------------------------------------
Balance at end of period $ 2,380 $ 4,088
======================================================================
NOTE 4 - INCOME TAXES
The Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," was adopted by Charter effective January 1,
1993. This new standard provides for a deferred tax asset to be recognized
for the estimated future tax effects attributable to temporary differences
and carryforwards. The adoption of SFAS No. 109 has been reported as the
effect of a change in accounting principle. Management determined that a
net deferred tax asset of approximately $2,950,000 should be recognized as
of January 1, 1993.
6
NOTE 5 - DIVIDENDS
Charter's board of directors declared cash dividends totalling $378,000
and $351,000 that were paid March 31, 1994 and July 20, 1994, while cash
dividends totalling $195,000 and $278,000 were paid March 31, 1993 and June
30, 1993 to shareholders of common and preferred stock. Of the amounts paid
on March 31, 1994 and 1993, $28,000 was paid to holders of the initial
series preferred stock and the remainder was paid on the common stock.
NOTE 6 - EARNINGS PER COMMON SHARE
Earnings per common share are computed as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
===============================================================================================
June 30, June 30,
- -----------------------------------------------------------------------------------------------
1994 1993 1994 1993
- -----------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Earnings before cumulative effect of a change in
accounting principle $ 3,275 $1,784 $ 1,772 $ 1,582
Cumulative effect on prior years of a change in
accounting for income taxes -- 2,950 -- --
- -----------------------------------------------------------------------------------------------
Net earnings 3,275 4,734 1,772 1,582
- -----------------------------------------------------------------------------------------------
Less preferred dividend requirements 28 28 -- --
- -----------------------------------------------------------------------------------------------
Primary earnings applicable to common
shareholders 3,247 4,706 1,772 1,582
Interest expense on debentures 5 9 -- 4
- -----------------------------------------------------------------------------------------------
Fully diluted earnings applicable to common
shareholders $ 3,252 $4,715 $ 1,772 $ 1,586
===============================================================================================
Primary earnings per common share:
Earnings before cumulative effect of a change in
accounting principle $ 0.57 $ 0.29 $ 0.31 $ 0.27
Cumulative effect of a change in accounting for
income taxes -- 0.52 -- --
- -----------------------------------------------------------------------------------------------
Net earnings $ 0.57 $ 0.81 $ 0.31 $ 0.27
===============================================================================================
Fully diluted earnings per common share:
Earnings before cumulative effect of a change in
accounting principle $ 0.57 $ 0.29 $ 0.31 $ 0.27
Cumulative effect of a change in accounting for
income taxes -- 0.52 -- --
- -----------------------------------------------------------------------------------------------
Net earnings $ 0.57 $ 0.81 $ 0.31 $ 0.27
===============================================================================================
Weighted average common shares outstanding:
Primary 5,734,204 5,725,227 5,742,770 5,725,227
Fully diluted 5,742,770 5,742,647 5,742,770 5,742,647
===============================================================================================
</TABLE>
Primary earnings per share amounts are computed by dividing net
earnings less current period preferred dividends by the weighted average
number of common shares outstanding during the period. Fully diluted
earnings per share amounts are similarly computed but include the pro forma
effect from conversion of Charter's other potentially dilutive securities.
7
NOTE 7 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values were estimated by management as of June 30, 1994 and
December 31, 1994, which required the exercise of considerable judgment.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts Charter could realize in a current market exchange. The use
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated values presented.
The estimated fair values of Charter's financial instruments were as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
========================================================================================================
1994 1993
- --------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------
Financial Assets:
<S> <C> <C> <C> <C>
Cash and short-term investments $ 131,636 $ 131,636 $ 72,365 $ 72,365
Securities 300,988 295,590 283,729 286,682
Loans 255,947 255,299 290,674 292,602
Less: allowance for credit losses (4,312) (4,312) (4,616) (4,616)
- --------------------------------------------------------------------------------------------------------
Loans, net $ 251,635 $ 250,987 $ 286,058 $ 287,986
- --------------------------------------------------------------------------------------------------------
Financial Liabilities:
Deposits $ 596,441 $ 596,760 $ 588,754 $ 589,794
Securities sold under agreements to repurchase 11,338 11,338 12,941 12,941
Federal Home Loan Bank advances 38,000 38,000 -- --
Long-term debt and debentures 15,050 12,371 13,550 12,133
- --------------------------------------------------------------------------------------------------------
Unrecognized financial instruments:
Commitments to extend credit $ 45,676 $ 45,676 $ 41,371 $ 41,371
Standby letters of credit 7,496 7,496 4,165 4,165
========================================================================================================
</TABLE>
NOTE 8 - SECURITIES
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," was adopted by Charter effective January 1, 1994. Under the
new rules, debt securities that the Company has both the positive intent
and ability to hold to maturity are carried at amortized cost. Debt
securities that the Company does not have the positive intent and ability
to hold to maturity and all marketable equity securities are classified as
available-for-sale or trading and carried at fair value. Unrealized holding
gains and losses on securities classified as available-for-sale are carried
as a separate component of shareholders' equity. Unrealized holding gains
and losses on securities classified as trading are reported in earnings.
