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 September 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 September 30, 1994:
Class of Stock Shares Outstanding
- - - -------------- ------------------
COMMON STOCK, PAR VALUE $1.00 5,773,216
CLASS B SPECIAL COMMON STOCK, PAR VALUE $1.00 209,261
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)
SEPTEMBER 30, December 31,
ASSETS 1994 1993
- - - ------ ------------- -----------
(in thousands)
Cash and due from banks .............................. $ 38,614 $ 32,745
Federal funds sold and securities purchased under
agreements to resell ............................... 40,202 39,617
Interest-bearing deposits in financial institutions .. 3 3
Trading account assets ............................... -- --
Securities held for investment (market value of
$169,737,000 at September 30, 1994, and $141,101,000
at December 31, 1993, respectively) ................. 175,833 139,797
Securities available for sale (market value of
$108,999,000 at September 30, 1994, and
$145,581,000 at December 31, 1993) .................. 108,999 143,932
--------- ---------
Loans ................................................ 318,242 290,674
Less: Allowance for credit losses (Note 2) ......... 4,445 4,616
--------- ---------
Loans, Net ....................................... 313,797 286,058
--------- ---------
Premises and equipment ............................... 14,052 13,006
Accrued interest receivable .......................... 3,980 3,687
Other real estate, net (Note 3) ...................... 1,716 2,178
Intangibles assets, net .............................. 4,320 2,220
Purchased mortgage servicing rights (Note 12) ........ 2,125 --
Other assets ......................................... 2,970 3,853
--------- ---------
TOTAL ASSETS ......................................... $ 706,611 $ 667,096
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest-bearing demand ...................... $ 178,253 $ 173,862
Savings .......................................... 36,202 35,356
Interest-bearing demand .......................... 88,251 98,982
Money market savings ............................. 108,546 107,665
Time over $100,000 ............................... 67,188 60,182
Time under $100,000 .............................. 110,810 112,707
--------- ---------
Total Deposits .................................. 589,250 588,754
--------- ---------
Securities sold under agreements to repurchase ..... 13,474 12,941
Federal Home Loan Bank advances (Note 11) .......... 33,000 --
Accrued interest payable ........................... 1,295 979
Other liabilities .................................. 6,350 4,843
Subordinated long-term debt (Note 10) .............. 12,750 11,250
Mandatory convertible subordinated debentures ...... -- 257
Other long-term debt ............................... 2,300 2,300
--------- ---------
Total Liabilities ............................... 658,419 621,324
--------- ---------
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 - 5,943,491 shares; 1993 -
5,642,682 shares) ................................ 5,944 5,643
Class B special common stock (250,000 shares
authorized; issued: 1994 - 209,261 shares;
1993 - 199,282 shares) ............................ 209 199
Series C special common stock (50,000 shares
authorized; issued: 1994 - 47,160 shares and
1993 - 44,915 shares) ............................. 47 45
Capital surplus .................................... 35,609 31,159
Retained earnings .................................. 8,592 8,749
Unrealized depreciation on securities available
for sale (Note 8) ................................. (2,181) --
Treasury stock at cost (1994 - 170,275 shares
common and 3 preferred; 1993 - 161,529 shares
common and 3 preferred) ........................... (738) (733)
--------- ---------
Total Shareholders' Equity ...................... 48,192 45,772
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........... $ 706,611 $ 667,096
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
1
<PAGE>
<TABLE>
CHARTER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- ------------------------
1994 1993 1994 1993
----------- ---------- ---------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees ................... $ 18,149 $ 16,509 $ 7,545 $ 5,891
Investment securities ................... 12,521 12,367 4,246 4,077
Trading account assets .................. 175 131 -- --
Federal funds sold ...................... 843 497 259 123
Securities purchased under agreements
to resell .............................. 29 7 -- (3)
Interest-bearing deposits ............... 18 10 -- 2
----------- ---------- ---------- -----------
Total Interest Income ................. 31,735 29,521 12,050 10,090
----------- ---------- ---------- -----------
Interest Expense:
Deposits:
Interest-bearing demand ............... 1,154 1,910 362 667
Savings ............................... 690 601 224 237
Money market savings .................. 2,324 2,153 848 769
Time over $100,000 .................... 1,819 1,711 732 549
Time under $100,000 ................... 2,920 3,037 1,025 1,041
Securities sold under agreements to
repurchase ............................. 392 276 107 69
Federal funds purchased ................. 360 -- 360 --
Long-term debt .......................... 863 703 316 281
----------- ---------- ---------- -----------
Total Interest Expense ................ 10,522 10,391 3,974 3,613
----------- ---------- ---------- -----------
Net interest income ....................... 21,213 19,130 8,076 6,477
Provision for credit losses (Note 2) ...... 191 659 82 52
----------- ---------- ---------- -----------
Net Interest Income After Provision
for Credit Losses ................... 21,022 18,471 7,994 6,425
----------- ---------- ---------- -----------
Non-Interest Income:
Service charges on deposit accounts ..... 4,686 4,025 1,758 1,465
Other customer service fees ............. 770 602 331 217
Trust Fees .............................. 594 385 163 161
Trading account profits (losses) ........ (33) -- -- --
Securities gains (losses) ............... 17 121 10 (30)
Mortgage company fees and sales of
originated servicing rights ........... 3,006 -- 1,528 --
Other ................................... 1,318 1,112 389 495
----------- ---------- ---------- -----------
