<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE
REQUIRED]
FOR FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM --------------------- TO ---------------------
</TABLE>
--------------------------
Commission File Number: 0-13496
CHARTER BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 74-1967164
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
2600 CITADEL PLAZA DRIVE, SUITE 600 77008
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 692-6121
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
-------------------------------------------------------- --------------------------------------------------------
<S> <C>
NONE N/A
</TABLE>
Securities registered pursuant to Section 12(g) of the Act and the
outstanding number of shares of each class of capital stock as of December 31,
1994:
<TABLE>
<CAPTION>
CLASS OF STOCK SHARES OUTSTANDING
------------------------------------------------------ ------------------
<S> <C>
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
</TABLE>
--------------------------
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 [ ]
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (17 CFR 229.405) is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the registrant's Common Stock held by
non-affiliates as of March 23, 1995, was $21,526,239 based on the high and low
sales price of $14.75 on such date.
As of March 23, 1995, registrant had outstanding 5,773,216 shares of Common
Stock, $1.00 par value, and 256,421 shares of Special Common Stock, $1.00 par
value.
DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for the Annual Meeting
of Shareholders to be held April 27, 1995 (Part III).
--------------------------------------------------------------------------------
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<PAGE>
PART I
ITEM 1. BUSINESS
Charter Bancshares, Inc. ("Charter" or "Company") is a Texas bank holding
company organized in 1978 under the Bank Holding Company Act of 1956, as
amended (the "Holding Company Act"). Charter maintains its principal offices
at 2600 Citadel Plaza Drive, Suite 600, Houston, Texas 77008 (telephone:
713/692-6121).
Charter owns all of the outstanding capital stock of CBH, Inc. ("CBH"), a
Delaware corporation and intermediate bank holding company (unless otherwise
indicated, all references herein to Charter include CBH). CBH owns all of
the outstanding capital stock of Charter National Bank-Houston
("Charter-Houston"), Charter National Bank-Colonial ("Charter-Colonial") and
University National Bank-Galveston ("University Bank-Galveston")
(hereinafter such banks and their operating subsidiaries may be referred to
collectively as the "Subsidiary Banks" and individually as a "Subsidiary
Bank").
Charter's principal activity is the ownership and management of the
Subsidiary Banks. All Subsidiary Banks are national banks organized under
the laws of the United States. Other than asset management and trust
services which are offered solely through Charter-Houston, each of the
Subsidiary Banks offers a full range of banking services to its customers,
including demand and time deposits and various types of commercial and
consumer loans. The Subsidiary Banks also offer discount brokerage services
for the purchase of securities through a consortium of the Subsidiary Banks,
which operates as Investor Services at Charter Banks ("Charter Investor
Services"). Charter-Houston and Charter-Colonial draw substantially all of
their deposits and a majority of their loans in the Houston-Harris County
area, while University Bank-Galveston draws substantially all of its deposits
and makes substantially all of its loans in the Galveston, Texas area.
Charter-Houston and Charter-Colonial own all of the outstanding capital stock
of Charter Venture Group, Inc., a small business investment company ("Charter
Venture"). Charter also is a joint venturer in Charter Venture Group-Joint
Venture ("Charter Joint Venture"). On April 27, 1994, Charter-Houston
acquired and now owns 90% of the outstanding capital stock of Capital
Standard Mortgage Company, which subsequently changed its name to Charter
Mortgage Company. Charter-Houston owns all of the outstanding capital stock
of Charter-Houston Securities, Inc., ("Charter-Houston Securities") and
Charter-Colonial owns all of the outstanding capital stock of
Charter-Colonial Securities, Inc. ("Charter-Colonial Securities").
As a multibank holding company, Charter may own or control, directly or
indirectly, more than one bank and furnish services to such banks and their
operating subsidiaries. Banking activities of Charter are conducted by the
Subsidiary Banks, each of which is a separately chartered banking
organization. The officers and directors of each Subsidiary Bank direct its
operations. The principal role of Charter is to provide management
assistance with respect to various aspects of the Subsidiary Banks'
operations, including the areas of asset and liability management, capital
provision and planning, business development, advertising, loan policies and
procedures, loan review, electronic data processing and communication,
accounting, auditing, financial reporting, budgetary and long-range planning,
and legal and regulatory compliance. While each of the Subsidiary Banks is
separately chartered, the holding company system allows the Subsidiary Banks
to participate in joint credit extensions and enables them to more
effectively meet the credit needs of their local communities.
FINANCIAL SERVICES
The Subsidiary Banks offer a full range of financial services to commercial,
industrial, financial and individual customers, including short-term and
medium-term loans, revolving credit arrangements, inventory and accounts
receivable financing, equipment financing, real estate lending, interim
construction lending, mortgage warehousing and purchase arrangements, Small
Business Administration lending, Export-Import Bank lending, letters of
credit, installment and other consumer loans, savings accounts and various
savings programs, including individual retirement accounts, and interest and
non-interest-bearing checking accounts. Other services include federal tax
depository, safe deposit, night depository and cash management services. The
Subsidiary Banks also make other installment loans, home improvement loans
and mortgage loans to their customers. Charter Investor Services offers a
broad array of non-deposit investment products including annuities, mutual
funds and discount brokerage. Charter-Houston also offers trust and asset
management services. Charter Mortgage originates and services one-to-four
single family residential mortgage loans.
1
<PAGE>
SUBSIDIARY BANKS
The following table sets forth certain balance sheet and operating information
at December 31, 1994, with respect to the Subsidiary Banks:
<TABLE>
<CAPTION>
CHARTER-HOUSTON CHARTER-COLONIAL UNIVERSITY BANK
--------------- ---------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance Sheet:
Assets . . . . . . . . . . . . . . . $444,596 $210,650 $91,568
Deposits . . . . . . . . . . . . . . 356,686 193,800 73,964
Loans. . . . . . . . . . . . . . . . 252,034 55,774 35,944
Allowance for Credit Losses. . . . . 2,430 544 568
Total Equity . . . . . . . . . . . . 27,392 10,793 7,801
Results of Operations:
Interest Income. . . . . . . . . . . 26,296 11,920 5,718
Interest Expense . . . . . . . . . . 8,005 4,013 2,176
Provision for Credit Losses. . . . . (145) (190) 168
Net Earnings . . . . . . . . . . . . 4,910 2,519 820
Capital Ratios:
Core capital (Tier 1) as a percentage of
risk-weighted assets . . . . . . . 9.9% 14.7% 14.0%
Total capital (Tier 1 and Tier 2) as a
percentage of risk-weighted assets. . 11.0 16.0 15.3
Tangible core capital as a percentage of
quarterly average assets (tangible
leverage ratio). . . . . . . . . . 5.8 6.6 6.7
Asset Quality Ratios:
Allowance as a percentage of loans
outstanding at year end. . . . . . 1.0% 1.0% 1.6%
Allowance as a percentage of non-
performing loans (non-performing
loans include non-accruals, restruc-
tured and 90+ days past due) . . . 107.9 248.1 150.5
Allowance as a percentage of total
non-accrual loans. . . . . . . . . 356.5 256.6 1,055.1
Non-performing loans as a percentage
of total loans . . . . . . . . . . 0.9 0.4 1.05
Total non-performing assets as a
percentage of total assets . . . . 0.9 0.3 0.1
</TABLE>
CHARTER-HOUSTON is a national banking association organized by Jerry E.
Finger and others in 1963. Charter-Houston's main office is at 2600 Citadel
Plaza Drive, Suite 100, on Houston's North Loop (I-610), with branches in
Houston at 5150-5200 North Shepherd, 5433 Westheimer, 2401 Fountainview, 7500
Beechnut, 4821 Cornish, 1005 Blalock and 14315 Bellaire Boulevard. The
various locations that together comprise Charter-Houston's banking facilities
are leased, with the exception of a facility held for a future banking use at
3000 Bering Drive, which is owned by Charter-Houston. Charter-Houston's
banking facilities include an aggregate of 32 drive-in lanes.
Charter-Houston's two-story office building at 5150 North Shepherd houses the
consolidated accounting, auditing, bookkeeping and data processing operations
of Charter and the Subsidiary Banks. The consolidated credit department of
the Subsidiary Banks is also located at Charter-Houston's main office at 2600
Citadel Plaza Drive. Charter-Houston employed 289 full-time and 33 part-time
persons at January 31, 1995, including 14 senior officers. The foregoing
number of employees includes approximately 41 full-time and 2 part-time
persons who staff the consolidated accounting, auditing, bookkeeping and data
processing operations of Charter and the Subsidiary Banks and approximately
41 full-time and 3 part-time persons who staff the Subsidiary Banks
consolidated central credit department. Charter-Houston acts as an upstream
correspondent bank in providing such services to Charter-Colonial and
University Bank-Galveston.
Charter-Houston also offers asset management and trust services to pension
and profit-sharing plans, private trusts and individual customers. At
December 31, 1994, Charter-Houston had approximately $180 million under trust
department management, as compared to $174 million at December 31, 1993.
2
<PAGE>
CHARTER-COLONIAL is a national banking association organized by Jerry E.
Finger and others and opened for business in 1975 as Colonial National Bank.
The bank was acquired by Charter in December 1978. The main banking house of
Charter-Colonial is located at 2301 FM 1960 West in north Harris County with
branches in Houston at 7915 FM 1960, 11025 FM 1960, 2240 FM 1960 and 8320 FM
1960. Except for the land and building comprising its main banking house and
the 11-lane drive-in facility adjacent to the Willowbrook Branch of
Charter-Colonial, each of which is owned by Charter-Colonial, the various
lobby and drive-in locations that together comprise Charter- Colonial's
banking facilities are leased. Charter-Colonial's banking facilities include
an aggregate of 22 drive-in lanes. At January 31, 1995, Charter-Colonial
employed 44 full-time and 16 part-time persons, including 2 senior officers.
UNIVERSITY BANK-GALVESTON ("University") is a national banking association
which was organized and opened for business in 1967. University was acquired
and consolidated into Charter on April 20, 1993. For further discussion of
the acquisition of University, reference should be made to the "Expansion"
discussion beginning on page 4 of this report. The main banking house of
University is located at 700 University Boulevard in close proximity to the
Galveston Medical Center with branches in Galveston at 200 University
Boulevard and 6109 Central City Boulevard. The land and building comprising
University's main banking house and the land comprising the drive-in facility
which was constructed during 1994 adjacent to the Central City Boulevard
Branch are owned by University, while the lobby areas that comprise
University's two branches are leased. University banking facilities include
an aggregate of 14 drive-in lanes. At January 31, 1995, University employed
28 full-time and 9 part-time persons, including 3 senior officers.
NON-BANKING ACTIVITIES
CBH, INC. On September 17, 1992, the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"), Charter and the Subsidiary Banks
completed a corporate reorganization involving the formation of an
intermediary bank holding company to be domiciled in Delaware under the name
CBH, Inc., whereupon all of the capital stock of CBH was issued to Charter in
exchange for all of the outstanding capital stock of the Subsidiary Banks,
effective as of December 31, 1991. Except for anticipated tax savings and
certain organizational and operating expenses, this corporate reorganization
is not expected to have any affect on the operations of Charter or its
subsidiaries or Charter's consolidated financial statements.
CHARTER MORTGAGE 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 ("Charter Mortgage"). Charter
Mortgage is a 90-percent owned subsidiary of 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 December 31, 1994, the
servicing portfolio totalled approximately $200 million and loans in the
pipeline totalled approximately $80 million. At January 31, 1995, Charter
Mortgage employed 103 full-time persons, including 5 senior officers.
CHARTER VENTURE is a small business investment company licensed by the Small
Business Administration with capitalization of approximately $954,000 and
offices at 2600 Citadel Plaza Drive in Houston. Charter Venture's investment
activities involve participation in venture capital private placements of
established small business concerns. All of Charter Venture's investments
include actual or potential equity ownership in the small businesses being
funded. At December 31, 1994, Charter Venture had an investment portfolio
comprised of equity ownership positions in five small business concerns.
Charter Venture strives to develop a diversified mixture of industries in its
investment portfolio with a concentration of investments in Texas and
bordering states.
CHARTER INVESTOR SERVICES was established in October 1983 as a consortium of
the Subsidiary Banks to offer discount brokerage services to customers.
Charter Investor Services is operated through a networking arrangement with
Tradestar, Inc. ("Tradestar"), which is intended to both complement
traditional banking services and generate fee income to the Subsidiary Banks.
Each Subsidiary Bank is a licensed securities dealer and has a Tradestar
registered representative to supervise the brokerage activity. In January
1984, Charter Venture purchased an investment in Tradestar, an affiliate of
which is the clearing agent for Charter Investor Services.
CHARTER JOINT VENTURE is an investment by Charter, along with six other joint
venture partners, in a non-voting investment unit of Equus Capital
Corporation. Equus Capital Corporation is managing general partner of two
public leveraged buyout funds and a business development company under the
Investment Company Act of 1940 with funds created to invest in leveraged
buyouts or private venture capital placements.
CHARTER-HOUSTON SECURITIES AND CHARTER-COLONIAL SECURITIES. For investment
securities management purposes, Charter contributed and assigned all of the
outstanding capital stock of Charter-Houston Securities and Charter-Colonial
Securities ("Operating Subsidiaries") to Charter-Houston and
Charter-Colonial, respectively, effective as of December 31, 1991. The
Operating Subsidiaries had been inactive for a number of years. The
business activity of each of the Operating Subsidiaries is confined to
owning, holding and trading investment securities for their own accounts, to
the extent permitted by applicable federal banking law. The investment
securities which have been contributed to the Operating Subsidiaries by the
respective Subsidiary Banks are principally comprised of collateralized
mortgage obligations ("CMOs") and governmental securities with longer term
maturities.
3
<PAGE>
EXPANSION
EXPANSION OPPORTUNITIES. Charter has availed itself of the opportunities
created by branch banking through the consummation of various failed bank
acquisitions and corporate reorganizations. Management intends to consider
on an ongoing basis opportunities for expansion through the acquisition of
financial institutions which may be efficiently integrated into Charter's
existing infrastructure and which enhance Charter's character as a community
bank and a diversified financial services provider. In considering such
acquisition opportunities, Charter intends to preserve its community and
middle market focus, while realizing some of the centralized operating
efficiencies and product standardization characteristic of larger banking
organizations, by concentrating on acquisition opportunities within roughly a
100-mile radius of Charter's corporate headquarters. This acquisition
strategy led to Charter's following acquisitions:
ACQUISITION OF UNIVERSITY. On October 19, 1992, Charter and University
entered into an Agreement and Plan of Consolidation pursuant to which Charter
agreed to acquire University for an aggregate cash purchase price of
approximately $9.4 million. Following receipt of all regulatory and
shareholder approvals, the acquisition of University was closed on April 20,
1993. At December 31, 1993, University had total assets of $98.3 million,
total deposits of $85.3 million, and total loans of $36.7 million. For
further information regarding University, reference should be made to the
"Subsidiary Banks--University Bank-Galveston" discussion beginning on page 2
of this report.
ACQUISITION OF FIESTA MART BRANCHES. 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. The 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.
ACQUISITION OF CERTAIN ASSETS AND LIABILITIES OF CAPITAL STANDARD MORTGAGE.
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 ("Charter Mortgage"). Charter Mortgage is a
90-percent owned subsidiary of 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 December 31, 1994, the servicing portfolio
totalled approximately $200 million and loans in the pipeline totalled
approximately $80 million.
ACQUISITION OF CERTAIN ASSETS OF ROOSEVELT FINANCIAL GROUP. 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 Texas construction lending operations of Farm and
Home Savings Association ("Farm and Home"). In addition to purchasing these
construction loans and selected fixed assets, Charter-Houston 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. This construction lending area operates as a
separate division of Charter-Houston under the name Charter Builders Group,
which is headquartered at 13101 Northwest Freeway.
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 December 31,
1994 was 8.50%) 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.
None 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 Charter Mortgage, an ability to offer a
wider range of mortgage-related products and services.
ACQUISITION OF WEST LOOP SAVINGS AND LOAN. On January 10, 1995, Charter
acquired West Loop Savings and Loan Association, which represented the fifth
largest thrift in the Houston area with total assets of approximately $140
million at December 31, 1994. Immediately following the acquisition, West
Loop's charter was converted to a Texas state savings bank under the name
Charter Bank, SSB, in order to reduce certain regulatory burdens, establish a
vehicle for possible expansion of nonbank activities, and implement a product
mix which is consistent with Charter's other subsidiary banks. Charter Bank,
SSB has two attractively located banking facilities that will enhance our
market penetration into the reemerging Meyerland area and nearby Baytown.