Presently, the Company classifies $117,425,000 of its debt securities
as available for sale and carries them at fair value. Application of the
new rules resulted in an estimated decrease of approximately $1,808,000 in
shareholders' equity as of June 30, 1994, representing the recognition in
shareholders' equity of unrealized depreciation, net of taxes, for the
Company's investment in debt and equity securities determined to be
available-for-sale.
8
NOTE 9 - ACQUISITIONS
On April 8, 1994, Charter consummated the acquisition of certain
assets and liabilities that comprise an aggregate of four branches which
are located in Fiesta Mart supermarkets in the Houston, Harris County area.
These Fiesta Mart branches had total deposits in excess of $20 million at
April 8, 1994. The purchase price for the Fiesta Mart branches was equal to
the net book value of the acquired assets less the assumed liabilities,
plus a premium of $775,000.
On April 27, 1994, Charter consummated the acquisition of certain
assets and liabilities of Capital Standard Mortgage, Inc. ("Capital
Standard"). Capital Standard has become a 90-percent owned subsidiary of
Charter National Bank - Houston ("Charter-Houston"). The remaining 10
percent of Capital Standard's stock is owned by principals of Capital
Standard. Capital Standard presently operates mortgage production offices
in Houston, Austin, Dallas, Plano and Arlington. At April 27, 1994, the
servicing portfolio totalled approximately $126 million and loans in the
pipeline totalled approximately $80 million; both the servicing portfolio
and the pipeline were comprised of relatively low rate mortgages with a
weighted average coupon of approximately 7.5%, which should be resistant to
accelerated prepayments. It is anticipated that Capital Standard will be
re-named Charter Mortgage Company, Inc.
On July 1, 1994, Charter Bancshares, Inc. ("Charter") consummated the
acquisition of residential construction loans and selected fixed assets
from Roosevelt Financial Group, Chesterfield, Missouri. The residential
construction loans represented the existing construction portfolio
generated by the construction lending operations of Farm and Home Savings
Association ("Farm and Home") prior to the June 30, 1994 acquisition of
Farm and Home by Roosevelt Financial Group. In addition to purchasing these
construction loans and selected fixed assets, Charter will employ
approximately 20 persons previously employed by Farm and Home and
associated with the construction lending area. The loans and selected fixed
assets were purchased by Charter-Houston, a wholly owned national bank
subsidiary of Charter.
The purchased residential construction loans represent approximately
$75 million in outstanding balances, with total credit lines of
approximately $210 million. Approximately one-third of the outstanding
loans are for home construction in Houston, one-third in Dallas, and the
balance are for homes in Austin and San Antonio. A typical interim
construction loan will have an average life of less than one year and earn
interest that floats at the prime rate plus one to one and one-half percent
(the prime rate as of July 1, 1994 was 7.25%). Additional fees may be
earned on construction loans in the form of origination fees, inspection
fees, appraisal fees, and extension fees. The purchased fixed assets of
approximately $267,000 are primarily comprised of the furniture and
equipment used in Farm and Home's construction lending area. Except for
approximately $11,000 in miscellaneous accounts payable related to
construction loans, there were no other liabilities assumed by Charter in
the transaction. All of the loans and selected fixed assets were purchased
at the existing net book values as reflected on Roosevelt Financial Group's
books, which amounts approximate their fair value. No purchase premium or
discount was paid to or received from Roosevelt Financial Group.
A portion of the purchase price was financed by $38 million in
borrowings from the Federal Home Loan Bank of Dallas. The remaining
purchase price was funded through the utilization of existing liquid assets
in the form of federal funds sold and short-term investments.
Neither of these acquisitions have an immediate material impact on the
consolidated financial position of Charter. However, these acquisitions
provide Charter with access to new markets, an increase in potential
revenues and, with the addition of the mortgage company, an ability to
offer a wider range of mortgage-related products and services.
On July 8, 1994, Charter agreed to acquire Houston-based West Loop
Savings and Loan Association ("West Loop") pending shareholder and
regulatory approval. At June 30, 1994, West Loop had total loans of
$96,304,000, total deposits of $100,160,000 and total assets of
$137,676,000. The requisite shareholder approval of the acquisition by
Charter was received at a special meeting of West Loop shareholders held on
August 4, 1994.
9
NOTE 10 - LONG TERM DEBT
At March 31, 1994, Charter Venture Group, Inc. elected to prepay its
$1,000,000 subordinated debenture guaranteed by the Small Business
Administration because management did not anticipate an alternative use of
such funds prior to the scheduled maturity of December 1, 1994.
Charter issued a $2,500,000 subordinated debenture in April, 1994 in
connection with the purchase of the Fiesta Mart branches. The subordinated
debenture matures April 8, 2006 and bears interest at a fixed rate of 8.11%
per annum, payable semi-annually.
NOTE 11 - FEDERAL HOME LOAN BANK ADVANCES
Two of Charter's subsidiary banks (Charter National Bank-Houston and
University National Bank-Galveston) are members of the Federal Home Loan
Bank of Dallas ("FHLB"). The FHLB provides advances as a source of funds to
each of its members. A portion of the funds used to purchase the
residential construction loans from Roosevelt Financial Group on July 1,
1994, as discussed in Note 9, were provided by advances funded on June 30,
1994 from the FHLB. The terms of these advances are as follows: (a)
$23,000,000 prepayable floating rate based on the 1-month LIBOR plus 10
basis points (initial rate of 4.66%) due December 30, 1996, and (b)
$15,000,000 at a fixed rate of 4.84% due August 29, 1994. These advances
are collateralized by a blanket pledge of the subsidiary banks' residential
mortgage loans.