Total Non-Interest Income ............. 10,358 6,245 4,179 2,308
----------- ---------- ---------- -----------
Non-Interest Expense:
Salaries and employee benefits .......... 12,326 8,737 4,736 2,970
Occupancy expense ....................... 3,419 2,678 1,287 976
Advertising ............................. 575 416 189 142
Data processing ......................... 1,024 813 357 245
Legal fees .............................. 729 446 304 150
Losses and carrying costs of
other real estate (Note 3) ............ 144 1,588 67 119
Deposit insurance premiums .............. 958 981 321 326
Amortization of intangibles ............. 270 2,027 141 1,772
Stationery and supplies ................. 525 316 214 139
Other ................................... 3,047 2,806 1,234 835
----------- ---------- ---------- -----------
Total Non-Interest Expense ............ 23,017 20,808 8,850 7,674
----------- ---------- ---------- -----------
Earnings before income taxes .............. 8,363 3,908 3,323 1,059
Income tax expense ...................... 2,912 401 1,147 (664)
----------- ---------- ---------- -----------
Earnings before effect of change in
accounting principle ..................... 5,451 3,507 2,176 1,723
Cumulative effect on prior years of a
change in accounting for income taxes
(Note 4) ............................... -- 2,950 -- --
----------- ---------- ---------- -----------
NET EARNINGS .......................... $ 5,451 $ 6,457 $ 2,176 $ 1,723
=========== ========== ========== ===========
Earnings per common share (Note 6):
Primary earnings before change in
accounting principle ................... $ 0.90 $ 0.57 $ 0.35 $ 0.28
Fully diluted earnings before change
in accounting principle ................ 0.90 0.57 0.35 0.28
Cumulative effect of change in accounting
for income taxes ....................... -- .49 -- --
Primary ................................. 0.90 1.06 0.35 0.28
Fully diluted ........................... 0.90 1.06 0.35 0.28
----------- ---------- ---------- -----------
Weighted Average Shares Outstanding:
Primary ................................. 6,023,958 6,011,261 6,029,637 6,011,337
Fully diluted ........................... 6,029,637 6,029,429 6,029,637 6,028,634
=========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
CHARTER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED Year Ended
SEPTEMBER 30, 1994 December 31, 1993
------------------ -----------------
(in thousands)
<S> <C> <C>
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 (282,769 shares in 1994 and
268,472 shares in 1993) .......................... 283 269
Conversion of debentures (18,040 shares in 1994 and
123 shares in 1993) ............................. 18 --
--------- ---------
Balance at end of period (5,943,491 shares
issued and 5,773,216 shares outstanding) ...... 5,944 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 (9,960 shares in 1994 and 9,484
shares in 1993) .................................. 10 9
--------- ---------
Balance at end of period (209,261 shares issued
and outstanding) .............................. 209 199
--------- ---------
Series C special common stock ($1.00 par value)
Balance at beginning of year ...................... 45 43
Stock dividend - common stock (2,245 shares in
1994 and 2,138 shares in 1993) ................... 2 2
--------- ---------
Balance at end of period (47,160 shares issued
and outstanding) .............................. 47 45
--------- ---------
Capital surplus
Balance at beginning of year ...................... 31,159 27,726
Conversion of debentures .......................... 247 2
Stock dividend - common stock ..................... 4,203 3,431
--------- ---------
Balance at end of period ........................ 35,609 31,159
--------- ---------
Retained earnings
Balance at beginning of year ...................... 8,749 5,326
Cash dividends - preferred stock .................. (57) (57)
Cash dividend - common stock ...................... (1,053) (1,015)
Stock dividend - common stock ..................... (4,498) (3,711)
Net earnings ...................................... 5,451 8,206
--------- ---------
Balance at end of period ........................ 8,592 8,749
--------- ---------
Unrealized appreciation (depreciation) on
securities available for sale ..................... (2,181) --
--------- ---------
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 (170,275 shares common
and 3 shares preferred) ....................... (738) (733)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (Notes 5 and 6) .......... $ 48,192 $ 45,772
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
CHARTER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
1994 1993
--------------- -------------
Cash flows from operating activities: .............. (in thousands)
Net earnings ..................................... $ 5,451 $ 6,457
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization .................. 1,811 1,130
Amortization of intangibles .................... 270 2,027
Net amortization of premiums and
discounts on securities ....................... 1,861 2,961
Provision for credit losses .................... 191 659
Provision for other real estate losses ......... -- 1,439
Net gain on sales of securities ................ (17) (211)
Writedown of securities ........................ -- 90
Origination of loans available for sale ........ (112,595) --
Proceeds from sales of loans available for sale 101,086 --
Net gain on sale of loans ...................... (1,125) --
Net trading account activity ................... 33 --
Net gain on sales of fixed assets, other real
estate and collateral acquired ................ (67) (8)
Net (increase) decrease in other assets and
interest receivable ........................... (75) (479)
Net increase (decrease) in other liabilities
and interest payable .......................... 1,436 (189)
Net (increase) decrease in deferred tax asset .. 1,464 (2,680)
Increase (decrease) in outstanding expense
and interest checks ........................... 178 (29)
--------- ---------
Total Adjustments ............................. (5,549) 4,710
--------- ---------
Net Cash Provided by (Used in) Operating
Activities ................................. (98) 11,167
--------- ---------
Cash flows from investing activities:
Net decrease in interest-bearing deposits ........ -- 686
Proceeds from sales of securities ................ 8,059 6,508
Proceeds from maturities and prepayments of
securities ...................................... 78,208 97,407
Purchase of securities ........................... (92,232) (110,601)
Net (increase) decrease in loans ................. 60,511 (20,347)
Purchases of loans held to maturity .............. (75,537) --
Capital expenditures ............................. (2,274) (626)
Proceeds from sales of other real estate ......... 575 779
Purchase of mortgage servicing rights ............ (730) --
Purchase of mortgage company, net of acquired
cash equivalents ................................ (3,371) --
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 ................................. (7,474) (21,761)
--------- ---------
Cash flows from financing activities:
Net decrease in non-interest-bearing, demand,
savings, interest-bearing demand and money
market accounts ................................ (18,259) (7,880)
Net decrease in certificate of deposits .......... (1,988) (24,509)
Net increase (decrease) in securities sold
under agreements to repurchase .................. 533 (6,633)
Net increase in Federal Home Loan Bank advances .. 33,000 --
Payment of long-term debt ........................ (1,000) (1,361)
Payment of common dividends ...................... (703) (723)
Payment of preferred dividends ................... (57) (57)
Increase in long-term debt ....................... 2,500 7,500
--------- ---------
Net Cash Provided by (Used in) Financing
Activities ................................. 14,026 (33,663)
--------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents ....................................... 6,454 (44,257)
--------- ---------
Cash and Cash Equivalents at Beginning of Period ... 72,362 81,603
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $ 78,816 $ 37,346
========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid .................................... $ 10,207 $ 10,623
Taxes paid ....................................... 350 1,305
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Other real estate and collateral acquired ........ $ 248 $ 996
Loans made to finance sales of other real estate . 210 448
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
4
<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 September 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 nine months ended September 30, 1994 and 1993:
1994 1993
------- -------
(in thousands)
Balance at beginning of period ..................... $ 4,616 $ 3,792
Provision charged to operating expenses ............ 191 659
Allowance of acquired bank ......................... -- 522
Loans charged off .................................. (814) (516)
Less recoveries on loans previously charged off .... 452 213
------- -------
Net loan charge-offs ............................... (362) (303)
------- -------
Balance at end of period ........................... $ 4,445 $ 4,670
======= =======
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 nine months ended September 30, 1994
and 1993:
1994 1993
------- -------
(in thousands)
Balance at beginning of period ................... $ 2,418 $ 3,569
Provision charged to operating expenses .......... -- 1,439
Allowance of acquired bank ....................... -- 10
Reductions ....................................... (56) (1,272)
------- -------
Balance at end of period ......................... $ 2,362 $ 3,746
======= =======
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.
5
<PAGE>
NOTE 5 - DIVIDENDS
Charter's board of directors declared cash dividends totalling $378,000,
$351,000 and $381,000 that were paid March 31, 1994, July 20, 1994 and
October 14, 1994, while cash dividends totalling $195,000, $278,000 and
$307,000 were paid March 31, 1993, June 30, 1993 and September 30, 1993 to
shareholders of common and preferred stock. Of the amounts paid on March 31
and September 30 in each year, $28,000 was paid to holders of the initial
series preferred stock and the remainder was paid on the common stock.
<TABLE>
NOTE 6 - EARNINGS PER COMMON SHARE
Earnings per common share are computed as follows:
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 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 ........................... $ 5,451 $ 3,507 $ 2,176 $ 1,723
Cumulative effect on prior years of a change in
accounting for income taxes .................... -- 2,950 -- --
---------- ---------- ---------- ----------
Net earnings ..................................... 5,451 6,457 2,176 1,723
---------- ---------- ---------- ----------
Less preferred dividend requirements ............. 57 57 28 28
---------- ---------- ---------- ----------
Primary earnings applicable to common
shareholders ................................... 5,394 6,400 2,148 1,695
Interest expense on debentures ................... 5 14 -- 5
---------- ---------- ---------- ----------
Fully diluted earnings applicable to common
shareholders ................................... $ 5,399 $ 6,414 $ 2,148 $ 1,700
========== ========== ========== ==========
Primary earnings per common share:
Earnings before cumulative effect of a change in
accounting principle ......................... $ 0.90 $ 0.57 $ 0.35 $ 0.30
Cumulative effect of a change in accounting for
income taxes ................................. -- 0.49 -- --
---------- ---------- ---------- ----------
Net earnings ................................... $ 0.90 $ 1.06 $ 0.35 $ 0.30
========== ========== ========== ==========
Fully diluted earnings per common share:
Earnings before cumulative effect of a change in
accounting principle ......................... $ 0.90 $ 0.57 $ 0.35 $ 0.28
Cumulative effect of a change in accounting for
income taxes ................................. -- 0.49 -- --
---------- ---------- ---------- ----------
Net earnings ................................... $ 0.90 $ 1.06 $ 0.35 $ 0.28
========== ========== ========== ==========
Weighted average common shares outstanding:
Primary ........................................ 6,023,958 6,011,261 6,029,637 6,011,337
Fully diluted .................................. 6,029,637 6,029,429 6,029,637 6,028,634
</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.