4
<PAGE>
FAILED BANK ACQUISITIONS. In October 1987, Charter-Houston expanded its
asset and deposit base by acquiring from the FDIC in excess of $200 million
of insured deposits and certain assets of the failed Western Bank-Westheimer.
During 1988, 1989 and 1990, Charter-Colonial expanded its deposit and asset
base through the acquisition from the FDIC of an aggregate of approximately
$64 million of deposits of Cy-Fair Bank, N.A. Fallbrook National Bank and
City National Bank, which gave rise to the opening of Charter-Colonial's
Cy-Fair and Katy Freeway branches to service those deposits.
CORPORATE REORGANIZATIONS. Under the Texas law that now permits branch
banking, the following reorganizations have been effected: during 1987,
Charter National Bank-Westheimer was merged into Charter-Houston and the
acquired banking facility became the Westheimer Branch of Charter-Houston;
Charter-Houston concurrently established its Galleria Branch at the site of
the failed Western Bank-Westheimer in connection with Charter-Houston's
acquisition from the FDIC of the insured deposits of Western Bank-Westheimer;
during 1988, Charter National Bank-Willowbrook was merged with and into
Charter-Colonial and Charter National Bank-Southwest was merged with and into
Charter-Houston, with the respective resulting banks continuing to operate
all acquired facilities as branches.
SUPERVISION AND REGULATION
CHARTER. As a bank holding company, Charter is subject to regulation by the
Federal Reserve Board and is required to file with the Federal Reserve Board
an annual report and to furnish such additional information as the Federal
Reserve Board may require pursuant to the Holding Company Act. The Federal
Reserve Board may conduct examinations of Charter and each of its
subsidiaries.
Charter is required to obtain the prior approval of the Federal Reserve Board
for the acquisition of five percent or more of the voting shares or
substantially all the assets of any bank or bank holding company. In
considering proposed acquisitions, the Federal Reserve Board considers the
expected benefits to the public, including greater convenience, identifying
and meeting the credit needs of its entire community, increased competition
or gains in efficiency, weighed against the risks of possible adverse
effects, such as undue concentration of resources, lessening or elimination
of competition, conflicts of interest or unsound banking practices. After an
application to acquire the voting shares of a state or national bank in Texas
has been accepted for filing by the Federal Reserve Board, a copy of such
application must be submitted to the Texas Banking Commissioner
("Commissioner") pursuant to the Texas Banking Code of 1943, as amended
("Code"). No application to acquire shares of a bank located outside Texas
may be approved by the Federal Reserve Board unless such acquisition is
expressly authorized by the statutes of the state where the bank whose shares
or assets are to be acquired is located.
Bank holding companies are prohibited by law, except in certain instances
prescribed by statute, from acquiring a direct or indirect interest in or
control of more than five percent of the voting shares of any company which
is not a bank or bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing or controlling
banks or providing service to its subsidiaries. Bank holding companies,
however, may engage in, and may own shares of companies engaged in certain
activities found by the Federal Reserve Board to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
After an application concerning these activities has been accepted for filing
by the Federal Reserve Board, a copy of such application also must be
submitted to the Commissioner pursuant to the Code for a determination as to
whether the application should be approved. The Commissioner is required to
deny the application unless he/she finds that the proposed activities will
produce benefits to the public, such as greater convenience or increased
competition, that outweigh possible adverse effects, such as unfair
competition, conflicts of interest or unsound banking practices.
Under the Holding Company Act and the regulations of the Federal Reserve
Board, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or lease or sale of property or furnishing of services. The Federal
Reserve Board possesses enforcement powers intended to prevent or eliminate
practices of bank holding companies and their non-bank subsidiaries deemed to
be unsafe and unsound or in violation of applicable laws.
Congress passed legislation in 1994 to remove geographic restrictions on bank
expansion. The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Branching Act") removes state law barriers to
acquisitions in all states and allows multi-state banking operations to
merge into a single bank with interstate branches. Interstate banking and
branching authority will be subject to certain conditions and restrictions,
such as capital adequacy, management and CRA compliance. The Interstate
Branching Act preempts existing barriers that restrict entry into all
states--such as regional compacts and reciprocity agreements--thus creating
opportunities for expansion into markets that were previously closed. Under
the law, bank holding companies will be able to acquire banks in any state,
subject to certain conditions. When the interstate branching provisions of
the law become effective, banks acquired pursuant to this authority may
subsequently be converted to branches. Interstate branching will be
permitted by allowing banks to merge across state lines to form a single
institution. Interstate merger transactions can be used to consolidate
existing multistate operations or to acquire new branches. Banks will be
able to establish a new branch as its initial entry into a state only if the
state has authorized de nove branching. In addition, out-of-state banks may
merge with a single branch of a bank if the state has authorized such a
transaction. The interstate branching provisions will become effective on
June 1, 1997, unless a state takes action before that time. A state can pass
laws either to opt in early or to opt out completely, as long as they act
before June 1, 1997.
5
<PAGE>
SUBSIDIARY BANKS. Various requirements of federal and Texas law affect the
operation of the Subsidiary Banks, including the requirement to maintain
reserves against deposits, restrictions on the nature and amount of loans
which may be made and the interest that may be charged thereon, and
restrictions relating to investments and other activities. All Subsidiary
Banks are national banks and are subject to regulation, supervision and
periodic examination by the Office of the Comptroller of the Currency
("OCC"). Any future subsidiary bank which might be a State of Texas
chartered bank would be subject to regulation by the Texas Department of
Banking. National and state banks are both subject to further regulation by
the Federal Reserve Board and the FDIC. The OCC has been granted enforcement
powers with respect to the Subsidiary Banks which are similar in scope and
nature to those powers previously described with respect to bank holding
companies.
At December 31, 1994, $1,100,000 of the $49,160,000 of regulatory total
capital of the Subsidiary Banks was represented by subordinated capital
notes. The Federal Reserve Board and the OCC have adopted guidelines
originally proposed by the Federal Financial Institutions Regulatory Board
that restrict the extent to which such capital notes qualify in meeting the
capital requirements imposed upon the Subsidiary Banks by the OCC. In
accordance with such guidelines, Charter in the past provided additional
capital to its Subsidiary Banks through now partially repaid bank borrowings
by Charter, the proceeds of which have been used to purchase capital stock in
the Subsidiary Banks.
Cash revenues derived from dividends and management fees received by Charter
from the Subsidiary Banks and non-bank subsidiaries represent the largest
source of total cash revenues of Charter. In addition to certain statutory
limitations restricting payments of dividends, approval of the OCC is
required for the payment of any dividend to Charter by any of the Subsidiary
Banks if the total of all dividends, including any proposed dividends,
declared by any such bank in any calendar year exceeds the total of its net
profits, as defined by the OCC, for that year, combined with its retained net
profits for the preceding two years, less any required transfers to surplus
or a fund for the retirement of any preferred stock. At December 31, 1994,
pursuant to applicable law $5,047,000 of retained earnings was available for
the payment of dividends by the Subsidiary Banks to Charter.
Each Subsidiary Bank, as well as any other controlled subsidiary of Charter,
is an affiliate within the meaning of the Federal Reserve Act and as such is
subject to certain restrictions with respect to loans and extensions of
credit to Charter or to other subsidiaries, or investment in their stock
securities and acceptance of such stock or securities as collateral for loans
to any borrower.
For further discussion of certain additional regulations affecting Charter
and the Subsidiary Banks, reference should be made to the "Government Fiscal
and Monetary Policies" discussion below.
COMPETITION
The activities in which the Subsidiary Banks engage are highly competitive.
Each activity engaged in and geographic market served involves competition
with other banks, as well as with non-banking financial institutions and
non-financial enterprises. The Subsidiary Banks actively compete with other
banks in their efforts to obtain deposits and make loans, in the scope and
types of services offered, in interest rates paid on time deposits and
charged on loans and in other aspects of banking. At December 31, 1994, the
Subsidiary Banks had aggregate deposits of $623,761,000.
In addition to competing with other commercial banks within and outside their
primary service area, the Subsidiary Banks compete with other financial
institutions engaged in the business of making loans or accepting deposits,
such as savings and loan associations, credit unions, industrial loan
associations, insurance companies, small loan companies, finance companies,
mortgage companies, real estate investment trusts, certain governmental
agencies, credit card organizations and other enterprises. In recent years,
competition for funds from securities brokers for money market accounts has
intensified. Additional competition for deposits comes from government and
private issues of debt obligations and other investment alternatives for
depositors such as money market funds. The Subsidiary Banks also compete
with a variety of other institutions in the provision of discount brokerage
services as well as trust and investment management services.
GOVERNMENT FISCAL AND MONETARY POLICIES
The commercial banking business is affected not only by general economic
conditions but also by the fiscal and monetary policies of the Federal
Reserve Board. Changes in the discount rate on Federal Reserve member bank
borrowings, availability of borrowings at the Federal Reserve "discount
window", open market operations, the imposition of and changes in reserve
requirements against member banks' deposits and assets of foreign branches,
the imposition of and changes in reserve requirements against certain
borrowings by member banks and their affiliates, and the placing of limits on
interest rates which member banks may pay on time and savings deposits are
some of the instruments of fiscal and monetary policy available to the Board.
Fiscal and monetary policies influence to a significant extent the overall
growth of bank loans, investments and deposits and the interest rates charged
on loans or paid on time and savings deposits. The nature of future monetary
policies and the effect of such policies on the future business and earnings
of Charter and the Subsidiary Banks cannot be predicted.
6
<PAGE>
The 1982 Garn-St. Germain Depository Institutions Act ("Garn Act") revised
many basic banking laws. Central provisions of the Garn Act include the
authorization for banks and savings and loan associations to offer insured
deposit accounts which are directly competitive with money market funds,
increased lending limits to a single customer for national banks, and the
elimination of borrowing limits by banks which are Federal Reserve members.
Also, the Garn Act liberalized laws regarding transactions by a member bank
with its affiliates, including its bank affiliates.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") contains important provisions affecting all federally insured
financial institutions ("banking organizations") in such areas as anti-fraud
and anti-abuse enforcement powers, each banking organization's performance
and record in meeting community credit needs, and acquisitions of savings and
loan institutions. During 1990 initial phase-in of risk-based capital
guidelines commenced and guidelines relative to the leverage ratio of minimum
capital to total assets, which became effective after year-end 1990, were
issued. For further discussion of these new capital requirements, reference
should be made to the "Capital Resources" presentation beginning on page 28
of this report. Another recent regulatory development affecting banking
organizations was the imposition by the FDIC of increased deposit insurance
premiums. In 1990, those premiums increased from 8.3 cents per $100 of
deposits to 12 cents per $100 of deposits. Deposit insurance premiums were
increased twice during 1991 from 12 cents to 19.5 cents per $100 of deposits,
then to 23 cents per $100 of insured deposits.
During December 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted by Congress and signed into law by
President Bush. The provisions of FDICIA include a plan to recapitalize the
Bank Insurance Fund that is the source of deposit insurance coverage to
FDIC-insured institutions, authority to ultimately fund such recapitalization
plan through increased deposit insurance premiums, various supervisory
reforms which will increase the frequency of on-site examinations by federal
banking regulators, changes in the deposit insurance system, an array of new
consumer lending requirements, and the adoption of the Truth in Savings Act.
FDICIA also authorizes federal banking regulators to take prompt, corrective
action against institutions which are under-capitalized, institute a
risk-based assessment system for deposit insurance, and implement a series of
operational and management-based standards and potential sanctions for
violations of such standards. It is clearly anticipated that FDICIA will
unquestionably increase the regulatory burden on financial institutions and
impose substantial actual and incidental costs on financial institutions and
their customers. In response to the savings and loan crisis of the 1980s,
financial institutions are expected to encounter further legislative and
regulatory changes in the future.
While the Equal Credit Opportunity Act, the Fair Housing Act and the
Community Reinvestment Act ("CRA")--laws that require financial institutions
to practice fair lending and meet the credit needs of the communities in
which they are located--have been in effect for a number of years, regulatory
attention to enforcement of such laws has increased significantly in recent
years. The fair lending laws strictly prohibit discriminatory lending
practice. Using Home Mortgage Disclosure Act and other data which financial
institutions are required to maintain and report to the federal government,
federal and state governmental authorities are vigorously targeting financial
institutions suspected of violating the fair lending laws. Financial
institutions may be subject to fair lending enforcement actions, including
civil money penalties, even thought their lending practices unintentionally
have disparate impact or discriminatory effect. Similar to the fair lending
laws, CRA initiatives and enforcement actions have been given increased
attention in recent years. The rules and regulations governing CRA
compliance are in the process of being revised in an effort to establish more
objective measurements of CRA performance. The focus of performance will be
on each institution's actual lending, services and investment records
relative to low and moderate income areas which are located within the
institution's delineated community. The penalties for inadequate CRA
performance may include monetary penalties and severe limitations on any
further acquisition or expansion activities. The board of directors of
Charter and its Subsidiary Banks and Charter's management are firmly
committed to nondiscriminatory lending practices and ensuring that the
Subsidiary Banks meet the credit needs of low and moderate income areas in
our local communities. Charter continues to devote a substantial amount of
time and resources to fair lending and CRA training and compliance.
EMPLOYEES
Charter and its subsidiaries had approximately 508 full-time and 59 part-time
employees as of January 31, 1995, approximately 28 of whom are senior
officers of either Charter or a Subsidiary Bank. None of the employees are
represented by any union or similar group, and management believes it has
excellent relations with the staff. Charter and its subsidiaries are equal
opportunity employers and provide equal employment opportunities to
individuals without regard to race, sex, age, national origin, religion,
veteran status or disability.
7
<PAGE>
ITEM 2. PROPERTIES
The executive offices of Charter are located at 2600 Citadel Plaza Drive,
Suite 600, Houston, Texas 77008. Charter-Houston owns a one-acre vacant lot
adjacent to its leased facility at 5200 North Shepherd and the land and
building comprising the facility held for future banking use at 3000 Bering
Drive. Charter-Colonial owns the land and building comprising its main
banking premises and its Cy-Fair Branch, as well as the land and improvements
comprising the drive-in banking facility of its Willowbrook Branch.
University owns the land and building comprising its main banking house and
the land comprising the drive-in facility constructed during 1994 adjacent to
the West 61st Street Branch. Charter or its Subsidiary Banks lease the
remaining banking premises and remote facilities under various leases
extending through the year 2000. (See "Subsidiary Banks" under Item 1.)
ITEM 3. LEGAL PROCEEDINGS
Neither Charter nor any of its subsidiaries are a party to any legal
proceedings that in management's judgment would have a material adverse
effect on the consolidated financial position of Charter and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Since the annual shareholders' meeting held on May 26, 1994, no matters have
been submitted to a vote of the shareholders of Charter.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK. Since February 1991, Charter's Common Stock
("Common Stock") has been listed on the automated quotation system ("Nasdaq")
of the National Association of Securities Dealers, Inc. ("NASD") and trades
over-the-counter on the Nasdaq under the symbol SAIL. The table below sets
forth the high and low sales prices as reported on Nasdaq for each fiscal
quarter of 1994 and 1993. Amounts have been adjusted to reflect the 5% stock
dividends paid on October 31, 1994 and September 30, 1993.
<TABLE>
<CAPTION>
REPORTED PERIOD HIGH LOW
--------------- ---- ---
<S> <C> <C>
Fourth Quarter of 1994 . . . . . $15.25 $13.75
Third Quarter of 1994. . . . . . $14.75 $13.75
Second Quarter of 1994 . . . . . $13.10 $12.86
First Quarter of 1994. . . . . . $13.57 $13.10
Fourth Quarter of 1993 . . . . . $13.33 $11.91
Third Quarter of 1993. . . . . . $12.70 $11.11
Second Quarter of 1993 . . . . . $14.06 $10.88
First Quarter of 1993. . . . . . $16.10 $11.11
</TABLE>
On March 23, 1995, the high and low sales price of the Common Stock was
$14.75.
PRICE INFORMATION ON OTHER CLASSES. The shares of Charter's Special Common
Stock ("Special Common Stock") and initial series of preferred stock
("Preferred Stock") (hereinafter collectively referred to, together with the
Common Stock, as the "Charter Stock") are inactively traded and there has not
been an active market maker. To the best of Charter's knowledge, the most
recent trades involved only shares of Charter's Common Stock.
HOLDERS. At March 1, 1995, Charter's Common Stock, Special Common Stock, and
Preferred Stock were owned of record by approximately 900, 5 and 350
shareholders, respectively.