NOTE 12 - PURCHASED MORTGAGE SERVICING RIGHTS
The acquisition of Capital Standard, as discussed in Note 9, included
the purchase of Capital Standard's mortgage servicing portfolio. Management
has determined that the fair value of these purchased mortgage servicing
rights ("PMSR's") to be approximately $1.5 million. The price paid for
these PMSR's will be amortized over approximately 10 years. These PMSR's
are includable in regulatory tangible capital.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(A) ANALYSIS OF RESULTS OF OPERATIONS
CONDENSED STATEMENTS OF OPERATIONS
The following is a comparison of Charter's condensed statements of
operations for the three and six-month periods ended June 30, 1994 and
1993:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, Increase June 30, Increase
---------------- ------------------
1994 1993 (Decrease) 1994 1993 (Decrease)
================================================================================================
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income $19,685 $19,431 $ 254 $10,439 $10,829 $ (390)
Interest expense 6,548 6,778 (230) 3,388 3,555 (167)
- ------------------------------------------------------------------------------------------------
Net interest income 13,137 12,653 484 7,051 7,274 (223)
Provision for credit losses 109 607 (498) 42 322 (280)
Non-interest income 6,179 3,937 2,242 4,049 2,066 1,983
Non-interest expense 14,167 13,134 1,033 8,278 6,535 1,743
- ------------------------------------------------------------------------------------------------
Earnings before income taxes 5,040 2,849 2,191 2,780 2,483 297
Income tax expense 1,765 1,065 700 1,008 901 107
- ------------------------------------------------------------------------------------------------
Earnings before effect of change
in accounting principle 3,275 1,784 1,491 1,772 1,582 190
Cumulative effect on prior years
of a change in accounting for
Income taxes -- 2,950 (2,950) -- -- --
- ------------------------------------------------------------------------------------------------
NET EARNINGS $ 3,275 $ 4,734 $ (1,459) $ 1,772 $ 1,582 $ 190
================================================================================================
</TABLE>
Earnings before income taxes increased $2.2 million for the first six
months of 1994 as compared to the first six months of 1993 primarily due to
a $1.4 million decrease in losses and carrying costs of other real estate
and a $500,000 decrease in the provision for credit losses. Net earnings
decreased for the first six months of 1994 to $3,275,000 as compared to
$4,734,000 for the first six months of 1993 primarily due to the adoption
of SFAS No. 109 in 1993. In the following sections, the major factors
affecting the components of income and expense are examined. Information
concerning assets and liabilities are subsequently provided so that an
evaluation can be made of capitalization and liquidity as they may affect
Charter's future outlook.
NET INTEREST INCOME
The data used in the analysis of the changes in net interest income is
derived from the daily average levels of earning assets and
interest-bearing liabilities as well as from the rates earned and paid on
such amounts. The schedule below gives a comparative analysis of Charter's
daily average interest-earning accounts (including non-accruing loans) and
interest-bearing accounts for the six-month periods ended June 30, 1994 and
1993. The rates earned and paid on each major type of asset and liability
account are then shown beside the average balance in the account for the
period. The average yields on all interest-earning assets (including
non-accruing loans) and the average cost of all interest-bearing
liabilities also are summarized.
11
<PAGE>
COMPARATIVE NET INTEREST MARGIN
<TABLE>
<CAPTION>
Six Months Ended June 30,
===================================================================================================
1994 1993
- ---------------------------------------------------------------------------------------------------
Average Yield Average Yield
Balance Interest or Rate Balance Interest or Rate
- ---------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans $ 257,895 $ 10,604 8.22% $244,486 $ 10,618 8.69%
Interest-earning deposits 841 18 4.28 437 8 3.23
Trading account assets 5,270 175 6.64 8,712 131 2.97
Securities:
Taxable 305,083 8,260 5.42 268,697 8,287 6.17
Non-taxable 651 15 4.71 110 3 5.65
- ---------------------------------------------------------------------------------------------------
Total Securities 305,734 8,275 5.41 268,807 8,290 6.17
- ---------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to
Resell 33,308 613 3.71 26,207 384 3.23
- ---------------------------------------------------------------------------------------------------
Total Earning Assets/Yield 603,048 $ 19,685 6.54% 548,649 $ 19,431 7.09%
- ---------------------------------------------------------------------------------------------------
Cash and due from banks 35,054 31,936
Other assets 28,490 28,143
Allowance for credit losses (4,497) (4,149)
- ---------------------------------------------------------------------------------------------------
Total Assets $ 662,095 $ 604,579
===================================================================================================
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits $ 96,302 $ 792 1.66% $ 94,037 $ 1,243 2.67%
Savings deposits 38,444 466 2.44 28,078 364 2.61
Money market savings 110,331 1,476 2.70 94,091 1,384 2.97
Other time deposits 172,159 2,982 3.46 170,720 3,158 3.70
Securities sold under agreements
to repurchase 15,673 285 3.66 18,592 207 2.24
Long-term debt 14,074 547 7.83 10,253 422 8.30
- ---------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities/Rate 446,983 $ 6,548 2.95% 415,771 $ 6,778 3.29%
- ---------------------------------------------------------------------------------------------------
Demand deposits 161,820 141,244
Other liabilities 5,977 6,319
- ---------------------------------------------------------------------------------------------------
Total Liabilities 614,780 563,334
Shareholders' Equity 47,315 41,245
- ---------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 662,095 $ 604,579
===================================================================================================
Interest Rate Spread 3.59% 3.80%
===================================================================================================
Net Interest Margin 4.38% 4.62%
===================================================================================================
</TABLE>
12
<PAGE>
The 3.8% increase in net interest income in the first six months of
1994 is due to an increase in earning assets. The interest rate spread of
3.6% and the net interest margin of 4.4% reflect a decrease from their
levels in the same period for the prior year. A further understanding of
the factors responsible for the year-to-year increase in net interest
income can be obtained by examining the changes in: (1) the volume of
earning assets and (2) the net interest income produced after the related
cost of funding these earning assets.