6
<PAGE>
NOTE 7 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values were estimated by management as of September 30, 1994 and
December 31, 1993, 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:
SEPTEMBER 30, December 31,
1994 1993
--------------------- ---------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------- --------- --------- ---------
Financial Assets:
Cash and short-term
investments ................. $ 78,819 $ 78,819 $ 72,365 $ 72,365
Securities ................... 284,832 278,736 283,729 286,682
Loans ........................ 318,242 317,452 290,674 292,602
Less: allowance for credit
losses ...................... (4,445) (4,445) (4,616) (4,616)
--------- --------- --------- ---------
Loans, net ................. $ 313,797 $ 313,007 $ 286,058 $ 287,986
--------- --------- --------- ---------
Financial Liabilities:
Deposits ..................... $ 589,250 $ 590,368 $ 588,754 $ 589,794
Securities sold under
agreements to repurchase .... 13,474 13,474 12,941 12,941
Federal Home Loan Bank
advances .................... 33,000 33,000 -- --
Long-term debt and debentures 15,050 13,794 13,550 12,133
--------- --------- --------- ---------
Unrecognized financial
instruments:
Commitments to extend credit . $ 92,562 $ 92,562 $ 41,371 $ 41,371
Standby letters of credit .... 10,460 10,460 4,165 4,165
========= ========= ========= =========
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 $108,999,000 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 $2,181,000 in
shareholders' equity as of September 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.
7
<PAGE>
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., which has since
been renamed Charter Mortgage Company, Inc. ("Charter Mortgage"). Charter
Mortgage has become a 90-percent owned subsidiary of Charter National Bank
- - - - Houston ("Charter-Houston"). The remaining 10 percent of Charter
Mortgage's stock is owned by principals of Charter Mortgage. Charter
Mortgage 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.
On July 1, 1994, 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 employs 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 September 30, 1994 was 7.75%). 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 ("FHLB"). 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 September 30, 1994, West Loop had total loans of
$88,372,000, total deposits of $102,130,000 and total assets of
$140,446,000. The requisite shareholder approval of the acquisition by
Charter was received at a special meeting of West Loop shareholders held on
August 4, 1994.
8
<PAGE>
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 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 were 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.
On August 29, 1994, Charter repaid the maturing $15 million advance and
prepaid $10 million of the original prepayable floating rate advance.
Charter continues to utilize FHLB advances in concert with its daily funds
management. Accordingly, at September 30, 1994, there was an additional $20
million advance outstanding, bringing the total outstanding to $33 million.
The $20 million advance was repaid at maturity on October 3, 1994.
NOTE 12 - PURCHASED MORTGAGE SERVICING RIGHTS
The acquisition of Charter Mortgage, as discussed in Note 9, included
the purchase of Charter Mortgage's mortgage servicing portfolio. Management
has determined that the fair value of the purchased mortgage servicing
rights ("PMSR's") from Charter Mortgage to be approximately $1.5 million.
During the third quarter of 1994, Charter purchased the servicing rights on
approximately $57 million in loans for approximately $700,000. The price
paid for these PMSR's will be amortized over approximately 10 years. These
PMSR's are includable in regulatory tangible capital.
9
<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
<TABLE>
The following is a comparison of Charter's condensed statements of
operations for the nine and three-month periods ended September 30, 1994
and 1993:
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------- Increase --------------------- Increase
1994 1993 (Decrease) 1994 1993 (Decrease)
------- ------- ---------- ------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income ................ $31,735 $29,521 $ 2,214 $12,050 $ 10,090 $1,960
Interest expense ............... 10,522 10,391 131 3,974 3,613 361
------- ------- ------- ------- -------- ------
Net interest income .......... 21,213 19,130 2,083 8,076 6,477 1,599
Provision for credit losses .... 191 659 (468) 82 52 30
Non-interest income ............ 10,358 6,245 4,113 4,179 2,308 1,871
Non-interest expense ........... 23,017 20,808 2,209 8,850 7,674 1,176
------- ------- ------- ------- -------- ------
Earnings before income taxes ... 8,363 3,908 4,455 3,323 1,059 2,264
Income tax expense ........... 2,912 401 2,511 1,147 (664) 1,811
------- ------- ------- ------- -------- ------
Earnings before effect of change
in accounting principle ...... 5,451 3,507 1,944 2,176 1,723 453
Cumulative effect on prior years
of a change in accounting for
income taxes ................. -- 2,950 (2,950) -- -- --
------- ------- ------- ------- -------- ------
NET EARNINGS ................. $ 5,451 $ 6,457 $(1,006) $ 2,176 $ 1,723 $ 453
======= ======= ======= ======= ======== ======
</TABLE>
Earnings before income taxes increased $4.5 million for the first nine
months of 1994 as compared to the first nine months of 1993 due to an
increase in earnings from ongoing operations combined with 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 nine months of 1994 to $5,451,000 as compared to $6,457,000 for the
first nine 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 nine-month periods ended September 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.