8
<PAGE>
DIVIDENDS AND DIVIDEND POLICY
DIVIDEND POLICY. Holders of Common Stock and Special Common Stock are
entitled to receive such dividends as are declared by Charter's Board of
Directors in accordance with Charter's dividend policy. Factors which
Charter's Board of Directors considers prior to declaring a dividend include
earnings, regulatory capital requirements, general business conditions and
the capital needs of its subsidiaries, as well as other factors which the
Board of Directors may deem relevant. The payment of dividends by Charter
also is restricted by the terms of two loan agreements, which agreements are
further described in Note 11 to the financial statements on page 41. As a
result of the termination of the Reserve Bank Agreement during 1992, Charter
is no longer required to obtain approval of the Federal Reserve Board prior
to paying any dividends to its shareholders. Dividends on Common Stock and
Special Common Stock are subject to the prior payment of any cumulated and
unpaid dividends on the Preferred Stock. Subject to compliance with
Charter's dividend policy, the Board of Directors has authorized the payment
of regular quarterly dividends on Charter's Common Stock and Special Common
Stock to be paid on the first business day of each fiscal quarter to the
holders of record on the fifteenth business day of the month immediately
preceding such payment date, at a rate to be fixed by the Board of Directors.
Such regular quarterly dividends may be suspended at any time by the Board
of Directors and there is no assurance that Charter will continue to pay
regular quarterly dividends on the Common Stock and Special Common Stock.
DIVIDENDS FROM SUBSIDIARY BANKS. Since Charter is a bank holding company it
is dependent upon receipt of dividends or advances from its subsidiaries
(primarily the Subsidiary Banks) for payment of dividends to shareholders.
The payment of dividends by the Subsidiary Banks is limited by applicable
federal banking law. (See "Supervision and Regulation - Subsidiary Banks"
beginning on page 5 and Note 3 beginning on page 39.)
DIVIDEND HISTORY. Charter paid quarterly cash dividends on its Common Stock
from 1979 through September 30, 1985. Effective December 31, 1985, Charter
suspended the payment of dividends to holders of Common Stock and Special
Common Stock as a consequence of losses sustained from operations and a
resulting desire to conserve capital. On August 10, 1992, Charter paid a
five percent (5%) stock dividend to the holders of record of Common Stock and
Special Common Stock as of July 31, 1992. On February 17, 1993, Charter's
Board of Directors resumed the payment of cash dividends on Charter's Common
Stock and Special Common Stock by declaring a quarterly cash dividend of $.03
per share to be paid on March 31, 1993, to the holders of Common Stock and
Special Common Stock as of March 15, 1993. The quarterly cash dividend on
Charter's Common Stock and Special Common Stock was increased to $.05 per
share for payment on June 30, 1993, with regular quarterly dividends of $.05
per share being paid on September 30, 1993, and January 1, 1994. On February
24, 1994, the Board of Directors increased the quarterly cash dividend on
Charter's Common Stock and Special Common Stock to $.06 per share, commencing
with the dividend to be paid on April 1, 1994, to holders of record on March
15, 1994, with regular quarterly dividends at $.06 per share being paid as of
July 20, 1994, September 30, 1994 and January 3, 1995.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
CHARTER BANCSHARES, INC. AND SUBSIDIARIES
1994 1993 1992 1991 1990
------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31:
Interest income . . . . . . . . . . . . . . . . $ 43,856 $ 39,227 $ 40,072 $ 44,977 $ 47,208
Interest expense . . . . . . . . . . . . . . 14,605 13,786 16,394 23,975 28,632
---------- ---------- ---------- ---------- ----------
Net interest income . . . . . . . . . . . . . 29,251 25,441 23,678 21,002 18,576
Provision for credit losses . . . . . . . . . . 233 911 1,465 1,662 696
Non-interest income . . . . . . . . . . . . . . 14,328 8,699 8,272 8,167 5,178
Non-interest expense (3). . . . . . . . . . . . 31,899 26,668 23,704 22,800 20,150
---------- ---------- ---------- ---------- ----------
Earnings before income taxes (3). . . . . . . . 11,447 6,561 6,781 4,707 2,908
Income tax expense ( 3) . . . . . . . . . . . . 3,761 1,305 136 339 104
---------- ---------- ---------- ---------- ----------
Earnings before effect of change in accounting
principle. . . . . . . . . . . . . . . . . . . 7,686 5,256 6,645 4,368 2,804
Cumulative effect of a change in accounting
for income taxes . . . . . . . . . . . . . . . -- 2,950 -- -- --
---------- ---------- ---------- ---------- ----------
Net earnings . . . . . . . . . . . . . . . . . $ 7,686 $ 8,206 $ 6,645 $ 4,368 $ 2,804
========== ========== ========== ========== ==========
Net earnings as a percent of:
Average assets . . . . . . . . . . . . . . . 1.13% 1.25% 1.16% 0.79% 0.51%
Average shareholders' equity . . . . . . . . 15.86 19.16 18.35 13.36 10.34
Average common shareholders' equity . . . . . 16.10 19.49 19.90 14.89 11.01
Per Common Share(1):
Primary earnings before change in
accounting principle . . . . . . . . . . . . $ 1.27 0.86 $ 1.16 $ 0.74 $ 0.42
Fully diluted earnings before change
in accounting principle . . . . . . . . . . 1.27 0.86 1.10 0.72 0.42
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . -- 0.49 -- -- --
Net earnings - primary . . . . . . . . . . . 1.27 1.35 1.16 0.74 0.42
Net earnings - fully diluted . . . . . . . . 1.27 1.35 1.10 0.72 0.42
Book value (2) . . . . . . . . . . . . . . . 7.99 7.50 6.31 5.21 4.47
Dividends . . . . . . . . . . . . . . . . . . 0.24 0.18 -- -- --
Dividend pay-out ratio. . . . . . . . . . . . . 18.90% 13.33% --% --% --%
Weighted average shares outstanding:
Primary . . . . . . . . . . . . . . . . . 6,025,389 6,011,283 5,476,604 5,289,001 5,057,746
Fully diluted . . . . . . . . . . . . . . . 6,029,637 6,029,514 5,996,214 5,963,214 5,731,959
BALANCE SHEET DATA AS OF DECEMBER 31:
Loans . . . . . . . . . . . . . . . . . . . . . $ 343,761 $ 290,674 $ 237,212 $ 221,748 $ 190,128
Total assets . . . . . . . . . . . . . . . . . 722,398 667,096 597,302 556,338 581,113
Deposits . . . . . . . . . . . . . . . . . . . 616,880 588,754 525,446 499,078 508,208
Long-term debt . . . . . . . . . . . . . . . . 14,850 13,550 7,511 7,757 8,103
Shareholders' equity (2) . . . . . . . . . . . 48,888 45,772 38,636 34,206 30,737
Shareholders' equity (percent change) (2) . . . 6.81% 18.47% 12.95% 11.29% 14.89%
Average shareholders' equity
as a percent of average assets (2) . . . . . . 7.14% 6.52% 6.33% 5.94% 4.97%
<FN>
(1) All per share figures and weighted average shares outstanding have been
adjusted for the 5% stock dividends paid on October 31, 1994, September 30,
1993 and August 10, 1992.
(2) At December 31, 1994, Charter's shareholders' equity has been reduced by
$3,352,000 to reflect the adoption of SFAS #115, which requires the net
unrealized gain (loss) on securities available for sale to be included in
shareholders' equity. Excluding the affect of this adjustment to
shareholders' equity at December 31, 1994, certain selected financial data
reflected above would be adjusted as follows: shareholders' equity of
$52,240,000, the percent change in shareholders' equity of 14.13%, average
shareholders' equity as a percent of average assets of 7.65% and book value
per common share of $8.54.
(3) Non-interest expenses for 1993 include approximately $1.5 million in
accelerated amortization of core deposit intangible. The total of income
tax expense for 1993 was reduced by an approximately $1.4 million tax
benefit related to this accelerated amortization of core deposit
intangibles. Excluding the effect of this accelerated amortization,
earnings before income taxes would have increased to approximately
$8 million in 1993.
</TABLE>
10
<PAGE>
CONDENSED STATEMENTS OF EARNINGS
The following is a comparison of Charter's condensed statements of earnings
for the most recent five-year period. The amounts for the years ended
December 31, 1994 through 1990 have not been presented on a taxable
equivalent basis due to Charter's federal income tax-loss carry forward
position in years prior to 1993 and the immaterial effect on earnings from
tax-exempt income in each year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992 1991 1990
----------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income(1) . . . . . . . . . . . . . . $43,856 $39,227 $40,072 $44,977 $47,208
Interest expense . . . . . . . . . . . . . . . 14,605 13,786 16,394 23,975 28,632
------- ------- ------- ------- -------
Net interest income(1) . . . . . . . . . . . 29,251 25,441 23,678 21,002 18,576
Provision for credit losses. . . . . . . . . . 233 911 1,465 1,662 696
Non-interest income. . . . . . . . . . . . . . 14,328 8,699 8,272 8,167 5,178
Non-interest expense (2) . . . . . . . . . . . 31,899 26,668 23,704 22,800 20,150
------- ------- ------- ------- -------
Earnings before income taxes (2) . . . . . . . 11,447 6,561 6,781 4,707 2,908
Income tax expense(2). . . . . . . . . . . . . 3,761 1,305 136 339 104
------- ------- ------- ------- -------
Earnings before effect of change in accounting
principle. . . . . . . . . . . . . . . . . . 7,686 5,256 6,645 4,368 2,804
Cumulative effect of a change in accounting for
income taxes . . . . . . . . . . . . . . . . -- 2,950 -- -- --
------- ------- ------- ------- -------
Net earnings . . . . . . . . . . . . . . . . $ 7,686 $ 8,206 $ 6,645 $ 4,368 $ 2,804
======= ======= ======= ======= =======
<FN>
(1) For the years ended December 31, 1994 through 1990, interest income would
have been $43,876,000, $39,232,000, $40,080,000, $44,995,000 and
$47,243,000, respectively, and net interest income would have been
$29,271,000, $25,446,000, $23,686,000, $21,020,000 and $18,611,000,
respectively, if all such amounts were shown using a comparable fully
taxable equivalent basis (using a tax rate of 34%).
(2) Non-interest expenses for 1993 included approximately $1.5 million in
accelerated amortization of core deposit intangibles. The total of income
tax expense for 1993 was reduced by an approximately $1.4 million tax
benefit related to this accelerated amortization of core deposit
intangibles. Excluding the effect of this accelerated amortization,
earnings before income taxes would have increased to approximately
$8 million in 1993.
</TABLE>
11
<PAGE>
CONDENSED AVERAGE BALANCE SHEETS
Although year-end statistics present general trends, the daily average
balance sheets are more indicative of Charter's levels of activity
throughout the years indicated and less subject to day-to-day business
activity fluctuations. The following schedule sets forth a
comparison of the most recent five years' consolidated daily average
balance sheets for Charter.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992 1991 1990
-------------- ------------- ------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ---- ------- ---- ------- ---- ------- ---- ------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks . . $ 36,397 5% $ 32,658 5% $ 28,172 5% $ 27,117 5% $ 33,064 6%
Loans . . . . . . . . . . . 293,536 43 277,409 42 217,643 38 197,969 36 181,478 33
Interest-bearing deposits . 465 -- 398 -- 1,766 -- 3,335 1 7,870 1
Trading account assets. . . 2,615 -- 4,320 -- 1,937 -- 7,231 1 1,816 --
Securities:
Taxable. . . . . . . . . . 294,227 43 294,714 45 269,241 47 260,110 47 257,434 47
Non-taxable. . . . . . . . 797 -- 183 -- 204 -- 457 -- 696 1
-------- --- -------- --- -------- --- -------- --- -------- --
Total Securities . . . . . 295,024 43 294,897 45 269,445 47 260,567 47 258,130 48
-------- --- -------- --- -------- --- -------- --- -------- --
Federal funds sold and
securities purchased under
agreements to resell . . . 27,654 4 23,662 4 32,183 6 29,909 5 37,458 7
Other assets . . . . . . . 27,853 4 28,483 4 24,663 4 27,700 5 28,726 5
Allowance for credit losses. (4,451) 1 (4,673) -- (3,591) -- (3,328) -- (2,876) --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total Assets. . . . . . . . $679,093 100% $657,154 100% $572,218 100% $550,500 100% $545,666 100%
======== === ======== === ======== === ======== === ======== ===
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing
demand . . . . . . . . . $167,207 25% $154,310 24 $120,936 21% $107,822 20% $104,328 19%
Interest-bearing demand. . 93,001 14 99,608 15 75,591 13 55,636 10 45,716 8
Savings. . . . . . . . . . 37,328 5 35,599 5 21,325 4 19,823 4 19,368 4
Money market savings . . . 109,923 16 103,187 1 85,579 15 62,895 11 55,859 10
Time . . . . . . . . . . . 176,837 26 185,218 28 204,559 36 236,665 43 258,496 47
-------- --- -------- --- -------- --- -------- --- -------- ---
Total Deposits. . . . . . 584,296 86 577,922 88 507,990 89 482,841 88 483,767 88
-------- --- -------- --- -------- --- -------- --- -------- ---
Securities sold under
agreements to repurchase . 26,183 4 17,641 2 14,467 3 21,916 4 19,674 4
Long-term debt. . . . . . . 14,549 2 12,087 2 7,991 1 8,341 2 9,906
Other liabilities . . . . . 5,604 1 6,679 1 5,559 1 4,717 1 5,215 1
-------- --- -------- --- -------- --- -------- --- -------- ---
Total Liabilities. . . . . 630,632 93 614,329 93 536,007 94 517,815 95 18,562 95
-------- --- -------- --- -------- --- -------- --- -------- ---
Shareholders' Equity. . . . 48,461 7 42,825 7 36,211 6 32,685 5 27,104 5
-------- --- -------- --- -------- --- -------- --- -------- ---
Total Liabilities and
Shareholders' Equity. . $679,093 100% $657,154 100% $572,218 100% $550,500 100% $545,666 100%
======== === ======== === ======== === ======== === ======== ===
</TABLE>
12
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Earnings before income taxes increased to $11,447,000 as compared to
$6,561,000 for 1993. Net earnings decreased in 1994 to $7,686,000,
as compared to $8,206,000 for 1993. In 1994 fully diluted earnings
per common share were $1.27; compared to $1.35 for 1993. Highlights
of the major components that affect Charter's net earnings are as follows:
- Average assets grew $21,939,000, or 3.3%, to $679,093,000, with average
deposits totalling $584,296,000.
- Non-performing assets - non-accrual and restructured loans plus other real
estate ("ORE") and collateral acquired - decreased by 8.5% to $3,812,000
at December 31, 1994, or 0.53% of total assets.
- Net-interest income - the difference between total interest income on
earning assets and total interest expense on deposits and borrowings -
increased 15.0%, or $3.8 million, to $29,251,000 for the year.
- Provision for credit losses - the amounts charged to earnings in order to
maintain an adequate allowance for credit losses - decreased by $678,000
to $233,000 for 1994.
- Non-interest income, excluding securities transactions and mortgage banking
income - the fees charged for banking services - increased by $1,666,000
to $10,030,000 for the year.
- Mortgage banking income - the revenues earned from mortgage banking
activity, such as loan origination fees, fees from the sale of loans and
sales of related servicing rights on originated loans - totaled $4,311,000.
This was a new source of revenues, as Charter acquired a mortgage banking
company in April 1994.
- Securities transactions - including trading account profits or losses and
investment securities gains or losses - resulted in a de-
minimus net loss before taxes of $13,000 for 1994.
- Non-interest expense - carrying costs and losses incurred with the
acquisition and sale of other real estate, employee compensation and
other expenses, such as for occupancy, furniture and equipment,
advertising, professional fees, deposit insurance premiums and supplies -
increased by 19.6%, or $5,231,000, to $31,899,000 for 1994. Approximately
$4.7 million of this increase was due to the acquisition of Charter
Mortgage Company.
- Income tax expense - the income tax provision on current year earnings -
increased by $2,456,000 to $3,761,000 for 1994. A change in the method
of accounting for income taxes was adopted effective January 1, 1993,
resulting in a one-time increase to earnings of $2,950,000 in 1993. Also
in 1993, the total income tax expense was reduced by an approximately
$1.4 million tax benefit related to the accelerated amortization of core
deposit intangibles.
In the following sections, these and other major factors and trends affecting
the components of income and expense are examined in more detail. Information
concerning assets and liabilities is subsequently provided so that an
evaluation can be made of capitalization and liquidity as they may affect
Charter's future outlook.