The following table allocates total interest income earned at the
"interest spread" between assets funded with: (1) interest-bearing
liabilities and (2) non-interest-bearing liabilities (primarily
non-interest-bearing demand deposits) and equity capital. The interest
spread on earning assets funded by interest-bearing liabilities is defined
as the difference between the average rate earned on total earning assets
and the average rate paid on interest-bearing liabilities. The interest
spread on assets funded with non-interest-bearing sources of funds is
simply the rate earned on total earning assets.
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Six Months Ended June 30,
=========================================================================================
1994 1993
- -----------------------------------------------------------------------------------------
Average Net Average Net
Earning Interest Interest Earning Interest Interest
Assets Spread Income Assets Spread Income
- -----------------------------------------------------------------------------------------
(in thousands)
SOURCE OF FUNDING
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities $ 446,983 3.59% $ 8,030 $ 415,771 3.80% $ 7,947
Non-interest-bearing
liabilities and
Equity capital 156,065 6.54 5,107 132,378 7.09 4,706
- ----------------------------------------------------------------------------------------
Total $ 603,048 $ 13,137 $548,149 $12,653
========================================================================================
</TABLE>
The $484,000 increase in total net interest income between the first
six months of 1994 and the first six months of 1993 can be attributed
entirely to a higher level of earning assets ($601,913,000 in 1994 versus
$546,850,000 in 1993). This factor more than offset the impact of a
substantially lower interest spread (6.59% in 1994 versus 7.16% in 1993) on
a higher level of earning assets funded with non-interest-bearing funds.
The lower interest spread was due to a lower yield on loans. The lower
yield on loans was the result of a significantly higher than normal amount
of interest accreted into income during the second quarter of 1993 from the
early payoff of loans previously purchased at a discount. Interest accreted
into income from the early payoff of loans purchased at discounts was
approximately $264,000 for the six months ended June 30, 1994 as compared
to approximately $598,000 for the same period in 1993.
Increases in non-interest-bearing sources of funds reflect the
increases in non-interest-bearing deposits, which were approximately 29% of
total deposits at June 30, 1994. The high level of this type of deposit
favorably impacts net interest income. However, the impact is more
favorable in periods of relatively higher interest rates than in the
current period of low interest rates. Accordingly, the net interest income
on earning assets funded with these non-interest-bearing funds would
benefit from a rise in interest rates due to the resulting increase in the
interest spread.
13
PROVISION FOR CREDIT LOSSES
The allowance for credit losses at June 30, 1994 of $4,312,000
represented 1.68% of outstanding loans. A year earlier, this ratio was
1.56% and at December 31, 1993, it was 1.59%. Annualized net loans charged
off as a percent of average loans outstanding was 0.32% during the first
six months of 1994 as compared to 0.20% during the first six months of
1993. The provision for credit losses charged against earnings was $109,000
for the six months ended June 30, 1994, as compared to $607,000 for the
corresponding period in 1993.