10
<PAGE>
<TABLE>
COMPARATIVE NET INTEREST MARGIN
<CAPTION>
Nine Months Ended September 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 ................................ $ 281,465 $ 18,149 8.60% $ 272,578 $ 16,509 8.10%
Interest-earning deposits ............ 571 18 4.20 394 10 3.39
Trading account assets ............... 3,495 175 6.68 5,776 131 2.99
Securities:
Taxable ............................ 300,823 12,495 5.54 294,259 12,362 5.60
Non-taxable ........................ 745 26 4.69 123 5 6.19
--------- -------- ---- --------- -------- ----
Total Securities ................... 301,568 12,521 5.54 294,382 12,367 5.60
--------- -------- ---- --------- -------- ----
Federal funds sold and securities
purchased under agreements to
resell ............................. 30,329 872 3.84 26,293 504 3.39
--------- -------- ---- --------- -------- ----
Total Earning Assets/Yield ........... 617,428 $ 31,735 6.85% 599,423 $ 29,521 6.58%
--------- -------- ---- --------- -------- ----
Cash and due from banks .............. 35,673 32,481
Other assets ......................... 29,463 29,633
Allowance for credit losses .......... (4,454) (4,628)
--------- ---------
Total Assets ....................... $ 678,110 $ 656,909
========= =========
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits ..... $ 94,342 $ 1,154 1.64% $ 103,212 $ 1,910 2.47%
Savings deposits ..................... 38,005 690 2.43 35,484 601 2.27
Money market savings ................. 111,399 2,324 2.79 100,830 2,153 2.86
Other time deposits .................. 175,047 4,739 3.61 188,759 4,748 3.35
Federal funds purchased and securities
sold under agreements to repurchase . 24,641 752 4.08 17,598 276 2.10
Long-term debt ....................... 14,403 863 8.01 11,485 703 8.18
--------- -------- ---- --------- -------- ----
Total Interest-Bearing
liabilities/Rate ................... 457,837 $ 10,522 3.07% 457,368 $ 10,391 3.04%
--------- -------- ---- --------- -------- ----
Demand deposits ...................... 166,012 150,962
Other liabilities .................... 6,157 6,517
--------- ---------
Total Liabilities .................. 630,006 614,847
Shareholders' Equity ................. 48,104 42,062
--------- ---------
Total Liabilities and
Shareholders' Equity ............. $ 678,110 $656,909
========= ========
Interest Rate Spread ................... 3.78% 3.54%
Net Interest Margin .................... 4.58% 4.26%
</TABLE>
The 10.9% increase in net interest income in the first nine months of
1994 is due to a higher net interest rate spread applied to a larger volume
of earning assets. The interest rate spread of 3.8% and the net interest
margin of 4.6% reflect an increase 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.
11
<PAGE>
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
Nine Months Ended September 30,
--------------------------------------------------------
1994 1993
---------------------------- --------------------------
AVERAGE NET Average Net
EARNING INTEREST INTEREST Earning Interest Interest
ASSETS SPREAD INCOME Assets Spread Income
------- -------- -------- ------- -------- --------
(in thousands)
SOURCE OF FUNDING
Interest-bearing
liabilities........... $457,837 3.78% $12,980 $457,368 3.54% $12,143
Non-interest-bearing
liabilities and
equity capital....... 159,591 6.85 8,233 142,055 6.58 6,987
------- ---- ------- -------- ---- -------
Total.............. $617,428 $21,213 $599,423 $19,130
======== ======= ======== =======
The $2,083,000 increase in total net interest income between the first
nine months of 1994 and the first nine months of 1993 can be attributed to
a higher level of earning assets ($617,428,000 in 1994 versus $599,423,000
in 1993) funded by non-interest bearing sources of funds. The higher
interest spread was due to a higher yield on loans. The higher yield on
loans was the result of an increase in lending rates, primarily the prime
lending rate (prime rate was 7.75% at September 30, 1994, as compared to
6.00% at September 30, 1993).
Increases in non-interest-bearing sources of funds reflect the
increases in non-interest-bearing deposits, which were approximately 30% of
total deposits at September 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.
12
<PAGE>
PROVISION FOR CREDIT LOSSES
The allowance for credit losses at September 30, 1994 of $4,445,000
represented 1.40% 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 0.17% during the first
nine months of 1994 as compared to 0.15% during the first nine months of
1993. The provision for credit losses charged against earnings was $191,000
for the nine months ended September 30, 1994, as compared to $659,000 for
the corresponding period in 1993.