13
<PAGE>
NET INTEREST INCOME
Net interest income increased 15.0% in 1994 to $29,251,000, compared to
$25,441,000 in 1993. The data used in the analysis of the changes in net
interest income is derived from the daily average levels of interest-earning
assets and interest-bearing liabilities as well as from the yields earned and
rates paid on such amounts. The schedule below gives a three-year history of
Charter's daily average interest-earning accounts (including non-accruing
loans) and interest-bearing accounts. The amounts earned and paid on each
major type of asset and liability account are then shown beside the average
balance in the account for the year. The average yields on all interest-
earning assets (including non-accruing loans) and the average cost of all
interest-bearing liabilities are also summarized.
COMPARATIVE NET INTEREST MARGIN
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
1994 1993 1992
-------------------------------------------------------------------------------------------
AVERAGE YIELD OR AVERAGE YIELD OR AVERAGE YIELD OR
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans. . . . . . . . . $293,536 $25,875 8.81% $277,409 $ 22,303 8.04% $217,643 $19,080 8.77%
Interest-bearing
deposits . . . . . . . 465 18 3.87 398 10 2.51 1,766 96 5.44
Trading account assets. 2,615 175 6.69 4,320 131 3.03 1,937 112 5.78
Securities:
Taxable . . . . . . . 294,227 16,609 5.64 294,714 16,145 5.48 269,241 19,622 7.29
Non-taxable (1) . . . 797 38 4.77 183 10 5.46 204 15 7.35
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Securities. . . 295,024 16,647 5.64 294,897 16,155 5.48 269,445 19,637 7.29
Federal funds sold and
securities purchased
under agreements to
resell . . . . . . . . 27,654 1,141 4.13 23,662 628 2.65 32,183 1,147 3.55
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Earning
Assets/Yields . . . . 619,294 43,856 7.08 600,686 39,227 6.53 522,974 40,072 7.67
-------- ------- ---- -------- ------- ---- -------- ------- ----
Cash and due from banks. 36,397 32,658 28,172
Other assets, net of
allowance for credit
losses . . . . . . . . 23,402 23,810 21,072
-------- -------- --------
Total Assets. $679,093 $657,154 $572,218
======== ======== ========
Liabilities and Shareholders' Equity:
Interest-bearing
demand deposits . . . $93,001 1,515 1.63 $ 99,608 2,387 2.40 $ 75,591 2,366 3.13
Savings deposits . . . 37,328 905 2.42 35,599 842 2.37 21,325 663 3.11
Money market savings . 109,923 3,195 2.91 103,187 2,922 2.83 85,579 3,022 3.53
Other time deposits. . 176,837 6,704 3.79 185,218 6,285 3.39 204,559 9,200 4.50
Securities sold under
agreements to
repurchase . . . . . 26,183 1,113 4.25 17,641 368 2.09 14,467 438 3.03
Long-term debt . . . . 14,549 1,173 8.06 12,087 982 8.12 7,991 705 8.82
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-Bearing
Liabilities/Rate . . 457,821 14,605 3.19 453,340 13,786 3.03 409,512 16,394 4.00
-------- ------- ---- -------- ------- ---- -------- ------- ----
Demand deposits 167,207 154,310 120,936
Other liabilities. . . 5,604 6,679 5,559
-------- -------- --------
Total Liabilities . . 630,632 614,329 536,007
Shareholders' Equity. 48,461 42,825 36,211
-------- -------- --------
Total Liabilities and
Shareholders' Equity $679,093 $657,154 $572,218
======== ======== ========
Net Interest Income . . $29,251 $25,441 $23,678
======= ======= =======
Interest Rate Spread. . 3.89% 3.50% 3.67%
==== ==== ====
Net Interest Margin(2). 4.72% 4.24% 4.54%
==== ==== ====
<FN>
(1) The yields for 1994, 1993 and 1992 are not presented on a taxable
equivalent basis due to the immaterial effect on earnings from
tax-exempt income in each year.
(2) The net interest margins for 1994, 1993 and 1992 would have been unchanged
if such data had been prepared on a comparable fully taxable equivalent
basis. In addition, the yields on non-taxable investment securities would
have been 7.22%, 8.20% and 11.27%, respectively.
</TABLE>
14
<PAGE>
ANALYZING EARNING ASSETS AND ALL FUNDING SOURCES
The preceding table indicated that net interest income increased by $3,810,000
over that of 1993. Moreover, the net interest margin increased to 4.72% for
1994 over the 4.24% reported for 1993. There are many factors working together
which result in changes to net interest income. The table below allocates the
change in net interest income between changes in volumes and the level of
interest rates. The remaining variance is allocable to a combination of
changes in rates and volumes. The rate/volume variance is then allocated on
a pro rata basis to arrive at a final variance.
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
-------------------------------- ------------------------------------
1994 COMPARED TO 1993 1993 COMPARED TO 1992
DUE TO DUE TO
--------------------------------- ------------------------------------
INCREASE RATE/ INCREASE RATE/
(DECREASE) VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME
--------- ------ ---- ------ ---------- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans . . . . . . . . . . $3,572 $1,297 $2,150 $125 $ 3,223 $5,239 $(1,582) $(434)
Interest-bearing deposits. 8 2 5 1 (86) (74) (52) 40
Trading account assets . . 44 (52) 158 (62) 19 138 (53) (66)
Securities:
Taxable . . . . . . . . . 464 (27) 491 (1) (3,477) 1,856 (4,872 (461)
Non-taxable (1). . . . . . 28 34 (1) (4) (5) (2) (4) --
------ ------ ------ ---- ------- ------ ------- ----
Total securities . . . . . 492 7 490 (5) (3,482) 1,854 (4,876) 461)
Federal funds sold and
securities purchased
under agreements to
resell. . . . . . . . . . 513 106 348 59 (519) (304) (293) 78
------ ------ ------ ---- ------ ------ ------- ----
Total interest income. . . 4,629 1,360 3,151 118 (845) 6,853 (6,856) (843)
------ ------ ------ ---- ------ ------ ------- ----
Interest Expense:
Deposits . . . . . . . . . (116) (191) 76 (1) (2,815) 1,440 (3,888) (367)
Federal funds purchased
and other short-term
borrowings. . . . . . . . 744 178 382 184 (70) 96 (30)
Long-term debt . . . . . . 191 200 (7) (2) 277 361 (56) (29)
------ ------ ------ ---- ------ ------ ------- ----
Total interest expense . . 819 187 451 181 (2,608) 1,897 (4,080) (426)
------ ------ ------ ---- ------ ------ ------- ----
Net interest income
before allocation of
volume/rate . . . . . . . 3,810 1,173 2,700 (63) 1,763 4,956 (2,776) (417)
------ ------ ------ ---- ------ ------ ------- ----
Allocation of
volume/rate . . . . . . . -- (19) (44) 63 -- (947) 530 417
------ ------ ------ ---- ------ ------ -------- ----
Changes in net
interest income . . . . . $3,810 $1,154 $2,656 $ -- $1,763 $4,009 $(2,246) $ --
====== ====== ====== ==== ====== ====== ======= ====
<FN>
(1) The amounts indicated are not presented on a taxable equivalent basis due
to the immaterial effect on earnings from tax-exempt income in each year.
</TABLE>
COMPARING 1994 WITH 1993
The above table shows that an increased level of earning assets accounted for
nearly one-third of the overall increase in net interest income. Earning
assets averaged $691,294,000 in 1994 for an increase of $18,608,000 or 3.1%.
A generally higher level of interest rates combined with increasing spreads
accounts for a majority of the increased net interest income. The table on
the previous page indicates the average rate paid on interest bearing
liabilities increased by 0.16% while the yield on earning assets changed
by 0.55%. While total loans and investment securities were repricing at
higher interest rates, many rates on deposit categories exhibited little
change.
COMPARING 1993 WITH 1992
Earning assets expanded during 1993 to average $77,712,000 higher than in 1992.
This represented an increase of 14.9% over the prior year. The growth in
earning assets resulted in the highly favorable volume variance. Offsetting
this increase, however, were lower interest rates and more narrow spreads.
Interest rates were generally lower in 1993 than for 1992. Consequently,
Charter received less value from non-interest-bearing funding sources than in
the higher rate environment of 1992. Since earning asset yields contracted at
a faster rate than rates paid on interest bearing liabilities, net interest
spreads narrowed. The yield on earning assets declined 1.14% year-
to-year while the cost of interest-bearing liabilities declined 0.97%.
15
<PAGE>
A further understanding of the factors responsible for the year-to-year
increases 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 the
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>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------
NET NET NET
AVERAGE INTEREST INTEREST AVERAGE INTEREST INTEREST AVERAGE INTEREST INTEREST
EARNING ASSETS SPREAD INCOME EARNING ASSETS SPREAD INCOME EARNING ASSETS SPREAD INCOME
-------------- -------- -------- -------------- -------- -------- -------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Source of Funding
Interest-bearing
liabilities. . . . . $457,821 3.89% $17,816 $453,340 3.50% $15,843 $409,512 3.67% $14,988
Non-interest-bearing
liabilities and
equity capital . . . 161,473 7.08 11,435 147,346 6.53 9,598 113,462 7.67 8,690
-------- ------- -------- ------- -------- -------
Total . . . . $619,294 $29,251 $600,686 $25,441 $522,974 $23,678
======== ======= ======== ======= ======== =======
</TABLE>
COMPARING 1994 WITH 1993
As outlined on the previous page, the increased level of net interest income
can be attributed to a higher level of earning asset volumes and an improved
interest rate spread variance. The growth in earning assets occurred within
the higher yielding loan category, thereby contributing to a higher earning
asset yield and wider spread over funding sources. In addition, there was a
greater reliance on non- interest-bearing funding than in 1993. Since these
funding sources become more valuable in a higher rate environment, net
interest income expanded accordingly. Approximately 26.1% of earning assets
were funded through non-interest-bearing sources. This compares more
favorably with the 24.5% in 1993.
COMPARING 1993 WITH 1992
The table on the preceding page exhibited the benefit of the expanded earning
asset base and reflected the offset of lower interest rates and reduced
spreads. The table above readily identifies the reduced interest spread on
non-interest-bearing funding sources. The spread on earning assets funded
with interest-bearing liabilities declined by 0.17% when compared with 1992.
However, the spread attributed to non-interest-bearing funding sources
declined by 1.14%. Offsetting this to some degree was the increased level of
funding provided by non-interest-bearing sources. For 1993, approximately
24.5% of earning assets were supported by non-interest-bearing funds, whereas
this ratio was 21.7% for 1992.
16
<PAGE>
LOANS
The following table shows the composition of the loan portfolio at the end of
each of the last five years:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
industrial . . . . . . . . . $ 75,113 $58,421 $54,097 $64,695 $ 63,805
Commercial real estate . . . . 40,923 50,467 45,432 42,028 33,382
Real estate - construction . . 90,478 6,477 8,135 9,609 8,757
Real estate - multi-family . . 10,611 16,573 18,850 17,042 8,313
Real estate - 1-4 family . . . 66,300 101,375 57,710 45,636 33,812
Loans to individuals . . . . . 60,336 57,361 52,988 42,657 42,059
------- ------- ------- ------- -------
Total loans. . . . . . . . . $343,761 290,674 $237,212 $221,748 $190,128
======== ======= ======== ======== ========
</TABLE>
Charter presently is, and in the future expects to remain, a middle-market
banking organization serving individuals and businesses with interests in and
around Harris County, Texas. Charter's middle-market orientation with respect
to both commercial and real estate lending generally results in avoidance of
large commitments to any single project. At the end of 1994, Charter had a
loan-to-deposit ratio of 55.7%. Charter's management believes this low
loan-to-deposit ratio results in a generally lower credit risk profile and
also is representative of the latent earning power of Charter. Management
believes that maintaining a loan-to-deposit ratio in the range of 55-
65% over the next several years, coupled with prudent evaluation and
administration of such loan growth, is within Charter's capabilities
in a generally, although modestly, expanding economy.
During 1994, Charter saw growth in its real estate loans in the real estate
construction category primarily as a result of the purchase of residential
construction loans from Roosevelt Financial Group as discussed earlier.
Included in the total of real estate-construction loans are $79 million of
loans secured by one-to-four family residential properties, which amount
comprises approximately 87% of the total of construction loans.
The composition of Charter's loan portfolio reflects management's desire to
maintain relatively low exposure to commercial real estate loans. Commercial
real estate, multi-family and construction loans as a percent of total loans
were 41.3% at December 31, 1994, as compared to 25.3% at year-end 1993. At
December 31, 1994, loans to individuals and 1-4 family owner-occupied
residential mortgages represented 36.8% of total loans outstanding versus
54.6% of total loans outstanding at year-end 1993. Charter has no highly
leveraged transaction ("HLT") loans as of December 31, 1994.
Economic indicators generally suggest that the U.S. and Houston-Galveston
area economies will continue to experience at least modest growth during the
next year. Most indicators suggest that the national and local economies
should not be materially different from 1994. While management does not
foresee any substantial upward shift in loan demand that would be attributable
to a more rapidly improving economy, the following indicators coupled with the
general prediction of a relatively low rate of inflation should contribute to
a stable local lending environment. Statistics released during 1994 and early
1995 continue to reflect steady national economic growth. Due to the
diversification that has been ongoing since the late 1980's, the Houston,
Harris County, and Galveston County economy now tends to track more closely
the national economy, although the energy sector remains the most significant
component of the local economy. The Federal Reserve predicts that economic
growth will remain slow in Houston, with the energy sector at best showing
either stability or modest improvement. Management generally subscribes to
a forecast of modest job growth for Houston during 1995. Generally, office
market rents are flat. The apartment market is stable, with modest
improvements in rent. Existing home sales ended 1994 with a decline from
1993 sales, new home sales fell significantly below the strong 1992 and 1993
totals, as home buyers reacted to the increase in mortgage rates. The
industrial market is producing only moderate loan demand.
17
<PAGE>
PROVISION FOR CREDIT LOSSES
The allowance for credit losses at December 31, 1994 was $4,446,000,
representing 1.29% of outstanding loans. A year earlier, this ratio was
1.59%. The provision for credit losses charged against earnings was $233,000
in 1994, $911,000 in 1993 and $1,465,000 in 1992. Net loans charged off in
1994 were $403,000, compared to $609,000 in 1993 and $789,000 in 1992. These
net charge-offs resulted in a net charge-off ratio to average loans of 0.14%
in 1994, a decrease from 0.22% in 1993 and 0.36% in 1992, with the latter
percentage being significantly lower than the levels experienced from 1985
through 1989.
To a very large extent Charter's loan portfolio remains secured and current
re-appraisals of collateral value have been received or undertaken in an
effort to further assess loss potential. Management has closely scrutinized
its loss potential on its non-performing assets, as well as on the entire
loan portfolio, and has, to the best of its knowledge and belief, reserved
for losses accordingly.
The transactions occurring in the allowance for credit losses for the five
years ended December 31, 1994, including a breakdown of net charge-offs by
type of loan, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans outstanding . . . . . $293,536 $277,409 $217,643 $197,969 $181,478
======== ======== ======== ======== ========
Loans outstanding at year-end . . . $343,761 $290,674 $237,212 $221,748 $190,128
======== ======== ======== ======== ========
Transactions in the allowance for credit losses:
Balance at beginning of period. . $ 4,616 $ 3,792 $ 3,116 $ 2,792 $ 3,465
Provision charged to operating
expenses . . . . . . . . . . . . 233 911 1,465 1,662 696
Allowance of acquired bank. -- 522 -- -- --
Loans charged off:
Real estate. . . . . . . . . . 264 148 667 705 447
Commercial . . . . . . . . . . 308 272 549 620 813
Individuals. . . . . . . . . . 367 441 201 454 420
-------- -------- -------- -------- --------
Total loans charged off . . 939 861 1,417 1,779 1,680
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Real estate. . . . . . . . . . 186 75 106 42 224
Commercial . . . . . . . . . . 176 93 299 324 38
Individuals. . . . . . . . . . 174 84 223 75 49
-------- -------- -------- -------- --------
Total recoveries . . . . . . 536 252 628 441 311
-------- -------- -------- -------- --------
Net loans charged off. . . . 403 609 789 1,338 1,369
-------- -------- -------- -------- --------
Balance at year end . . . . . . . $ 4,446 $ 4,616 $ 3,792 $ 3,116 $ 2,792
======== ======== ======== ======== ========
Ratios:
Allowance as a percent of loans
outstanding at year end. . . . 1.29% 1.59% 1.60% 1.40% 1.47%
Allowance as a percent of
average loans . . . . . . . . . 1.51 1.66 1.74 1.57 1.54
Net loans charged off as a
percent of average loans
outstanding. . . . . . . . . . . 0.14 0.22 0.36 0.68 0.75
</TABLE>
Management of Charter maintains a process of identifying and addressing
credit problems. Efforts have been undertaken and are ongoing to strengthen
credit review policies and procedures. Intensive efforts are ongoing to
ensure that any existing or identifiable developing problem loans receive the
necessary effective attention. Charter's procedures for reviewing the
adequacy of its allowance for credit losses involve a review of lending
policies and practices, the lending history of personnel involved in the
lending process and the compliance by those personnel with the policies.