The following table is an analysis of the activity in the allowance for
credit losses for the three and six-month periods ended June 30, 1994 and
1993:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
==============================================================================================
June 30, June 30,
- ----------------------------------------------------------------------------------------------
1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Average loans outstanding $257,895 $242,687 $254,896 $280,293
Loans outstanding at end of period 255,947 299,958 255,947 299,958
- ----------------------------------------------------------------------------------------------
Transactions in the allowance for credit losses:
Balance at beginning of period 4,616 3,792 4,367 3,837
Provision charged to operating expenses 109 607 42 322
Allowance of acquired bank -- 522 -- 522
Loans charged off:
Real estate 261 72 32 23
Commercial 267 94 96 20
Individuals 195 204 94 40
- ----------------------------------------------------------------------------------------------
Total loans charged off 723 370 222 83
- ----------------------------------------------------------------------------------------------
Recoveries on loans previously charged off:
Real estate 162 31 55 13
Commercial 58 49 36 44
Individuals 90 46 34 22
- ----------------------------------------------------------------------------------------------
Total recoveries 310 126 125 79
- ----------------------------------------------------------------------------------------------
Net loans charged off 413 244 97 4
- ----------------------------------------------------------------------------------------------
Balance at end of period $ 4,312 $ 4,677 $ 4,312 $ 4,677
==============================================================================================
Ratios:
Allowance as a percent of loans outstanding
at end of period 1.68% 1.56% 1.68% 1.56%
Allowance as a percent of average loans 1.67 1.93 1.69 1.67
Net loans charged off as a percent of
average loans outstanding (annualized) 0.32 0.20 0.15 0.01
==============================================================================================
</TABLE>
14
NON-INTEREST INCOME
Non-interest income increased 56.9% during the first six months of 1994
as compared to the same period in 1993. Excluding the effect of securities
transactions and mortgage company fees and sales of originated servicing
rights for the six months ended June 30 of each year, non-interest income
increased 24.0% in 1994 following a 17.3% increase in 1993. Service charges
on deposits, the largest component of non-interest income, increased by
14.4% to $2,928,000 for the six months ended June 30, 1994, as compared to
$2,560,000 for the same period in 1993. The increase in service charge
income was primarily due to an increase in the average volume of
transaction deposit accounts, particularly non-interest-bearing demand
accounts, which generate the majority of this fee income. Average
non-interest-bearing demand accounts increased by approximately $20.5
million, or 14.6% for the first six months of 1994 as compared to the same
period in 1993. The acquisition of University Bank-Galveston in April 1993
contributed to the growth in deposit accounts. At June 30, 1994,
non-interest-bearing demand accounts and total deposits at University
Bank-Galveston were $14,541,000 and $84,309,000, respectively. Service
charges from University Bank-Galveston's deposits included in Charter's
consolidated financial statements for the first six months of 1994 were
approximately $304,000 compared to $133,000 for the same period in 1993.
Mortgage company fees and sales of originated servicing rights of
$1,478,000 for the six months ended June 30, 1994 are entirely attributable
to the acquisition of Capital Standard in April, 1994. Accordingly, no such
non-interest income was recorded in the year earlier six-month period.
Components of mortgage company fees and sales of originated servicing
rights include loan origination income, fees from the sale of originated
mortgage servicing rights, appraisal income, loan servicing fees and
underwriting income.
Investment securities gains decreased by $144,000 for the first six
months of 1994 as compared to the same period in 1993. Trust fees represent
revenues earned by services provided to customers of Charter's Asset
Management and Trust Services Department. During the first six months of
1994 trust fees increased $207,000 to $431,000, or by 92.4% compared to the
first six months of 1993, due to an increase in the assets under
administration which grew to approximately $180 million at the end of June
1994, compared to $152 million at the end of June 1993.
Other customer service fees increased $115,000 for the six months ended
June 30, 1994 as compared to the same period in 1993 due to the acquisition
of University Bank-Galveston, which added $89,000 in such income during
1994 as compared to $28,000 in the first six months of 1993. Components of
other customer service fees include check printing fees, ATM settlement
fees, research fees and wire transfer fees.
The components of the "other" category of non-interest income consist
of rental income on other real estate owned, fees generated from customers
engaged in international trade such as foreign exchange fees and letter of
credit fees, plus miscellaneous fees such as collection fees, credit card
fees, safe deposit rentals and discount brokerage commissions. These fees
correlate to the level of transactions in each of the referenced
categories. Other non-interest income increased $251,000, or 40.7% in the
first six months of 1994 compared to the first six months of 1993. Fees
from components within the "other" category which improved in 1994 include
a $90,000 increase in fees generated from customers engaged in
international trade. Furthermore, the acquisition of University
Bank-Galveston added approximately $165,000 in 1994 as compared to $41,000
for the same period in 1993 in this "other" category of fee income.
The following table sets forth by category the non-interest income and
the percentage change from the prior period:
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
==============================================================================================================
1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------------------
Amount Change Amount Change Amount Change Amount Change
- --------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposits $ 2,928 14.4% 2,560 18.5% $ 1,605 16.5% $ 1,378 33.9%
Other customer service fees 500 29.9 385 5.2 197 4.8 188 5.0
Investment securities
gains (losses) 7 (95.4 151 (76.0) 1 103.3) (30) 129.4
Trading account
profits (losses) (33) NM -- NM (34) NM -- NM
Trust fees 431 92.4 224 101.8 216 60.0 135 136.8
Mortgage company fees and sales
of originated servicing rights 1,478 NM -- -- 1,478 NM -- --
OTHER 868 40.7 617 (11.6) 586 48.4 395 0.8
- --------------------------------------------------------------------------------------------------------------
Total $ 6,179 56.9% $ 3,937 3.2% $ 4,049 96.0% $2,066
==============================================================================================================
</TABLE>
"NM" denotes a comparison that is not meaningful.
15
NON-INTEREST EXPENSE
Non-interest expense increased 7.9% during the first six months of 1994
as compared to the same period in 1993. Non-interest expenses from Capital
Standard were $1.5 million in 1994. Excluding the impact of expenses from
Capital Standard, non-interest expense decreased 3.6% during the first six
months of 1994 as compared to the same period in 1993. The most significant
decrease in expenses was in the category of ORE losses and carrying costs.
Charter has established an allowance for other real estate in order to
recognize possible declines in fair values of foreclosed properties. This
allowance is increased by provisions charged to earnings and reduced by
writedowns upon the sale of ORE at a loss. ORE losses and carrying costs
decreased by approximately $1.4 million primarily due to a declining
balance in ORE. Total ORE, net of the allowance for other real estate,
declined from a total of $3.6 million at June 30, 1993 to $1.9 million at
June 30, 1994. The reduction in ORE has resulted in a substantial reduction
in associated carrying costs. Management anticipates that its ongoing
efforts to dispose of some or all of the remaining ORE properties will be
accompanied by additional reductions in associated carrying costs.