<TABLE>
The following table is an analysis of the activity in the allowance for
credit losses for the three and nine-month periods ended September 30, 1994
and 1993:
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ------------------------
1994 1993 1994 1993
-------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Average loans outstanding ...................... $281,465 $272,578 $ 320,722 $286,792
Loans outstanding at end of period ............. 318,242 299,507 318,242 299,507
-------- -------- --------- --------
Transactions in the allowance for credit losses:
Balance at beginning of period ............... 4,616 3,792 4,312 4,677
Provision charged to operating expenses ...... 191 659 82 52
Allowance of acquired bank ................... -- 522 -- --
Loans charged off:
Real estate ................................ 262 119 1 47
Commercial ................................. 296 112 29 18
Individuals ................................ 256 285 61 81
-------- -------- --------- --------
Total loans charged off .................... 814 516 91 146
-------- -------- --------- --------
Recoveries on loans previously charged off:
Real estate ................................ 182 70 20 39
Commercial ................................. 161 83 103 34
Individuals ................................ 109 60 19 14
-------- -------- --------- --------
Total recoveries ........................... 452 213 142 87
-------- -------- --------- --------
Net loans charged off .................... 362 303 (51) 59
-------- -------- --------- --------
Balance at end of period ..................... $ 4,445 $ 4,670 $ 4,445 $ 4,670
======== ======== ========= ========
Ratios:
Allowance as a percent of loans outstanding
at end of period ......................... 1.40% 1.56% 1.40% 1.56%
Allowance as a percent of average loans .... 1.58 1.70 1.39 1.63
Net loans charged off as a percent of
average loans outstanding (annualized) ... 0.17 0.15 (0.06) 0.08
======== ======== ========= ========
</TABLE>
13
<PAGE>
NON-INTEREST INCOME
Non-interest income increased 65.9% during the first nine 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 nine months ended September 30 of each year, non-interest
income increased 20% in 1994 following a 2.8% decrease in 1993. Service
charges on deposits, the largest component of non-interest income,
increased by 16.4% to $4,686,000 for the nine months ended September 30,
1994, as compared to $4,025,000 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 $15.1
million, or 10.0% for the first nine 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 September 30, 1994,
non-interest-bearing demand accounts and total deposits at University
Bank-Galveston were $13,246,000 and $73,224,000, respectively. Service
charges from University Bank-Galveston's deposits included in Charter's
consolidated financial statements for the first nine months of 1994 were
approximately $463,000 compared to $315,000 for the same period in 1993.
Mortgage company fees and sales of originated servicing rights of
$3,006,000 for the nine months ended September 30, 1994 are entirely
attributable to the acquisition of Charter Mortgage in April, 1994.
Accordingly, no such non-interest income was recorded in the year earlier
nine-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. Fees from the sale of originated
mortgage servicing rights represent premiums received from the sale of
servicing rights on loans originated in the current period only. These fees
approximated $579,000 since acquisition through September 30, 1994.
Investment securities gains decreased by $104,000 for the first nine
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 nine months of
1994 trust fees increased $209,000 to $594,000, or by 54.3% compared to the
first nine months of 1993, due to an increase in the assets under
administration which grew to approximately $177 million at the end of
September 1994, compared to $149 million at the end of September 1993.
Other customer service fees increased $168,000 for the nine months ended
September 30, 1994 as compared to the same period in 1993 due to the
acquisition of University Bank-Galveston, which added $132,000 in such
income during 1994 as compared to $63,000 in the first nine 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 $206,000, or 18.5% in the
first nine months of 1994 compared to the first nine months of 1993. Fees
from components within the "other" category which improved in 1994 include
a $148,000 increase in fees generated from letters of credit and $108,000
increase in discount brokerage fee income. Furthermore, the acquisition of
University Bank-Galveston added approximately $256,000 in 1994 as compared
to $107,000 for the same period in 1993 in this "other" category of fee
income.
<TABLE>
The following table sets forth by category the non-interest income and
the percentage change from the prior period:
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 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 .... $ 4,686 16.4% $4,025 21.5% $1,758 20.0% $ 1,465 27.1%
Other customer service fees .... 770 27.9 602 14.0 331 52.5 217 18.6
Investment securities
gains (losses) ............... 17 (86.0) 121 (88.4) 10 (133.3) (30) 107.2
Trading account
profits (losses) ............. (33) NM -- NM -- NM -- NM
Trust fees ..................... 594 54.3 385 88.7 163 1.2 161 73.1
Mortgage company fees and sales
of originated servicing rights 3,006 NM -- -- 1,528 NM -- --
Other .......................... 1,318 18.5 1,112 (18.8) 389 (21.4) 495 (34.6)
-------- ----- ------ ----- ------ ----- ------- -----
Total ...................... $ 10,358 65.9% $6,245 (2.8)% $4,179 81.1% $ 2,308 (11.5)%
======== ===== ====== ===== ====== ===== ======= =====
</TABLE>
"NM" denotes a comparison that is not meaningful.
14
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense increased 10.6% during the first nine months of 1994
as compared to the same period in 1993. Non-interest expenses from Charter
Mortgage were $3.1 million in 1994. Excluding the impact of expenses from
Charter Mortgage, non-interest expense decreased 4.3% during the first nine
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 $2.2 million at September 30, 1993 to $1.7 million
at September 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 $3,589,000, or 41.1% for the first
nine months of 1994. Approximately $304,000 of the increase in salaries and
benefits was generated by University Bank-Galveston, $350,000 from the new
Fiesta Mart branches and $135,000 by Charter Builders Group, while the
Charter Mortgage acquisition generated an additional $2,245,000. Excluding
the impact of these acquisitions, total salaries and benefits increased by
$555,000, or 6.4% for 1994 as compared to 1993. This remaining increase in
salary expense is due to merit increases and Charter's expanded activities
and strategic initiatives in the areas of trust services, services
facilitating international trade, and expanded retail banking.
The acquisition of University Bank-Galveston gave rise to 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 $169,000, $53,000,
$2,000, and $57,000, respectively, over amounts reflected for the first
nine months of 1993.
The acquisition of Charter Mortgage also contributed to increases in
several categories of non-interest expense, including net premises and
equipment expense, advertising, legal fees, amortization of intangibles,
stationary and supplies and "other" expense. Expense incurred by Charter
Mortgage and reflected on the consolidated financial statements of Charter
for 1994 in each of the preceding categories approximated $324,000,
$20,000, $28,000, $120,000, $128,000 and $316,000, respectively.