Consideration also is given to (i) management's review of individual
outstanding and proposed credits, (ii) the current size and composition of
the loan portfolio, (iii) expectations of future economic conditions and
their impact on particular industries and specific borrowers, (iv) the level
and composition of non-performing loans, (v) evaluation of the underlying
collateral for secured loans, (vi) historical loan loss and recovery
experience and (vii) comments made during regular examinations or audits by
banking regulators, Charter's internal loan review staff and independent
auditors. The above-referenced policies and procedures have been implemented
on an integrated company-wide basis.
18
<PAGE>
The allocation of Charter's allowance for credit losses by loan category for
the five years ended December 31, 1994, is presented in the following table.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allocation amount:
Commercial, financial and
industrial . . . . . . . . . . $ 231 $ 49 $ 183 $ 609 $ 476
Commercial real estate. . . . . 80 21 462 87 410
Real estate - construction. . . -- -- 4 3 52
Real estate - multi-family. . . 55 64 211 21 110
Real estate - 1-4 family. . . . 17 21 141 95 493
Loans to individuals. . . . . . 3 13 83 94 334
Unallocated allowance . . . . . 4,060 4,448 2,708 2,207 917
------ ------ ------ ------ ------
Total. . . . . . . . . . . . $4,446 $4,616 $3,792 $3,116 $2,792
====== ====== ====== ====== ======
Percent of each loan category to total loans:
Commercial, financial and
industrial . . . . . . . . . . 22% 20% 23% 29% 34%
Commercial real estate. . . . . 12 17 19 19 18
Real estate - construction (1). 26 2 3 4 4
Real estate - multi-family. . . 3 6 8 7 4
Real estate - 1-4 family. . . . 19 35 25 22 18
Loans to individuals. . . . . . 18 20 22 19 22
--- --- --- --- ---
Total. . . . . . . . . . . . 100% 100% 100% 100% 100%
=== === === === ===
<FN>
(1) At December 31, 1994, 23% of total loans are one-to-four family
residential construction loans.
</TABLE>
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets are comprised of loans that are not accruing interest,
restructured loans on which certain concessions have been granted due to the
borrowers' financial condition, and real estate or other assets that have
been acquired in partial or total satisfaction of loan obligations. Assets
totaling $3,812,000, or 0.53% of total assets, were classified as
non-performing assets at year-end 1994, a reduction compared to the prior
level of $4,165,000, or 0.62% of total assets, at year-end 1993. At December
31, 1994, Charter had no loans identified as highly leveraged transactions.
At December 31, 1994, Charter had $5,769,000 of energy-related loans
outstanding. Charter has no loans outstanding to foreign corporations or
governments.
Earnings for the years ended December 31, 1994, 1993 and 1992 would have been
increased by $68,000, $100,000 and $63,000, respectively, if the non-accrual
and restructured loans as of such dates had continued to perform at the terms
originally agreed upon. The corresponding improvement in the per share
earnings performance would have been $0.01 in 1994, $0.02 in 1993 and $0.01
in 1992. The amount of interest payments recorded in interest income for all
such non-performing loans at December 31, 1994 was $27,000. Further reference
is made to Note 6 to the consolidated financial statements beginning on page
40.
19
<PAGE>
NON-INTEREST INCOME
Non-interest income increased 64.7% in 1994 as compared to an increase of
5.2% during 1993. Excluding the effect of securities transactions and
mortgage banking income, non-interest income increased 19.9% in 1994
following a 16.0% increase in 1993. Service charges on deposits, the largest
component of non-interest income, increased by 14.9% to $6,329,000 in 1994 as
compared to an increase of 22.2% 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 $12.9 million, or 8.36% in 1994.
The acquisition of the Fiesta Mart branches in April 1994 and University in
April 1993 contributed to the growth in deposit accounts. At December 31,
1994, non-interest-bearing demand accounts at Fiesta Mart branches and at
University were $3,139,000 and $13,935,000, respectively. Service charges
from Fiesta Mart branches and University deposits included in Charter's
consolidated financial statements for 1994 were approximately $865,000
compared to $496,000 for the same period in 1993.
Mortgage banking income of $4,311,000 for 1994 is entirely attributed to the
acquisition of Charter Mortgage in April 1994. Accordingly, no such
non-interest income was recorded in 1993. Components of mortgage banking
income include loan origination income, fees from the sale of originated
mortgage servicing rights represent premiums received from the sale of
servicing rights on loans originated in 1994. These fees approximated
$1,483,000 since acquisition through December 31, 1994.
Other customer service fees increased $295,000 in 1994 as compared to the
same period in 1993 due to the acquisition of University, which added
$174,000 in such income during 1994 as compared to $71,000 in 1993.
Components of other customer service fees include check printing fees, ATM
settlement fees, research fees and wire transfer fees.
Investment securities gains decreased by $315,000 or 94.0% during 1994.
Trust fees represent revenues earned by services provided to customers of
Charter's Asset Management and Trust Services Department. In 1994 trust fees
increased $196,000 to $779,000, due to an increase in the average assets
under administration. Total assets under administration grew to
approximately $180 million at the end of 1994, compared to $177 million at
the end of 1993.
The components of the "other" category of non-interest income consist of 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
$355,00 or 23.8% in 1994 compared to a $161,000 or 9.7% decrease in 1993.
Fees from components within the "other " category which improved in 1994
included a $221,000 increase in fees generated from letters of credit and
$204,000 increase in discount brokerage fee income. Furthermore, the
acquisition of Fiesta Mart branches and University added approximately
$586,000 in 1994 as compared to $117,000 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 year for the most recent three years:
<TABLE>
YEAR ENDED DECEMBER 31,
1994 1993 1992
----------------------------------------------------
PERCENT PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
------ ------- ------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposits . . $ 6,329 14.9% $5,509 22.2% $4,509 4.4%
Other customer service fees . . 1,076 37.8 781 12.9 692 8.8
Trust fees. . . . . . . . . . . 779 33.6 583 64.2 355 241.3
Investment securities gains
(losses) . . . . . . . . . . . 20 (94.0) 335 (69.5) 1,098 (38.0)
Trading account profits
(losses) . . . . . . . . . . . (33) NM 0 (100.0) (34) (187.2)
Mortgage banking income . . . . 4,311 NM 0 -- 0 0.0
Other. . . . . . . . . . . . . 1,846 23.8 1,491 (9.7) 1,652 27.4
------- ----- ------ ------ ------ ------
Total . . . . . . . . . . . . $14,328 64.7% $8,699 5.2% $8,272 1.3%
======= ===== ====== ====== ====== ======
<FN>
"NM" denotes a comparison that is not meaningful.
</TABLE>
20
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense increased 19.6% in 1994 as compared to a 12.5% increase
in 1993 and a 4.0% increase in 1992. Non -interest expenses from Charter
Mortgage were $4.7 million in 1994. Excluding the impact in expenses from
Charter Mortgage, non-interest expense increased 2.0% during 1994 as compared
to the same period in 1993. The most significant decreases in expenses were
in the categories of amortization of intangibles and 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 $1.5 million primarily due to a declining balance
in ORE. Total ORE, net of the allowance for other real estate, was $1.7
million at December 31, 1994, and $2.2 million at December 31, 1993. 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 $5,315,000, or 45.7% for 1994.
Approximately $477,000 of the increase in salaries and benefits was generated
by the new Fiesta Mart branches and $287,000 by Charter Builders Group, while
the Charter Mortgage acquisition generated an additional $3,366,000.
Excluding the impact of these acquisitions, total salaries and benefits
increased by $804,000, or 6.9% 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 gave rise to increases in several categories of
non-interest expense, including net premises and equipment expense,
advertising and deposit insurance premiums. Expense incurred by University
and reflected on the consolidated financial statements of Charter for 1994 in
each of the preceding categories increased approximately $174,000, $51,000
and $36,000, respectively, over amounts reflected for 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 $486,000, $31,000, $37,000,
$209,000, $150,000 and $381,000, respectively.
The following table sets forth by category the operating expenses and the
percentage change from the prior year for the most recent three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
----------------------------------------------------
PERCENT PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
------ ------ ------ ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits . . . . . $16,945 45.7% $11,630 14.2% $10,186 6.82%
Occupancy expense . . . . . . . 4,749 29.5 3,667 12.9 3,249 1.31
Advertising . . . . . . . . . . 789 40.4 562 21.4 463 33.43
Electronic data processing. . . 1,381 27.2 1,086 38.0 787 (2.36)
Legal expense . . . . . . . . . 1,492 163.6 566 (38.2) 916 (45.70)
ORE losses and carrying costs . 167 (89.9) 1,653 (39.4) 2,728 60.38
Amortization of intangibles. . 424 (79.9) 2,108 372.6 446 0.00
Deposit insurance premiums. . . 1,279 (2.1) 1,306 15.7 1,129 13.24
Stationery and supplies . . . . 737 70.6 432 31.3 329 1.23
Other . . . . . . . . . . . . 3,936 7.6 3,658 5.4 3,471 (7.39)
------- ----- ------- ----- ------ -----
Total . . . . . . . . . . . . $31,899 19.6% $26,668 12.5% $23,704 3.96%
======= ===== ======= ===== ======= =====
</TABLE>
21
<PAGE>
INCOME TAXES
As of December 31, 1994, Charter had utilized all of its tax net operating
loss carryforwards that were generated in prior periods. At December 31,
1994, there were $899,000 net deferred tax assets recorded on the
consolidated balance sheets.
As discussed in Note 1, "Summary of Significant Accounting and Reporting
Policies", SFAS No. 109 was required to be adopted effective as of the
beginning of fiscal year 1993. Management elected to adopt this statement on
a prospective basis, and therefore, prior to 1993 financial statements have
not been restated to apply the provisions of SFAS No. 109.
Management determined that a net deferred tax asset of approximately
$2,950,000 should be recognized as of January 1, 1993. Income earned
subsequent to the application of this statement would be reduced by the
amount of any tax benefit that may have been recognized from the utilization
of deductible temporary differences in those subsequent periods, thereby
initially resulting in an increase in equity of $2,950,000 and a decrease in
future net earnings after taxes. Further reference is made to Note 14 to the
consolidated financial statements on page 44.
On October 1, 1987, Charter purchased from the Federal Deposit Insurance
Corporation ("FDIC") certain assets and insured deposits of a failed Houston
bank, Western Bank-Westheimer ("Western Bank"). Charter paid the FDIC a
premium of $4,055,000. Previously, this premium had been recorded as an
intangible asset and amortized over ten years on a straight-line basis for
financial reporting purposes. Due to uncertainties prior to a 1993 decision
by the U.S. Supreme Court, the amortization of this intangible asset had not
been deducted as a business expense on Charter's tax returns or in its
computations for book federal income tax expenses. Charter engaged the
services of outside valuation experts to assist management in determining the
value and the useful life of this core deposit intangible. The results of
this valuation study were completed in October 1993, and supports
management's conclusion that the original purchase premium of $4,055,000 is
deductible over its determined useful life. The remaining $1.6 million core
deposit intangible associated with this acquisition was fully amortized in
1993 in accordance with the revised estimated useful life established by the
valuation study. A corresponding tax benefit for the entire premium of
$4.055 million, or $1,379,000 after applying a 34% tax rate, was also
recognized in the third quarter of 1993.
ASSET/LIABILITY MANAGEMENT
The primary objective of the asset/liability management process is to
optimize net interest income while prudently managing balance sheet risk.
These risks include liquidity risk, interest rate risk, and maintenance of
capital adequacy. Most management decisions involve a trade-off between risk
elimination and profitability. For example, a certain amount of interest
rate sensitivity in the balance sheet may produce an enhanced level of
earnings. Thus, it is not the objective of the asset/liability management
function to eliminate interest rate risk entirely. Rather, the process
attempts to ensure that the level of risk associated with decisions is fully
understood and reasonable, and that Charter's consolidated level of interest
rate risk is constantly monitored.
Charter's asset/liability committee uses interest rate sensitivity, "gap"
analysis, balance sheet and income statement simulation models, and to a
limited extent, duration analysis to project multiple interest rate scenarios
to measure the potential effects of changes in interest rates and/or
alternative funding and investments on Charter's interest rate sensitivity
profile.
Interest rates increased significantly during 1994 as the Federal Reserve
raised the discount rate from 3.00% on January 1, 1994 to 4.75% by December
31, 1994. In contrast, the level of interest rates had remained relatively
constant in 1993 and 1992. The increasing rate environment allowed Charter's
loans available for repricing to be repriced at higher yields. Since the
related funding sources repriced more slowly, the spread realized between the
yield on loans and the cost of funds widened in 1994. The higher level of
interest rates also lead to reduced prepayments on mortgage-backed securities
and CMOs in Charter's securities portfolio. As prepayments slowed, the
effective yield on these securities increased due to the resulting decline in
premium amortization. An increased level of funding provided through
non-interest-bearing sources also contributed to the increased spread
realized over the cost of funds. Non-interest bearing funding comprised
26.1% of earning assets in 1994 as compared with 24.5% in 1993.
With over 26% of earning assets funded through non-interest bearing sources,
Charter should benefit from a modestly rising rate environment. Moreover, a
significant portion of Charter's funding is derived from lowcost transaction
accounts whose rates are not as responsive to changes in market rates.
22
<PAGE>
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 December 31, 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. Passbook savings accounts and regular
interest-bearing demand accounts with balances at December 31, 1994, of
approximately $34 million and $94 million, respectively, are included in the
91-180 day 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 year-end 1994, the table shows a positive (asset-sensitive) rate
sensitivity gap of $208 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. . . . . . . . . . . . . . . . $255,416 $ 11,924 $ 9,769 $ 18,192 $37,197 $ 11,263 $343,761
Securities . . . . . . . . . . . . . 19,063 13,207 12,816 37,997 55,121 142,110 280,314
Other earning assets . . . . . . . . 28,004 -- -- -- -- -- 28,004
-------- --------- --------- -------- ------- -------- --------
Total Earning Assets. . . . . . . 302,483 25,131 22,585 56,189 92,318 153,373 652,079
-------- --------- --------- -------- ------- -------- --------
Interest-Bearing Liabilities:
Interest-bearing deposits. . . . . . 71,385 142,312 159,638 28,300 31,917 642 434,194
Borrowed funds . . . . . . . . . . . . 23,344 -- -- 200 14,900 10,000 48,444
-------- --------- --------- -------- ------- -------- --------
Total Interest-Bearing Liabilities . 94,729 142,312 159,638 28,500 46,817 10,642 482,638
-------- --------- --------- -------- ------- -------- --------
Asset-Liability Gap . . . . . . . . . $207,754 $(117,181) $(137,053) $ 27,689 $45,501 $142,731 $169,441
Derivatives affecting interest
sensitivity:
Prime Rate Caps Purchased. . . . . . 40,000 -- -- -- -- -- 40,000
Prime Rate Caps Sold . . . . . . . . (40,000) -- -- -- -- -- (40,000)
Libor Floor Purchased. . . . . . . . (30,000) -- -- -- -- -- (30,000)
Interest rate sensitivity gap. . . . . 177,754 (117,181) (137,053) 27,689 45,501 142,731 139,441
Cumulative interest rate
sensitivity gap. . . . . . . . . . . 177,754 60,573 (76,480) (48,791) (3,290) 139,441 --
Cumulative Amounts as a
Percentage of Cumulative
Earning Assets . . . . . . . . . . . 58.76% 18.49% (21.84)% (12.01)% (0.66)% 21.38% --
Cumulative Ratio . . . . . . . . . . . 2.43X 1.23X 0.82X 0.89X 0.99X 1.27X 1.27X
===== ===== ====== ====== ===== ===== ====
</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 single-day depiction of
Charter's rate sensitivity structure, which can be adjusted in response to
changes in forecasted interest rates.
Charter enters into various types of interest rate contracts in managing its
interest rate risk. The notational amounts derivatives do not represent
amounts exchanged by the parties and are not a measure of Charter's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives.
At December 31, 1994, $30 million notional amount Libor rate floor had been
purchased and was outstanding with a final maturity date of May 4, 1999.