The largest single line item for non-interest expense continues to be
salaries and benefits which increased by $1,823,000, or 31.6% for the first
six months of 1994. Approximately $377,000 of the increase in salaries and
benefits was generated by University Bank-Galveston, while the Capital
Standard acquisition generated an additional $1,099,000. Excluding the
impact of the acquisition of University Bank-Galveston and Capital
Standard, total salaries and benefits increased by $377,000, or 6.5% for
1994 as compared to 1993.
The acquisition of University Bank-Galveston was the primary source of
increases in several categories of non-interest expense, including net
premises and equipment expense, advertising, electronic data processing and
deposit insurance premiums. Expense incurred by University Bank-Galveston
and reflected on the consolidated financial statements of Charter for 1994
in each of the preceding categories increased approximately $153,000,
$44,000, $38,000, and $66,000, respectively, over amouts reflected for the
first six months of 1993.
The acquisition of Capital Standard contributed to increases in several
categories of non-interest expense, including net premises and equipment
expense, advertising, legal fees, amortization of intangible and "other"
expense. Expense incurred by Capital Standard and reflected on the
consolidated financial statements of Charter for 1994 in each of the
preceding categories approximated $158,000, $12,000, $16,000, $20,000 and
$190,000, respectively.
The following table sets forth by category the operating expenses and the
percentage change from the prior period:
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
================================================================================================
1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------
Amount Change Amount Change Amount Change Amount Change
- ------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits $7,590 31.6% $ 5,767 12.3% $ 4,532 48.6% $ 3,050 20.6%
Occupancy expense 2,132 25.3 1,702 5.8 1,182 29.0 916 14.5
Advertising 386 40.9 274 14.6 188 43.5 131 (3.7)
Electronic data processing 667 17.4 568 36.9 345 17.7 293 48.0
Legal fees 425 43.6 296 (23.7) 207 13.1 183 (28.8)
ORE losses and
carrying costs 77 (94.8) 1,469 (6.8) 22 (93.2) 323 (51.6)
Deposit insurance premium 637 (2.7) 655 19.3 318 (8.9) 349 27.4
Amortization of intangibles 129 (49.4) 255 14.3 109 (23.8) 143 28.8
Stationery and supplies 311 59.5 195 25.0 194 81.3 107 33.8
Other 1,813 (7.2) 1,953 15.7 1,181 13.6 1,040 18.1
- ------------------------------------------------------------------------------------------------
Total $ 14,167 7.9% $13,134 9.6% $8,278 26.7% $6,535 10.1%
================================================================================================
</TABLE>
16
(B) ANALYSIS OF FINANCIAL CONDITION
Total assets at June 30, 1994, were $713,820,000, as compared to
Charter's total assets of $667,096,000 at December 31, 1993. Total
securities and federal funds sold increased $17.3 and $54.3 million,
respectively, from as compared to December 31, 1993. Loans decreased by
approximately $34.7 million from year-end 1993. Normal recurring
fluctuations increased cash and due from banks by $5.0 million since
year-end. The most significant changes in sources of funds were in
deposits, securities sold under agreements to repurchase, and long-term
debt which increased in the aggregate by approximately $7.7 million, $36.4
million, and $2.5 million, respectively, from year-end 1993.
CAPITAL RESOURCES
Under the guidelines published by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"), Charter's aggregate risk-weighted
assets and off-balance sheet exposures at June 30, 1994 and December 31,
1993, were approximately $325,194,000 and $310,489,000, respectively,
calculated as follows:
<TABLE>
<CAPTION>
Risk-Weighted Assets June 30, December 31,
=======================================================================================
1994 1993
- ---------------------------------------------------------------------------------------
Aggregate Risk-weighted Aggregate Risk-Weighted
Amount Amount Amount Amount
- ---------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Securities $ 300,988 $ 40,219 $ 283,730 $ 37,982
Loans 255,947 218,554 290,674
224,687
Other earning assets 93,919 18,784 39,619 7,924
Cash and due from banks 37,717 4,081 32,745 3,772
All other assets 29,561 29,554 24,944 24,943
- ---------------------------------------------------------------------------------------
Total Adjusted Assets (1) $ 718,132 311,192 $ 671,712 299,308
- ---------------------------------------------------------------------------------------
Total credit-equivalent amount of
off-balance sheet items 14,002 11,181
- ---------------------------------------------------------------------------------------
Total Risk-Weighted Assets $ 325,194 $310,489
=======================================================================================
(1) Total adjusted assets are total assets plus the allowance for credit losses.