<TABLE>
The following table sets forth by category the operating expenses and the
percentage change from the prior period:
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 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 ..... $ 12,326 41.1% $ 8,737 14.6% $ 4,736 59.5% $ 2,970 19.2%
Occupancy expense ......... 3,419 27.7 2,678 10.6 1,287 31.9 976 20.2
Advertising ............... 575 38.2 416 22.4 189 33.1 142 40.6
Electronic data processing 1,024 26.0 813 33.9 357 45.7 245 27.6
Legal fees ................ 729 63.5 446 (43.1) 304 102.7 150 (62.1)
ORE losses and
carrying costs .......... 144 (90.9) 1,588 (31.4) 67 (43.7) 119 (83.9)
Deposit insurance premium . 958 (2.3) 981 16.9 321 (1.5) 326 12.4
Amortization of intangibles 270 (86.7) 2,027 505.1 141 (92.0) 1,772 NM
Stationery and supplies ... 525 66.1 316 26.9 214 54.0 139 61.6
Other ..................... 3,047 8.6 2,806 (0.9) 1,234 47.8 835 (17.5)
-------- ----- -------- ----- -------- ----- -------- -----
Total ................... $ 23,017 10.6% $ 20,808 14.7% $ 8,850 15.3% $ 7,674 24.5%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
15
<PAGE>
(B) ANALYSIS OF FINANCIAL CONDITION
Total assets at September 30, 1994, were $706,611,000, as compared to
Charter's total assets of $667,096,000 at December 31, 1993. Loans
increased by approximately $27.6 million from year-end 1993. Normal
recurring fluctuations increased cash and due from banks by $5.9 million
since year-end. The most significant changes in sources of funds were in
securities sold under agreements to repurchase and long-term debt, which
increased in the aggregate by approximately $33.5 million and $1.2 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 September 30, 1994 and December
31, 1993, were approximately $366,719,000 and $310,489,000, respectively,
calculated as follows:
RISK-WEIGHTED ASSETS SEPTEMBER 30, December 31,
---------------------- --------------------
1994 1993
---------------------- --------------------
Risk-
AGGREGATE RISK-WEIGHTED Aggregate Weighted
AMOUNT AMOUNT Amount Amount
---------- -------- -------- --------
(in thousands)
Securities....................... $284,832 $39,330 $283,730 $ 37,982
Loans............................ 318,242 273,640 290,674 224,687
Other earning assets............. 40,205 8,040 39,619 7,924
Cash and due from banks.......... 38,614 3,967 32,745 3,772
All other assets................. 29,163 29,164 24,944 24,943
-------- -------- -------- --------
Total Adjusted Assets (1).... $711,056 $354,141 $671,712 $299,308
-------- -------- -------- --------
Total credit-equivalent amount
of off-balance sheet items..... 12,578 11,181
-------- --------
Total Risk-Weighted Assets... $366,719 $310,489
======== ========
(1) Total adjusted assets are total assets plus the allowance for credit
losses.
The following table indicates Charter's risk-based capital as calculated
in accordance with the Federal Reserve Board's guidelines:
Risk-Weighted Capital SEPTEMBER 30, December 31,
1994 1993
------------- ------------
(in thousands)
Core Capital (Tier 1):
Common equity ...................................... $45,766 $45,062
Preferred equity ................................... 710 710
------- -------
Total Core Capital ................................. 46,476 45,772
------- -------
Supplementary Capital (Tier 2):
Allowance for credit losses ........................ 4,445 3,881
Mandatory convertible debt ......................... -- 257
Subordinated debt .................................. 1,500 1,650
------- -------
Total Supplementary Capital ........................ 5,945 5,788
------- -------
Total Capital ...................................... $52,421 $51,560
======= =======
Core capital (Tier 1) as a percentage of
risk-weighted assets ............................... 12.56% 14.78%
Total capital (Tier 1 and Tier 2) as a percentage of
risk-weighted assets ............................... 14.18 16.65
Core capital as a percentage of quarterly
average assets (leverage ratio) .................... 6.53 6.90
Tangible core capital as a percentage of
quarterly average assets (tangible leverage ratio) . 6.25 6.64
======= =======
16
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 September 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 September 30,
1994, of approximately $36.2 million and $88.3 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 September 30, 1994, the table shows a positive (asset-sensitive) rate
sensitivity gap of $212 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........................ $229,260 $ 7,512 $ 15,583 $ 15,944 $ 36,141 $ 13,802 $318,242
Securities.................. 22,208 19,144 16,876 34,480 64,050 128,074 284,832
Other earning assets......... 40,202 - - - - - 40,202
------- ---------- --------- -------- ------- -------- --------
Total Earning Assets......... 291,670 26,656 32,459 50,424 100,191 141,876 643,276
------- ---------- --------- -------- ------- -------- --------
Interest-Bearing Liabilities:
Interest-bearing deposits... 43,253 144,419 161,605 28,815 32,753 152 410,997
Repurchase agreements and FHLB
advances.................... 33,474 - - - 13,000 - 46,474
Borrowed funds.............. 2,750 200 - - 2,100 10,000 15,050
------- ---------- --------- -------- ------- -------- --------
Total Interest-Bearing
Liabilities................. 79,477 144,619 161,605 28,815 47,853 10,152 472,521
Interest-Bearing Assets Less
Interest-Bearing Liabilities $212,193 $(117,963) $(129,146) $ 21,609 $ 52,338 $131,724 $170,755
======= ========== ========= ======== ======= ======= ========
Cumulative Gap................ $212,193 $ 94,230 $ (34,916) $(13,307) $ 39,031 $170,755 $ -
Cumulative Amounts as a
Percentage of Total
Interest-Earning Assets..... 72.75% 29.60% (9.95)% (3.32)% 7.78% 26.54% -
Cumulative Ratio.............. 3.67X 1.42X 0.91X 0.97X 1.08X 1.36X 1.36X
</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 September 30, 1994, $40 million notional
amount of "prime" rate caps maturing in June 1995, 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 maturing
in June 1995, 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 September 30, 1994, there were no interest rate swaps in
effect.