This strategy is expected to stabilize net interest income in the event of a
decline in Libor below 4%. Also outstanding at December 31, 1994 were $40
million notional amounts of prime rate caps which had been purchased.
Furthermore, $40 million notional amount in prime rate caps had been sold and
was outstanding. These contracts have a final maturity date of June 21,
1995. This strategy was expected to stabilize net interest income in the
event of changes in the prime lending rate.
23
<PAGE>
SECURITIES
Charter maintained securities portfolio larger than the loan portfolio until
1994. Expansion of the securities portfolios occurred over the last half of
the prior decade for various reasons, including the acquisition of deposits
from other failed institutions in which Charter purchased very few assets and
even fewer loans, a desired increase in liquidity which was orchestrated by
management to address a discouraging regional economic environment that
prevailed during much of the 1980's, and an apparent absence in the supply of
loans that met Charter's underwriting standards during the region's prolonged
economic downturn. Expansion of the investment portfolio coincided with
management's desire to achieve certain balance sheet and interest rate risk
objectives. Charter concentrated on a shift from traditional investment
securities to higher-yielding mortgage-backed securities and CMOs. All of
Charter's holdings in mortgage-backed securities and CMOs are backed by U.S.
Government or federal agency guarantees.
During 1992, certain securities were designated as securities held for sale,
thereby reflecting management's future intent with respect to this group of
securities. This securities portfolio serves a primary role in the
management of the interest-rate sensitivity of the Company and, therefore, is
managed in the context of the overall balance sheet. This portfolio
generates substantial interest income and serves as a necessary reservoir of
liquidity. The decision to purchase securities is based upon the current
assessment of long-term economic and financial conditions, including the
interest rate environment and other balance sheet components. These
conditions can change quickly, considerably and unexpectedly, and as a
result, repositioning of the portfolio may be appropriate.
The tables below set forth the distribution by maturity, yield and fair value
of Charter's securities portfolio at December 31, 1994. The yield has been
computed by relating the forward income stream on the investments, plus or
minus the anticipated accretion of discounts or amortization of premiums, to
the book value of the securities. The tables incorporate the stated maturity
dates of all investment securities, excluding securities not due at a single
maturity date, such as mortgage-backed securities issued by U.S. Government
agencies and corporations ("MBSs") and CMOs.
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN WITHIN FIVE WITHIN TEN AFTER
ONE YEAR YEARS YEARS TEN YEARS TOTAL
-------- ------------- --------------- --------- -------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ -------- ------- ------------- ------ --------------- ------ --------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury . . . . $4,710 5.16% $31,816 5.08% $ -- --% $ -- --% $36,526 5.09%
U.S. Government
agencies . . . . . . 2,075 4.21 8,087 5.06 1,918 7.01 6,965 6.94 19,045 5.85
State and political
subdivisions(1) . . 45 6.16 803 4.63 285 6.09 -- -- 1,133 5.06
Other securities . . . -- -- 255 6.48 25 7.00 -- -- 280 6.53
MBSs(2) . . . . . . . -- -- -- -- -- -- -- -- 56,157 6.09
CMOs(2) . . . . . . . -- -- -- -- -- -- -- -- 55,320 7.21
------ ---- ------- ---- ------ ---- ------ ---- -------- ----
Total. . . . . . . . $6,830 4.88% $40,961 5.08% $2,228 6.90% $6,965 6.94% $168,461 6.21%
====== ==== ======= ==== ====== ==== ====== ==== ======== ====
Fair value . . . . . . $6,741 $38,381 $2,267 $7,111 $160,016
====== ======= ====== ====== ========
<FN>
(1) The yields are not presented on a taxable equivalent basis due to the
immaterial effect on earnings from tax-exempt income.
(2) Based on the actual principal payments experienced over the prior twelve
months, the average lives of the MBSs and CMOs at December 31, 1994
were approximately 5.0 years and 2.3 years, respectively.
</TABLE>
24
<PAGE>
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN WITHIN FIVE WITHIN TEN AFTER
ONE YEAR YEARS YEARS TEN YEARS TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- -------- ------ ------------- ------ --------------- ------ --------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury. . . . $18,254 4.84% $9,379 5.15% $ -- --% $ -- --% $ 27,633 4.95%
Other securities. . . 4,413 6.33 -- -- -- -- 4,534 (6.47) 8,947 (0.16)
MBSs(1) . . . . . . . -- -- -- -- -- -- -- -- 48,604 6.52
CMOs(1) . . . . . . . -- -- -- -- -- -- -- -- 26,669 6.95
------- ---- ------ ---- ------ --- ------ ----- -------- -----
Total . . . . . . . $22,667 5.13% $9,379 5.15% $ -- --% $4,534 (6.47)% $111,853 5.70%
======= ==== ====== ==== ====== === ====== ===== ======== =====
<FN>
(1) Based on the actual principal payments experienced over the prior twelve
months, the average lives of the MBSs and CMOs at December 31, 1994 were
approximately 4.4 years and 2.5 years, respectively.
</TABLE>
DEPOSITS
The deposit base of the Subsidiary Banks continues to be the most important
funding source. The type of deposits held by the Subsidiary Banks on a daily
average basis and the related average rates paid during each of the last
three years are categorized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1993 1992
-------------- -------------- --------------
RATE RATE RATE
AMOUNT PAID AMOUNT PAID AMOUNT PAID
-------- ---- -------- ---- -------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand
deposits. . . . . . . . . . . . . $167,207 -- $154,310 -- $120,936 --
Interest-bearing demand deposits. . 93,001 1.63% 99,608 2.40% 75,591 3.13%
Savings deposits. . . . . . . . . . 37,328 2.42 35,599 2.37 21,325 3.11
Money market savings deposits . . . 109,923 2.91 103,187 2.83 85,579 3.53
Time $100,000 and over. . . . . . . 64,280 4.04 68,192 3.29 89,962 4.53
Time under $100,000 . . . . . . . . 112,557 3.65 117,026 3.45 114,597 4.47
-------- ---- -------- ---- -------- ----
Total average deposits. . . . . . $584,296 2.11% $577,922 2.15% $507,990 3.00%
======== ==== ======== ==== ======== ====
</TABLE>
The scheduled maturity of time deposits $100,000 and over at December 31, 1994,
is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Due in 3 months or less . . . . . . . . . . . . . . . . . $70,064
Due in over 3 through 6 months. . . . . . . . . . . . . . 9,412
Due in over 6 through 12 months . . . . . . . . . . . . . 6,951
Due in over 12 months. . . . . . . . . . . . . . . . . . 7,950
--------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $94,377
========
</TABLE>
Charter has maintained relationships with certain state and political
subdivisions and has acquired appropriate contracts to be depositories for
these public bodies. As of December 31, 1994, Charter had a total of
$64,530,000 in deposits from these sources. This represents approximately
10% of Charter's total deposits on that date.
25
<PAGE>
LIQUIDITY
Like any commercial bank, the liability structure of the 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 December 31, 1994, Charter had $45,163,000 in cash,
$28,004,000 in federal funds sold, $3,000 in time deposits with other
financial institutions, and a $280,314,000 total securities portfolio for
which the market value was $8,445,000 less than the carrying value. The
average loan-to-deposit ratio was 50.2% for 1994, compared to 48.0% for 1993.
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 34 indicates the sources of
these cash flows. In addition to the assets which could be readily converted
to cash (of which no sales or asset securitizations are presently
contemplated), Charter received during 1994 $99,238,000 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 December 31, 1994, Charter had $20,594,000 in securities
sold under agreements to repurchase, all of which were transactions effected
through existing deposit customers, rather than through the national markets.
Back up sources of liquidity may include securities sold under agreements to
repurchase in the national markets, thereby allowing Charter to utilize its
significant holdings of investment securities. Additional liquidity can be
generated through borrowings from the Federal Reserve Bank of Dallas, of
which each of the Subsidiary Banks is a member. Liquidity and matched
funding may also be obtained from the Federal Home Loan Bank of Dallas, of
which Charter-Houston and University are members. At December 31, 1994,
Charter had $13,000,000 in Federal Home Loan Bank advances outstanding.
CAPITAL RESOURCES
Risk-based capital guidelines of the Federal Reserve Board stipulate that
four categories of risk weights (0%, 20%, 50%, and 100%), primarily based on
relative credit risk, be applied to the different types of balance sheet
assets. Risk weights for all off-balance sheet exposures are determined by a
two-step process. First, the notional principal amount, or face value, of
the off-balance sheet item is generally multiplied by a credit conversion
factor to arrive at the balance sheet credit-equivalent amount, and then such
credit equivalent amount is assigned to the appropriate risk category to
determine its risk weight.
Under the Federal Reserve Board's guidelines, Charter's aggregate
risk-weighted assets and off-balance sheet exposures at December 31, 1994 and
1993 were approximately $386,041,000 and $310,464,000, respectively,
calculated as follows:
RISK-WEIGHTED ASSETS
<TABLE>
<CAPTION>
1994 1993
------------------------ ------------------------
AGGREGATE RISK-WEIGHTED AGGREGATE RISK-WEIGHTED
AMOUNT AMOUNT AMOUNT AMOUNT
--------- ------------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities . . . . . . $280,314 $ 42,971 $283,730 $ 37,982
Loans. . . . . . . . . . . . . . 343,761 294,394 290,674 224,687
Other interest-earning assets . . 28,007 5,602 39,619 7,924
Cash and due from banks . . . . . 45,163 5,576 32,745 3,772
All other assets. . . . . . . . . 29,599 29,599 24,944 24,943
-------- -------- -------- --------
Total Adjusted Assets (1) . . . $726,844 378,142 $671,712 299,308
======== -------- ======== --------
Total Credit-Equivalent Amount of
Off-Balance Sheet Items . . . . 7,899 11,181
-------- --------
Total Risk-Weighted Assets. . . $386,041 $310,489
======== ========
<FN>
(1) Total adjusted assets are total assets plus the allowance for credit losses.
</TABLE>
26
<PAGE>
The Federal Reserve Board's guidelines classify capital into two tiers,
referred to as Tier 1 and Tier 2. Tier 1 capital consists of common and
qualifying preferred shareholders' equity less goodwill. Tier 2 capital
consists of mandatory convertible debt, preferred stock not qualifying as
Tier 1 capital, qualifying subordinated debt and the allowance for loan
losses up to 1.25% of risk-weighted assets. At year-end 1994, the minimum
ratio for the sum of Tier 1 and Tier 2 is 8.00%, at least one-half of which
should be in the form of Tier 1 capital. At December 31, 1994 and 1993,
Charter's capital as calculated in accordance with the Federal Reserve
Board's fully phased-in 1992 guidelines was as follows:
RISK-WEIGHTED CAPITAL
<TABLE>
<CAPTION>
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
Core Capital (Tier 1):
Common equity . . . . . . . . . . . . . . . . . . . . $47,721 $45,062
Preferred equity. . . . . . . . . . . . . . . . . . . 710 710
------- -------
Total Core Capital . . . . . . . . . . . . . . . . . 48,431 45,772
------- -------
Supplementary Capital (Tier 2):
Allowance for credit losses . . . . . . . . . . . . . 4,446 3,881
Mandatory convertible debt. . . . . . . . . . . . . . -- 257
Subordinated debt . . . . . . . . . . . . . . . . . . 11,100 9,150
------- -------
Total Supplementary Capital. . . . . . . . . . . . . 15,546 13,288
------- -------
Total Capital . . . . . . . . . . . . . . . . . . . . $63,977 $59,060
======= =======
Core capital (Tier 1) as a percentage
of risk-weighted assets. . . . . . . . . . . . . . . 12.55% 14.78%
Total capital (Tier 1 and Tier 2) as a
percentage of risk-weighted assets . . . . . . . . . 16.57 19.07
Core capital as a percentage of adjusted quarterly
average assets (leverage ratio). . . . . . . . . . . 7.04 6.90
Tangible core capital as a percentage of
quarterly average assets (tangible leverage ratio) . 6.72 6.64
</TABLE>
In addition to its risk-based capital ratios for Tier 1 and Tier 2 capital,
the Federal Reserve Board has issued guidelines establishing a 3% minimum
Tier 1 leverage ratio of capital to total assets. Under the Federal Reserve
Board's guidelines, these standards would be minimum requirements. Any
institution operating at or near these levels would be expected to have
well-diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, would
have to be considered a strong banking organization, rated composite 1 under
the appropriate bank or bank holding company rating system. The Federal
Reserve Board proposal does not delineate a specific minimum leverage ratio
for institutions with higher risk profiles or which are experiencing or
anticipating significant growth; however, the Federal Reserve Board has
indicated that such institutions should maintain capital levels ranging to
200 basis points above the 3% minimum, or 5%.
For purposes of the above-described Tier 1 capital to total assets leverage
ratio, the definition of Tier 1 capital under the risk-based capital
guidelines applies. Total assets consist of quarterly average total
consolidated assets (defined net of any allowance for credit losses), less
goodwill and any other intangible assets or investments in subsidiaries that
the primary regulator determines should be deducted from Tier 1 capital on a
case-by-case basis. At December 31, 1994, Charter had Tier 1 capital of
$48,431,000, and average total consolidated assets (net of allowance for
credit losses) of $687,345,000 for the fourth quarter, 1994. Therefore,
Charter's leverage ratio at December 31, 1994 was 7.04%. While the Federal
Reserve Board has not yet identified the required minimum leverage ratio for
all banking institutions, Charter's ratio nonetheless presently exceeds the
highest proposed minimum leverage ratio of 5%. Further reference is made to
the table on page 2 for a comparison of similar capital ratios for each
Subsidiary Bank.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . 29
Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1993 . . . 30
Consolidated Statements of Earnings - Years Ended December 31,
1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . 31
Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . 32
Consolidated Statements of Cash Flows - Years Ended December 31,
1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . 34
Notes to Consolidated Financial Statements . . . . . . . . . . . . 35
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Charter Bancshares, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Charter
Bancshares, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of earnings, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Charter Bancshares, Inc. and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 14 to the consolidated financial statements,
effective January 1, 1993, Charter Bancshares, Inc. and subsidiaries changed
their method of accounting for income taxes to conform with Statement of
Financial Accounting Standards No. 109. As discussed in Note 1 to the
consolidated financial statements, on January 1, 1994, Charter Bancshares,
Inc. and subsidiaries changed their method of accounting for certain
investments in debt and equity securities to conform with Statement of
Financial Accounting Standards No. 115.