</TABLE>
The following table indicates Charter's risk-based capital as
calculated in accordance with the Federal Reserve Board's guidelines:
<TABLE>
<CAPTION>
RISK-WEIGHTED CAPITAL June 30, December 31,
=======================================================================================
1994 1993
- ---------------------------------------------------------------------------------------
(in thousands)
<S> <C>
Core Capital (Tier 1):
Common equity $ 46,566 45,062
Preferred equity 710 710
- ---------------------------------------------------------------------------------------
Total Core Capital 47,276 45,772
- ---------------------------------------------------------------------------------------
Supplementary Capital (Tier 2):
Allowance for credit losses 4,065 3,881
Mandatory convertible debt -- 257
Subordinated debt 1,650 1,650
- ---------------------------------------------------------------------------------------
Total Supplementary Capital 5,715 5,788
- ---------------------------------------------------------------------------------------
Total Capital $ 52,991 $51,560
=======================================================================================
Core capital (Tier 1) as a percentage of
risk-weighted assets 14.55% 14.78%
Total capital (Tier 1 and Tier 2) as a percentage of
risk-weighted assets 16.31% 16.65%
Core capital as a percentage of quarterly
average assets (leverage ratio) 7.00% 6.90%
Tangible core capital as a percentage of
quarterly average assets (tangible leverage ratio) 6.41% 6.64%
=======================================================================================
</TABLE>
17
RATE-SENSITIVE ASSETS AND LIABILITIES
Interest rate sensitivity is a measure of the volatility of the net
interest margin as a consequence of changes in market rates. The following
table summarizes the rate sensitivity of earning assets and
interest-bearing liabilities of Charter at June 30, 1994. Charter monitors
the rate sensitivity gap (rate-sensitive, earning assets less
rate-sensitive, interest-bearing liabilities) at least monthly in the
normal process of asset and liability management. Money market savings
accounts are included in the 31-90 days category. Passbook savings accounts
and regular interest-bearing demand accounts with balances at June 30,
1994, of approximately $39.5 million and $91.9 million, respectively, are
included in the 91-180 days category. Although repricing on such accounts
is possible at any time, the historical stability of the rates paid on such
accounts supports this classification.
At June 30, 1994, the table shows a positive (asset-sensitive) rate
sensitivity gap of $185 million in the 1-30 day repricing category. The gap
beyond thirty days becomes more liability-sensitive as interest-bearing
liabilities that reprice within 90 days, 180 days and one year become
greater in volume than rate-sensitive assets that are subject to repricing
in the same respective time periods.
<TABLE>
<CAPTION>
Rate Sensitive Within
=================================================================================================================
1-30 31-90 91-180 181 Days- 1-5 Over
Days Days Days 1 Year Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans $167,874 $ 8,572 $ 9,108 $ 22,158 $ 33,861 $ 14,374 $255,947
Securities 21,809 19,166 34,684 49,427 114,846 61,056 300,988
Other earning assets 93,919 -- -- -- -- -- 93,919
- -----------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 283,602 27,738 43,792 71,585 148,707 75,430 650,854
- -----------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Interest-bearing deposits 46,777 149,021 160,751 32,176 31,621 284 420,630
Repurchase agreements and FHLB
advances 34,338 15,000 -- -- -- -- 49,338
Borrowed funds 2,750 -- 200 -- 2,100 10,000 15,050
- -----------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 83,865 164,021 160,951 32,176 33,721 10,284 485,018
- -----------------------------------------------------------------------------------------------------------------
Interest-Bearing Assets Less
Interest-Bearing Liabilities $199,737 $(136,283) $(117,159) $ 39,409 $114,986 $ 65,146 $165,836
=================================================================================================================
Cumulative Gap $199,737 $ 63,454 $ (53,705) $(14,296) $100,690 $165,836 --
Cumulative Amounts as a
Percentage of Total
Interest-Earning Assets 70.43% 20.38% (15.12)% (3.35)% 17.50% 25.48% --
Cumulative Ratio 3.38X 1.26X 0.87X 0.97X 1.21X 1.34X 1.34X
=================================================================================================================
</TABLE>
The foregoing table shows the interval of time in which given volumes
of earning assets and interest-bearing liabilities would be responsive to
changes in market interest rates based on their contractual maturities or
terms for repricing. It is, however, only a static, single-day depiction of
Charter's rate sensitivity structure, which can be adjusted in response to
changes in forecasted interest rates. Various off-balance sheet instruments
may be used in managing Charter's interest rate sensitivity. Instruments
which may be used include interest rate swaps, futures and forward rate
agreements which serve to hedge interest rate risk by matching the maturity
rate of securities and loans with funding sources. Charter evaluates the
creditworthiness of the counterparties to these agreements under its credit
policy guidelines. Off-balance sheet instruments which complement
discretionary balance sheet management may be incorporated in overall
interest rate risk analysis. As of June 30, 1994, $40 million notional
amount of "prime" rate caps had been sold and were outstanding. This
strategy is expected to stabilize net interest income in the event of a
decline in the prime lending rate below the national rate of 6%.
Furthermore, $40 million notional amount of "prime" rate caps had been
purchased and were outstanding. This strategy was expected to stabilize the
impact on net interest income from the interest rate caps sold in the event
of rapidly rising interest rates, which may result in an increase in the
prime lending rate above 8.5%. These interest rate agreements, along with
the availability of other mechanisms such as interest rate futures, swaps
and future rate agreements, provide Charter the flexibility to change the
rate sensitivity gap should the interest rate outlook change. At June 30,
1994, there were no interest rate swaps in effect.