17
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 September
30, 1994, Charter had $38,614,000 in cash, $40,202,000 in federal funds
sold and a $284,832,000 total securities portfolio in which the market
value was approximately $6,096,000 less than the carrying value. The
average loan-to-deposit ratio for the nine-month period ended September 30,
1994 was 48.1%.
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 nine months of 1994, Charter
received $78,208,000 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 September 30, 1994, Charter had $13,474,000 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 September 30, 1994, Charter had $33,000,000 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 increased $27,568,000, OR 9.48%, from December 31,
1993 to September 30, 1994. The following is a schedule of loans
outstanding classified by type:
SEPTEMBER 30, DECEMBER 31,
1994 1993
-------- --------
(in thousands)
Commercial, financial and industrial................ $71,239 $58,421
Commercial real estate.............................. 41,754 50,467
Real estate-construction............................ 92,264 6,477
Real estate-multi-family............................ 11,303 16,573
Real estate-1-4 family.............................. 48,117 101,375
Loans to individuals................................ 53,565 57,361
-------- --------
Total Loans..................................... $318,242 $290,674
======== ========
18
NON-PERFORMING ASSETS AND PAST DUE LOANS
The following table sets forth the components of non-performing assets
and past due loans as of September 30, 1994 and December 31, 1993:
SEPTEMBER 30, DECEMBER 31,
1994 1993
------ ------
(in thousands)
Non-accrual loans
Real estate......................................... $ 823 $1,172
Commercial and industrial........................... 542 464
Individual.......................................... - 98
Other............................................... 37 -
------ ------
Total non-accrual loans........................... 1,402 1,734
------ ------
Restructured loans:
Real estate......................................... 210 213
Commercial and industrial........................... 1,203 -
Individual.......................................... - -
Other............................................... - -
------ ------
Total restructured loans.......................... 1,413 213
------ ------
Other real estate, net and collateral acquired........ 1,739 2,218
----- -----
Total non-performing assets ...................... $4,554 $4,165
====== ======
Loans past due 90 days or more
and still accruing interest:
Real estate......................................... $ 377 $ 207
Commercial and industrial........................... 2 19
Individual.......................................... 338 342
All other loans..................................... 2 9
------ ------
Total loans past due 90 days or more
and still accruing interest...................... $ 719 $ 577
====== ======
Ratios:
Allowance for credit losses as a
percentage of loans.............................. 1.4% 1.6%
Allowance for credit losses as a
percentage of non-accrual loans.................. 317.0 266.2
Allowance for credit losses as a
percentage of non-performing loans (1)........... 125.8 182.9
Non-performing loans as a percentage
of total loans (1)............................... 1.1 0.9
Total non-performing assets as a
percentage of total assets....................... 0.6 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 increased $389,000 since year-end to
$4,554,000 at September 30, 1994. Total non-performing assets as a
percentage of total assets was 0.6% at both September 30, 1994 and December
31, 1993.
Charter has $50,000 in loans outstanding to foreign corporations or
governments. At September 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.
19
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 loans.
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: November 10, 1994
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the September
30, 1994 10-Q of Charter Bancshares, Inc. and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 38,614
<INT-BEARING-DEPOSITS> 3
<FED-FUNDS-SOLD> 40,202
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,899
<INVESTMENTS-CARRYING> 175,833
<INVESTMENTS-MARKET> 169,737
<LOANS> 318,242
<ALLOWANCE> 4,445
<TOTAL-ASSETS> 706,611
<DEPOSITS> 589,250
<SHORT-TERM> 46,474
<LIABILITIES-OTHER> 7,645
<LONG-TERM> 15,050
<COMMON> 0
710
6,200
<OTHER-SE> 41,282
<TOTAL-LIABILITIES-AND-EQUITY> 706,611
<INTEREST-LOAN> 18,149
<INTEREST-INVEST> 12,521
<INTEREST-OTHER> 890
<INTEREST-TOTAL> 31,735
<INTEREST-DEPOSIT> 8,907
<INTEREST-EXPENSE> 10,522
<INTEREST-INCOME-NET> 21,213
<LOAN-LOSSES> 191
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 23,017
<INCOME-PRETAX> 8,363
<INCOME-PRE-EXTRAORDINARY> 5,451
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,451
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
<YIELD-ACTUAL> 4.58
<LOANS-NON> 1,402
<LOANS-PAST> 719
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,616
<CHARGE-OFFS> 814
<RECOVERIES> 452
<ALLOWANCE-CLOSE> 4,445
<ALLOWANCE-DOMESTIC> 576
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,869
</TABLE>