Houston, Texas
February 16, 1995
29
<PAGE>
CHARTER BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks (Note 4) . . . . . . . . . . . $ 45,166 $ 32,748
Federal funds sold and securities purchased under
agreements to resell. . . . . . . . . . . . . . . . . 28,004 39,617
Securities held to maturity (Note 5)(fair value of
$160,016,000 and $141,101,000 at December 31, 1994
and 1993, respectively) . . . . . . . . . . . . . . . 168,461 139,797
Securities available for sale (Note 5) (amortized
cost of $116,636,000 at December 31, 1994 and fair
value of $145,581,000 at December 31, 1993) . . . . . 111,853 143,932
Loans (Note 6) . . . . . . . . . . . . . . . . . . . . 343,761 290,674
Less: Allowance for credit losses (Note 7). . . . . . 4,446 4,616
-------- --------
Loans, net . . . . . . . . . . . . . . . . . . . . . . 339,315 286,058
-------- --------
Premises and equipment (Note 9). . . . . . . . . . . . 14,263 13,006
Accrued interest receivable. . . . . . . . . . . . . . 4,212 3,687
Other real estate, net (Note 8). . . . . . . . . . . . 1,660 2,178
Intangible assets, net . . . . . . . . . . . . . . . . 4,223 2,220
Purchased mortgage servicing rights. . . . . . . . . . 2,371 --
Other assets . . . . . . . . . . . . . . . . . . . . . 2,870 3,853
-------- --------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $722,398 $667,096
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest-bearing demand . . . . . . . . . . . . . $182,686 $173,862
Savings . . . . . . . . . . . . . . . . . . . . . . . 34,077 35,356
Interest-bearing demand . . . . . . . . . . . . . . . 93,753 98,982
Money market savings. . . . . . . . . . . . . . . . . 101,554 107,665
Time $100,000 and over. . . . . . . . . . . . . . . . 94,377 60,182
Time under $100,000 . . . . . . . . . . . . . . . . . 110,433 112,707
-------- --------
Total Deposits. . . . . . . . . . . . . . . . . . . 616,880 588,754
-------- --------
Federal funds purchased and securities sold under
agreements to repurchase (Note 10). . . . . . . . . . 20,594 12,941
Federal Home Loan Bank advances (Note 10). . . . . . . 13,000 --
Accrued interest payable . . . . . . . . . . . . . . . 1,168 979
Other liabilities. . . . . . . . . . . . . . . . . . . 7,018 4,843
Subordinated long-term debt (Note 11). . . . . . . . . 12,750 11,250
Mandatory convertible subordinated debentures
(Note 12) . . . . . . . . . . . . . . . . . . . . . . -- 257
Other long-term debt (Note 11) . . . . . . . . . . . . 2,100 2,300
-------- --------
Total Liabilities. . . . . . . . . . . . . . . . . . . 673,510 621,324
-------- --------
Commitments and contingencies (Notes 3, 9, 11, 16
and 17)
Shareholders' Equity (Notes 12, 13 and 18):
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;
1993 - 44,915 shares) . . . . . . . . . . . . . . . . 47 45
Capital surplus. . . . . . . . . . . . . . . . . . . . 35,609 31,159
Retained earnings . . . . . . . . . . . . . . . . . . 10,459 8,749
Net unrealized (loss) on securities available for
sale (Note 5) . . . . . . . . . . . . . . . . . . . . (3,352) --
Treasury stock at cost (1994 - 170,275 shares common
and 3 shares preferred; 1993 - 161,529 shares common
and 3 shares preferred) . . . . . . . . . . . . . . . (738) (733)
-------- --------
Total Shareholders' Equity . . . . . . . . . . . . . 48,888 45,772
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . . . . . $722,398 $667,096
======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
30
<PAGE>
CHARTER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest Income:
Loans, including fees . . . . . . . . . . . $25,875 $22,303 $19,080
Investment securities . . . . . . . . . . . 16,647 16,154 19,637
Federal funds sold. . . . . . . . . . . . . 1,112 620 1,104
Other earning assets. . . . . . . . . . . . 222 150 251
------- ------- -------
Total Interest Income. . . . . . . . . . . 43,856 39,227 40,072
------- ------- -------
Interest Expense:
Deposits:
Interest-bearing demand. . . . . . . . . . 1,515 2,387 2,366
Savings. . . . . . . . . . . . . . . . . . 905 842 663
Money market savings . . . . . . . . . . . 3,195 2,922 3,022
Time $100,000 and over . . . . . . . . . . 2,599 2,246 4,078
Time under $100,000. . . . . . . . . . . . 4,105 4,039 5,122
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . 503 368 438
Federal funds purchased and
Federal Home Loan Bank Advances. . . . . . 610 -- --
Long-term debt. . . . . . . . . . . . . . . 1,173 982 705
------- ------- -------
Total Interest Expense . . . . . . . . . . 14,605 13,786 16,394
------- ------- -------
Net interest income. . . . . . . . . . . . . 29,251 25,441 23,678
Provision for credit losses (Note 7) . . . . 233 911 1,465
------- ------- -------
Net Interest Income After Provision for
Credit Losses. . . . . . . . . . . . . . . 29,018 24,530 22,213
------- ------- -------
Non-Interest Income:
Service charges on deposit accounts . . . . 6,329 5,509 4,509
Other customer service fees . . . . . . . . 1,076 781 692
Trust fees. . . . . . . . . . . . . . . . . 779 583 355
Trading account (losses). . . . . . . . . . (33) -- (34)
Securities gains. . . . . . . . . . . . . . 20 335 1,098
Mortgage banking income (Note 1). . . . . . 4,311 -- --
Other . . . . . . . . . . . . . . . . . . . 1,846 1,491 1,652
------- ------- -------
Total Non-Interest Income. . . . . . . . . 14,328 8,699 8,272
------- ------- -------
Non-Interest Expense:
Salaries and employee benefits. . . . . . . 16,945 11,630 10,186
Net premises and equipment expense. . . . . 4,749 3,667 3,249
Advertising . . . . . . . . . . . . . . . . 789 562 463
Data processing . . . . . . . . . . . . . . 1,381 1,086 787
Legal expense (Note 17) . . . . . . . . . . 1,492 566 916
Losses and carrying costs of other real
estate (Note 8). . . . . . . . . . . . . . 167 1,653 2,728
Deposit insurance premiums. . . . . . . . . 1,279 1,306 1,129
Amortization of intangibles . . . . . . . . 424 2,108 446
Stationery and supplies . . . . . . . . . . 737 432 329
Other . . . . . . . . . . . . . . . . . . . 3,936 3,658 3,471
------- ------- -------
Total Non-Interest Expense . . . . . . . . 31,899 26,668 23,704
------- ------- -------
Earnings before income taxes . . . . . . . . 11,447 6,561 6,781
Income tax expense (Note 14). . . . . . . . 3,761 1,305 136
------- ------- -------
Earnings before effect of change in
accounting principle. . . . . . . . . . . . 7,686 5,256 6,645
Cumulative effect of a change in accounting
for income taxes (Note 14) . . . . . . . . -- 2,950 --
------- ------- -------
NET EARNINGS . . . . . . . . . . . . . . . $ 7,686 $ 8,206 $ 6,645
======= ======= =======
Earnings per Common Share (Note 20):
Primary earnings before a change in
accounting principle . . . . . . . . . . . $1.27 $0.86 $1.17
Fully diluted earnings before change in
accounting principle . . . . . . . . . . . 1.27 0.86 1.10
Cumulative effect of change in accounting
for income taxes. . . . . . . . . . . . . -- 0.49 --
Primary . . . . . . . . . . . . . . . . . . 1.27 1.35 1.17
Fully diluted . . . . . . . . . . . . . . . 1.27 1.35 1.10
------- ------- -------
Weighted Average Shares Outstanding:
Primary . . . . . . . . . . . . . . . . . . 6,025,389 6,011,283 5,476,604
Fully diluted . . . . . . . . . . . . . . . 6,029,637 6,029,514 5,996,214
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
31
<PAGE>
CHARTER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Preferred stock ($50.00 par value)
Balance at beginning of year. . . . . . . . . $ 710 $ 710 $ 710
------- ------- -------
Balance at end of year (14,204 shares
issued and 14,201 shares outstanding) . . . 710 710 710
------- ------- -------
Series B preferred stock ($50.00 par value)
Balance at beginning of year. . . . . . . . . -- -- 2,067
Conversion of preferred stock into common
stock and series C special common stock. . . -- -- (2,067)
------- ------- -------
Balance at end of year . . . . . . . . . . . -- -- --
------- ------- -------
Common stock ($1.00 par value)
Balance at beginning of year. . . . . . . . . 5,643 5,374 4,496
Stock dividend (282,769 shares in 1994;
268,472 shares in 1993; and 224,589 shares
in 1992) . . . . . . . . . . . . . . . . . . 283 269 225
Conversion of preferred stock (652,919
shares in 1992). . . . . . . . . . . . . . . -- -- 653
Conversion of debentures (18,040 shares in
1994 and 123 shares in 1993) . . . . . . . . 18 -- --
------- ------- -------
Balance at end of year (5,943,491 shares
issued and 5,773,216 shares outstanding). . 5,944 5,643 5,374
------- ------- -------
Class B special common stock ($1.00 par value)
Balance at beginning of year. . . . . . . . . 199 190 181
Conversion of debentures (19 shares in 1994)
Stock dividend (9,960 shares in 1994, 9,484
shares in 1993 and 9,030 shares in 1992). . 10 9 9
------- ------- -------
Balance at end of year (209,261 shares
issued and outstanding) . . . . . . . . . . 209 199 190
------- ------- -------
Series C special common stock ($1.00 par value)
Balance at beginning of year. . . . . . . . . 45 43 20
Stock dividend - common stock (2,245 shares
in 1994, 2,138 shares in 1993 and 1,023
shares in 1992). . . . . . . . . . . . . . . 2 2 1
Conversion of preferred stock (21,294 shares
in 1992) . . . . . . . . . . . . . . . . . . -- -- 22
------- ------- -------
Balance at end of year (47,160 shares
issued and outstanding) . . . . . . . . . . 47 45 43
------- ------- -------
Capital surplus
Balance at beginning of year. . . . . . . . . 31,159 27,726 24,601
Conversion of debentures. . . . . . . . . . . 247 2 --
Conversion of preferred stock . . . . . . . . -- -- 1,392
Stock dividend - common stock . . . . . . . . 4,203 3,431 1,733
------- ------- -------
Balance at end of year . . . . . . . . . . . 35,609 31,159 27,726
------- ------- -------
Retained earnings
Balance at beginning of year. . . . . . . . . 8,749 5,326 2,708
Cash dividends - preferred stock. . . . . . . (57) (57) (2,060)
Cash dividend - common stock. . . . . . . . . (1,421) (1,015) --
Stock dividend - common stock . . . . . . . . (4,498) (3,711) (1,967)
Net earnings. . . . . . . . . . . . . . . . . 7,686 8,206 6,645
------- ------- -------
Balance at end of year . . . . . . . . . . . 10,459 8,749 5,326
------- ------- -------
Unrealized (loss) on securities available
for sale. . . . . . . . . . . . . . . . . . . (3,352) -- --
------- ------- -------
Treasury stock
Balance at beginning of period. . . . . . . . (733) (733) (577)
Treasury stock acquired through conversion
of debentures (639 shares in 1994) . . . . . (5) -- --
Treasury stock acquired (27,431 shares of
common in 1992 and 3 shares of preferred
in 1992) . . . . . . . . . . . . . . . . . . -- -- (156)
------- ------- -------
Balance at end of period (170,275 shares
common and 3 shares preferred). . . . . . . (738) (733) (733)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY (NOTES 12 AND 13) . $48,888 $45,772 $38,636
======= ======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
32
<PAGE>
CHARTER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . $ 7,686 $ 8,206 $ 6,645
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Depreciation and amortization. . . . . . . . 2,399 1,478 1,392
Amortization of intangibles. . . . . . . . . 424 2,108 446
Net amortization of premiums and
discounts on securities . . . . . . . . . . 1,996 4,107 2,183
Provision for credit losses. . . . . . . . . 233 911 1,465
Provision for other real estate losses . . . 16 1,463 2,228
Net gain on sales of securities. . . . . . . (43) (455) (1,200)
Origination of loans available for sale. . . (171,669) -- --
Proceeds from sales of loans available
for sale. . . . . . . . . . . . . . . . . . 155,454 -- --
Net gain on sale of loans. . . . . . . . . . (1,423) -- --
Net (gain) loss on sales of fixed assets,
other real estate and collateral acquired . (91) (12) 87
Net decrease in other assets and interest
receivable. . . . . . . . . . . . . . . . . 1,685 361 1,233
Net increase (decrease) in other liabilities
and interest payable. . . . . . . . . . . . 1,908 (354) (969)
Net (increase) decrease in deferred tax
asset . . . . . . . . . . . . . . . . . . . 230 (1,129) --
Other . . . . . . . . . . . . . . . . . . . 281 195 (38)
--------- --------- ---------
Total Adjustments. . . . . . . . . . . . (8,600) 8,673 6,827
--------- --------- ---------
Net Cash Provided by (Used In) Operating
Activities. . . . . . . . . . . . . . . (914) 16,879 13,472
--------- --------- ---------
Cash flows from investing activities:
Net decrease in interest-bearing deposits. . -- 754 1,981
Proceeds from sales of securities (Note 5) . 8,026 25,629 34,979
Proceeds from maturities and prepayments
of securities. . . . . . . . . . . . . . . 99,238 143,050 137,137
Purchase of securities . . . . . . . . . . . (110,664) (159,144) (179,639)
Net increase (decrease) in loans . . . . . . 40,108 (12,505) (16,264)
Purchase of loans held to maturity . . . . . (75,537) -- --
Capital expenditures, net. . . . . . . . . . (3,067) (1,272) (580)
Proceeds from sales of other real estate . . 524 1,167 529
Purchase of mortgage servicing rights. . . . (1,032) -- --
Purchase of mortgage company . . . . . . . . (3,371) -- --
Purchase of banking organization, net of
acquired cash and cash equivalents. . . . . 19,317 4,433 --
--------- --------- ---------
Net Cash Provided by (Used in)
Investing Activities . . . . . . . . . . . . (26,458) 2,112 (21,857)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in non-interest-
bearing demand, savings, interest-bearing
demand and money market accounts. . . . . . (17,490) 6,210 62,472
Net increase (decrease) in certificates
of deposit. . . . . . . . . . . . . . . . . 24,826 (31,631) (35,930)
Net increase (decrease) in securities
sold under agreements to repurchase . . . . 7,653 (7,778) 11,408
Net increase in Federal Home Loan
Bank Advances . . . . . . . . . . . . . . . 13,000 -- --
Payment of preferred dividends . . . . . . . (57) (57) (2,060)
Payment of common dividends. . . . . . . . . (1,055) (1,015) --
Repayment of long-term debt. . . . . . . . . (1,200) (1,461) (246)
Increase in long-term debt . . . . . . . . . 2,500 7,500 --
--------- --------- ---------
Net Cash Provided by (Used in)
Financing Activities . . . . . . . . . . . 28,177 (28,232) 35,644
--------- --------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents. . . . . . . . . . . . . . . 805 (9,241) 27,259
--------- --------- ---------
Cash and Cash Equivalents at Beginning
of Period . . . . . . . . . . . . . . . . . . 72,362 81,603 54,344
--------- --------- ---------
Cash and Cash Equivalents at End
of Period (Note 1). . . . . . . . . . . . . . $ 73,167 $ 72,362 $ 81,603
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . $ 14,414 $ 13,925 $ 17,171
Income taxes paid . . . . . . . . . . . . . . 800 1,305 264
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Other real estate and collateral acquired . . $ 386 $ 1,068 $ 536
Loans made to finance sales of other
real estate. . . . . . . . . . . . . . . . . 201 448 833
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
33
<PAGE>
CHARTER BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accounting and reporting policies of Charter Bancshares, Inc. ("Charter"
or "Company") and subsidiaries conform to generally accepted accounting
principles and general practices within the banking industry. A summary of
significant accounting policies is as follows:
CONSOLIDATION: The consolidated financial statements include the accounts
of Charter and its subsidiaries, after elimination of significant
intercompany balances and transactions.
SECURITIES AND TRADING ACCOUNT ASSETS: Charter reviews its financial
position, liquidity and future plans in evaluating the criteria for
classifying securities. Generally, securities are classified between held to
maturity, available for sale and trading at the time the securities are
purchased. Securities held to maturity are stated at cost, increased by
accretion of discounts and reduced by amortization of premiums. The
adjusted cost of specific securities sold is used to compute gains or losses
on securities transactions. Trading account securities are carried at market
value with gains and losses, both realized and unrealized, being included in
non-interest income. Effective September 30, 1992, certain securities were
designated as securities held for sale, thereby reflecting management's
future intent with respect to this group of securities. Securities
identified as held for sale are separately classified, and are valued at the
lower of cost or market. Market values of securities are estimated based on
available market quotations. In the few instances when market quotations
are unavailable, the securities are stated at cost or appraised values as
deemed appropriate by management.
On January 1, 1994, Charter adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," effective for fiscal years beginning after December 15,
1993. 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 beginning in 1994. Unrealized holding gains and losses on securities
classified as trading are reported in earnings. Effective January 1, 1994,
certain securities were designated as available for sale, thereby replacing
the category of securities designated as held for sale in prior periods.
Presently, the Company classifies $111,853,000 of its debt securities as
available for sale and carries them at fair value. Application of the new
rules resulted in an estimated increase of approximately $860,000 in
shareholders' equity as of January 1, 1994, representing the recognition in
shareholders' equity of unrealized gains, net of taxes, for the Company's
investment in debt and equity securities determined to be available for sale.
LOANS: Loans are stated at the principal amount outstanding, net of
unearned discount. The unearned discount relates principally to consumer
installment loans. The related interest income for multi-payment loans is
recognized principally by the "sum of the digits" method which records
interest in proportion to the declining outstanding balances of the loans;
for single payment loans such income is recognized under the straight-line
method. Both methods approximate the interest method.
Mortgage warehouse loans available for sale are carried at the lower of book
value or market value as determined by commitments from investors or current
investor yield requirements calculated on an aggregate loan basis. Net
unrealized losses, if any, are recognized in a valuation allowance by a
charge to current operations.
Premiums and discounts on mortgage warehouse loans available for sale are
not recognized in income until the related loans are sold. Premiums and
discounts associated with Charter's other loans for which the collection is
probable and estimable are recognized in income using the level-yield method
over the loans' remaining lives (adjusted for anticipated prepayments) or
when such loans are sold.