18
LIQUIDITY
Like any commercial bank, the liability structure of Charter's
subsidiary banks requires that Charter maintain an appropriate level of
liquid resources to meet normal day-to-day fluctuations in deposit volume
and to make new loans and investments as opportunities arise. Liquidity can
be provided by either assets or liabilities. Traditional sources of
liquidity include cash and due from demand balances, money market
investments, investment security maturities and prepayments, loan
maturities and repayments, and core deposit growth. Other sources of asset
liquidity readily available to Charter include interest-bearing deposits
with other financial institutions and trading account assets. At June 30,
1994, Charter had $37,717,000 in cash, $93,916,000 in federal funds sold
and a $300,988,000 total securities portfolio in which the market value was
approximately $5,398,000 less than the carrying value. The average
loan-to-deposit ratio for the six-month period ended June 30, 1994 was
44.5%.
A financial service company's activities consist primarily of
financing and investing activities. These activities result in large cash
flows. Charter's Consolidated Statements of Cash Flows on page 4 indicate
the sources of these cash flows. In addition to the assets which could be
readily converted to cash during the first six months of 1994, Charter
received $63,135,000 in proceeds from maturities and prepayments of
securities.
Charter has substantial liability liquidity through its customer
base. In addition to normal core deposit growth, liability liquidity is
available through various sources of purchased funds. Charter emphasizes
direct issuance of liabilities in order to develop stable, long-lasting
funding relationships. At June 30, 1994, Charter had $11,338,000 in
securities sold under agreements to repurchase, all of which were
transactions effected through existing deposit customers, rather than
through the national markets. Liquidity and matched funding may also be
obtained from the FHLB, of which Charter-Houston and University
Bank-Galveston are members. At June 30, 1994, Charter had $38,000,000 in
advances from the FHLB (see Notes 9 and 11). There were no federal funds
purchased or other short-term borrowings, reflecting management's
continuing effort to limit the use of more expensive purchased funds. The
liquidity of Charter also may be maintained through access to the Federal
Reserve System's "discount window," which is a liquidity source all banks
may avail themselves of if needed.
LOANS
Total loans have decreased $34,727,000, OR 11.95%, from December 31,
1993 to June 30, 1994. The following is a schedule of loans outstanding
classified by type:
June 30, December 31,
=============================================================================
1994 1993
- -----------------------------------------------------------------------------
(in thousands)
Commercial, financial and industrial $ 66,148 $ 58,421
Commercial real estate 46,991 50,467
Real estate-construction 9,882 6,477
Real estate-multi-family 18,221 16,573
Real estate-1-4 family 52,280 101,375
Loans to individuals 62,425 57,361
- -----------------------------------------------------------------------------
Total Loans $ 255,947 $ 290,674
=============================================================================
19
NON-PERFORMING ASSETS AND PAST DUE LOANS
The following table sets forth the components of non-performing assets and
past due loans as of June 30, 1994 and December 31, 1993:
June 30, December 31,
=============================================================================
1994 1993
- -----------------------------------------------------------------------------
(in thousands)
Non-accrual loans:
Real estate $ 1,045 $1,172
Commercial and industrial 581 464
Individual -- 98
Other 40 --
- -----------------------------------------------------------------------------
Total non-accrual loans 1,666 1,734
- -----------------------------------------------------------------------------
Restructured loans:
Real estate 211 213
Commercial and industrial -- --
Individual -- --
Other -- --
- -----------------------------------------------------------------------------
Total restructured loans 211 213
- -----------------------------------------------------------------------------
Other real estate, net and collateral acquired 1,999 2,218
- -----------------------------------------------------------------------------
Total non-performing assets $ 3,876 $4,165
============================================================================
Loans past due 90 days or more and still accruing interest:
Real estate $ 125 $ 207
Commercial and industrial 588 19
Individual 356 342
All other loans 4 9
- -----------------------------------------------------------------------------
Total loans past due 90 days or more
and still accruing interest $ 1,073 $ 577
=============================================================================
Ratios:
Allowance for credit losses as a
percentage of loans 1.7% 1.6%
Allowance for credit losses as a
percentage of non-accrual loans 258.9 266.2
Allowance for credit losses as a
percentage of non-performing loans (1) 146.2 182.9
Non-performing loans as a percentage
of total loans (1) 1.2 0.9
Total non-performing assets as a
percentage of total assets 0.5 0.6
=============================================================================
(1) Non-performing loans includes non-accrual loans, restructured loans and
loans past due 90 days or more and still accruing interest.
Total non-performing assets decreased $289,000 since year-end to
$3,876,000 at June 30, 1994. Total non-performing assets as a percentage of
total assets was 0.5% at June 30, 1994 and 0.6% at December 31, 1993.
Charter has $50,000 in loans outstanding to foreign corporations or
governments. At June 30, 1994 and December 31, 1993, Charter had none and
$47,000, respectively, in properties subject to a sales contract and
accounted for under the "deposit method" as defined in Statement of
Financial Accounting Standards No. 66.
20
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
On July 14, 1994, Charter filed a Form 8-K to report the acquisition
of certain residential construction loan.
All other items prescribed by Part II of Form 10-Q are inapplicable
and accordingly have been omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTER BANCSHARES, INC.
-------------------------
(Registrant)
By:
------------------------------
William S. Shropshire, Jr.
Chief Financial Officer
and Treasurer
(Principal financial and
accounting officer)
Date: August 12, 1994
21