Loan fees on mortgage warehouse loans available for sale, net of certain
direct loan origination costs, are not recognized in income until the
related loans are sold. Loan fees on other loans, net of certain direct
origination costs, are deferred and recognized in income, using the
level-yield method over the loans' remaining lives (adjusted for anticipated
prepayments) or until such loans are sold.
34
<PAGE>
SALES OF SINGLE FAMILY LOANS AND SERVICING RIGHTS: From time to time,
Charter sells loans to institutional and private investors. Gains or losses
on loan sales, recognized at the time of sale, are determined on the specific
identification method and reflect the extent that net sales proceeds differ
from the book value of the loans. Certain of the loans and servicing rights
are sold with general representations and warranties under contracts for
sales of loans and servicing rights. Repurchases of the loans and servicing
rights may be required when a loan fails to meet certain conditions
specified in the contract pursuant to which the loans and servicing rights
were sold and that failure was caused by a matter covered by the general
representations and warranties. Charter determines an accrual for the
estimated future costs of its obligations, which is included in other
liabilities on the consolidated statement of financial condition and
maintained at levels management believes are adequate to cover estimated
losses. The related expense is reflected in non-interest expense in the
consolidated statement of operations.
From time to time, Charter sells its rights to service single family loans
that it originates. The sale of the servicing rights is recognized upon
execution of a contract, receipt of an adequate downpayment, and the transfer
of the related risks and rewards of ownership to the purchaser.
ALLOWANCE FOR CREDIT LOSSES: The allowance for credit losses is a valuation
allowance available for losses incurred on loans. All losses are charged to
the allowance for credit losses when the loss actually occurs or when a
determination is made that a loss is likely to occur. Recoveries are
credited to the allowance at the time of recovery.
Prior to the beginning of each year and at least quarterly during the year,
management estimates the likely level of future losses to determine whether
the allowance for credit losses is adequate to absorb anticipated losses in
the existing portfolio. Based on these estimates, an amount is charged to
the provision for credit losses and credited to the allowance for credit
losses in order to adjust the allowance to a level estimated to be adequate
to absorb future losses.
Management's judgment as to the level of future losses on existing credits
involves the consideration of current and anticipated economic conditions
and their potential effects on specific borrowers; an evaluation of the
existing relationships among credits with potential losses; the present
level of the allowance; historical loan loss and recovery experience; results
of examinations of the loan portfolio by regulatory agencies; and
management's internal review of the loan portfolio. In determining the
collectibility of certain loans, management also considers the fair value of
any underlying collateral.
It should be understood that estimates of future credit losses involve an
exercise of judgment. While it is possible that in particular periods
Charter may sustain losses which are substantial relative to the allowance
for credit losses, it is the judgment of management that the allowance for
credit losses reflected in the consolidated balance sheets is adequate to
absorb anticipated losses in the existing loan portfolio.
NON-PERFORMING ASSETS: Included in the non-performing asset category are
(i) loans which have been categorized by management as non-accrual because
collection of interest and/or principal is doubtful, (ii) loans which have
been restructured to provide a reduction in the interest rate or a deferral
of interest or principal payments, and (iii) other assets which consist of
real estate and other property that have been acquired in lieu of loan
balances due, which are awaiting disposition.
When the payment of principal or interest on a loan is delinquent for 90
days, or earlier in some cases, the loan is placed on non-accrual status,
unless the loan is in the process of collection and the underlying collateral
fully supports the carrying value of the loan. If the decision is made to
continue accruing interest on the loan, periodic reviews are made to confirm
the basis for the accruing status of the loan. When a loan is put on
non-accrual status, interest accrued during the current year and prior to the
loan being put on non-accrual status is charged to operations. Interest
accrued during prior periods, and deemed uncollectible, is charged to the
allowance for credit losses. Generally, any payments received on non-accrual
loans are applied first to outstanding loan amounts and next to the recovery
of charged off loan amounts. Any excess is treated as a recovery of lost
interest.
Charter records other real estate acquired by foreclosure at the lesser of
the outstanding loan amount or fair value less estimated costs to sell at
the time of foreclosure. Required developmental costs associated with
foreclosed property under construction are capitalized and considered in
determining the fair value of the property. If at a later date it is
determined that the fair value less estimated costs to sell of the asset is
less than the total capitalized cost, the additional loss is recognized by a
credit to the allowance for other real estate losses.
In 1993, the Financial Accounting Standards Board ( FASB ) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." In October 1994,
the FASB issued SFAS No. 118, Accounting by Creditors for Impairment of a
Loans Income Recognition and Disclosures, which amended income recognition
methods and certain disclosures required by SFAS 114. These statements
address the accounting by creditors for impairment of certain loans and
require that impaired loans generally be measured based on the present value
of expected future cash flows discounted at the loan's effective rate. These
statements became effective January 1, 1995. Management believes that the
adoption of the statements will not significantly impact the Company's
financial statements.
35
<PAGE>
PREMISES AND EQUIPMENT: Premises and equipment are
stated at cost, less accumulated depreciation and amortization. Depreciation
and amortization are charged to operations at rates based upon the
straight-line method over the estimated useful lives of the underlying
assets.
INCOME TAXES: In February 1992, the FASB issued SFAS No. 109, "Accounting
for Income Taxes" (Note 14). This new standard provides for a deferred tax
asset to be recognized for the estimated future tax effects attributable to
temporary differences and carryforwards. SFAS No. 109 was adopted as of
January 1, 1993, and accordingly, a deferred tax asset was recognized as of
January 1, 1993. The cumulative effect of initially applying this statement
is reported as the effect of a change in accounting principle.
Prior to January 1, 1993, Charter applied the provisions of SFAS No. 96.
Under SFAS Nos. 109 and 96 there are two components of income tax provision,
current and deferred. Current income tax provisions approximate taxes to be
paid or refunded for the applicable period. The balance sheet amounts of
deferred tax assets or liabilities are recognized based upon the temporary
differences between the basis of assets and liabilities as measured by tax
laws and their basis as reported on the financial statements. Deferred tax
expense or benefit is then recognized for the change in deferred tax
liabilities or assets between periods.
INTEREST RATE CONTRACTS: Interest rate swap agreements, forward and futures
contracts, options and cap, collar and floor agreements are used for trading
purposes and are used to manage interest rate exposure by hedging certain
assets and liabilities. Contracts used in trading activities are carried at
market value, and gains and losses are recognized currently in income. For
contracts used to manage interest rate risk, income and expense are accrued
based upon expected settlement payments, and are recorded as an adjustment
to interest income and expense.
INTANGIBLES ARISING FROM ACQUISITIONS: Because of the earning power or
other special values of certain purchased companies or businesses, the
company paid amounts in excess of fair value for tangible assets acquired.
Generally, such amounts are being amortized by systematic charges to income
(primarily for periods from 6 to 15 years) over a period no greater than the
estimated remaining life of the assets acquired or not exceeding the
estimated average remaining life of the existing deposit base assumed, which
conforms with the method used for income tax purposes.
PURCHASED MORTGAGE SERVICING RIGHTS: The acquisition of Charter Mortgage
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 $1.7
million. During the third quarter of 1994, Charter purchased the servicing
rights on approximately $57 million in loans for approximately $700,000.
These PMSR's are includable in regulatory tangible capital. PMSRs are
amortized in proportion to, and over the period of, the estimated net
servicing revenue of the underlying mortgages, which are collaterized by
both single and multi-family properties. Charter periodically evaluates the
carrying value of PMSRs for impairment, on a disaggregated basis. This
evaluation included discounting the estimated future net servicing revenue of
the servicing portfolio at an appropriate long-term discount rate. The
evaluation incorporates prepayment, default and certain interest rate
assumptions. Impairment losses are charged to operations as incurred.
EARNINGS PER COMMON SHARE: Earnings per common share are based on the
average number of shares of Common, Class B Special Common and Series C
Special Common Stock outstanding during the year after deducting from net
earnings the current period preferred dividends only, excluding accumulated
and unpaid dividends and interest on preferred stock from any prior periods.
All per share figures have been adjusted for the 5% stock dividends paid on
August 10, 1992, September 30, 1993 and October 31, 1994.
RECLASSIFICATION OF PRIOR YEAR AMOUNTS: Certain amounts have been
reclassified in the accompanying consolidated financial statements from
those previously reported for the years ended December 31, 1993 and 1992 to
conform to current year financial statement classifications.
STATEMENTS OF CASH FLOWS: Cash equivalents include amounts due from banks
and federal funds sold and securities sold under agreements to resell.
Generally, federal funds and securities sold under agreements to resell are
purchased and sold for one-day periods.
36
<PAGE>
NOTE 2 - ACQUISITIONS
On April 20, 1993, Charter consummated the acquisition of University National
Bank-Galveston, Galveston, Texas ("University"). This acquisition has been
accounted for under the purchase method of accounting. At April 20, 1993,
University had total assets of $96.3 million, total deposits of $88.7
million, and total loans of $41.7 million.
University was acquired for cash consideration of approximately $9.4 million,
or $50.00 per share of outstanding capital stock of University. A portion of
the purchase price was financed by Charter's issuance of a $7.5 million
subordinated debenture to a bank holding company. The subordinated debenture
matures April 2005 and bears interest at 7.2% per annum, payable
semiannually. A portion of the proceeds from such subordinated debt was used
to retire an outstanding bank loan with a principal balance of $1,361,000,
which loan was secured by all of the capital stock of Charter National
Bank-Colonial and 30% of the capital stock of Charter National Bank-Houston
("Charter-Houston"). All of such stock was released upon retirement of the
loan.
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. The 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 ("Charter Mortgage"). Charter Mortgage is a
90-percent owned subsidiary of 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 December 31,
1994 was 8.5%) Additional fees may be earned on construction loans in the
form of origination fees, inspection fees, appraisal fees and extension fees.
The purchased premises and equipment 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 the acquisition of Charter Mortgage nor Farm and Home's construction
lending operations has 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 June 24, 1994, Charter agreed to acquire Houston-based West Loop Savings
and Loan Association ("West Loop") pending shareholder and regulatory
approval. At December 31, 1994, West Loop had total loans of $91,139,000
total deposits of $103,793,000 and total assets of $140,301,000. Following
receipt of the requisite shareholder and regulatory approvals the acquisition
was closed on January 10, 1995, after which West Loop's charter was converted
to a Texas state savings bank with the name Charter Bank, SSB.
Each of the above acquisitions have been accounted for under the purchase
method of accounting with cash as the sole form of consideration given. These
acquisitions combined for a total increase in goodwill of $2,303,000, which
is being amortized straight line over fifteen years.
37
<PAGE>
The Charter Mortgage, Fiesta Mart and Farm and Home acquisitions would have
an immaterial affect on the financial statements of Charter for the period
ending December 31, 1994, therefore no pro forma financial data is provided
herein. Pro forma financial statements assuming the acquisition of West Loop
was effective January 1, 1994 are presented as follows:
PRO FORMA CONDENSED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------
CHARTER WEST LOOP ADJUSTMENTS PRO FORMA
--------- --------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees. . . . . . . $25,875 $11,799 $(1,160) $36,514
Investment securities. . . . . . . 16,647 2,130 18,777
Other interest income. . . . . . . 1,334 403 1,737
------- ------- ------- -------
Total Interest Income . . . . . . 43,856 14,332 (1,160) 57,028
------- ------- ------- -------
Interest Expense:
Deposits . . . . . . . . . . . . . 12,319 4,650 16,969
Other interest expense . . . . . . 1,113 1,113
Long-term debt . . . . . . . . . . 1,173 1,242 2,415
------- ------- ------- -------
Total Interest Expense. . . . . . 14,605 5,892 20,497
------- ------- ------- -------
Net interest income . . . . . . . . 29,251 8,440 (1,160) 36,531
Provisions for credit loses . . . . 233 (98) 140 275
------- ------- ------- -------
Net Interest Income After
Provision for Credit Loss . . . . 29,018 8,538 (1,300) 36,256
------- ------- ------- -------
Non-Interest Income:
Service charges on deposit
accounts. . . . . . . . . . . . . 6,329 26 6,355
Mortgage banking income. . . . . . 4,311 4,311
Fees and other . . . . . . . . . . 3,668 139 3,807
Securities gains (losses). . . . . 20 20
------- ------- ------- -------
Total Non-Interest Income . . . . 14,328 165 14,493
------- ------- ------- -------
Non-Interest Expense:
Salaries and employee benefits . . 16,945 1,535 18,480
Occupancy expense. . . . . . . . . 4,749 516 5,265
Data processing. . . . . . . . . . 1,381 113 1,494
Legal expense. . . . . . . . . . . 1,492 122 1,614
Deposit insurance premiums . . . . 1,279 292 1,571
Amortization of intangibles. . . . 424 45 469
Other . . . . . . . . . . . . . . 5,629 1,175 6,804
------- ------- ------- -------
Total Non-Interest Expense. . . . 31,899 3,798 35,697
------- ------- ------- -------
Earnings before income taxes. . . . 11,447 4,905 (1,300) 15,052
Income tax expense . . . . . . . . 3,761 1,677 (400) 5,038
------- ------- ------- -------
Net Earnings. . . . . . . . . . . $ 7,686 $ 3,228 $ (900) $10,014
======= ======= ======= =======
Earnings per Common Share:
Primary. . . . . . . . . . . . . . $ 1.27 $ 0.54 $ (.15) $ 1.66
Fully diluted. . . . . . . . . . . $ 1.27 $ 0.54 $ (.15) $ 1.66
Weighted Average Shares Outstanding:
Primary. . . . . . . . . . . . . . 6,025,389 6,025,389 6,025,389 6,025,389
Fully diluted. . . . . . . . . . . 6,029,637 6,029,637 6,029,637 6,029,637
========= ========= ========= =========
</TABLE>
38
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------
CHARTER WEST LOOP ADJUSTMENTS PRO FORMA
-------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and short-term investments. . . $ 73,170 $ 17,202 $(11,000) $ 79,372
Securities . . . . . . . . . . . . . 280,314 34,960 (2,650) 312,624
Loans . . . . . . . . . . . . . . . 343,761 86,580 148 430,489
Less: Allowance for credit
losses. . . . . . . . . . . . . . . 4,446 659 5,105
-------- -------- -------- --------
Loans, net. . . . . . . . . . . . . 339,315 85,921 148 425,384
Other assets. . . . . . . . . . . . 29,599 2,218 200 32,017
-------- -------- -------- --------
Total Assets . . . . . . . . . . . . 722,398 140,301 (13,302) 849,397
======== ======== ======== ========
Liabilities and Shareholders' Equity:
Liabilities:
Deposits:
Non-interest-bearing deposits. . . . 182,686 2,745 185,431
Interest-bearing deposits. . . . . . 434,194 101,048 (500) 534,742
-------- -------- -------- --------
Total Deposits. . . . . . . . . . . . 616,880 103,793 (500) 720,173
-------- -------- -------- --------
Securities sold under agreement
to repurchase . . . . . . . . . . . . 20,594 -- 20,594
Federal Home loan Bank advances. . . . 13,000 24,698 (1,800) 35,898
Long-term debt and debentures. . . . . 14,850 -- 14,850
Other liabilities. . . . . . . . . . . 8,186 808 8,994
-------- -------- -------- --------
Total Liabilities . . . . . . . . . . 673,510 129,299 (2,300) 800,509
-------- -------- -------- --------
Total Shareholders' Equity . . . . . . 48,888 11,002 (11,002) 48,888
-------- -------- -------- --------
Total Liabilities and
Shareholders' Equity . . . . . . . . $722,398 $140,301 $(13,302) $849,397
======== ======== ======== ========
</TABLE>
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
NOTE A - CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments include cash, due from banks, federal funds
sold, securities purchased under agreements to resell and short-term
interest-bearing deposits in financial institutions. Pro forma cash and due
from banks were $45,425,000 at December 31, 1994. Pro forma federal funds
sold, securities purchased under agreement to resell and short-term
interest-bearing deposits in financial institutions were $44,947,000 at
December 31, 1994. The adjustments to this category include the estimated
cash purchase price at December 31, 1994.
NOTE B - SECURITIES
Securities include investments held to maturity of $203,421,000 and
securities available for sale of $111,853,000 at December 31, 1994. The
adjustment of $2,650,000 represents the purchase accounting adjustment
allocated to securities to reflect their estimated fair value as of December
31, 1994.
NOTE C - OTHER ASSETS
Included within the category of other assets are intangible assets. The
purchase accounting adjustments result in an intangible asset, goodwill and
core deposit intangibles, of approximately $200,000. It is anticipated that
this intangible asset will be amortized on a straight line basis over ten to
fifteen years.
NOTE D - FEDERAL HOME LOAN BANK ADVANCES
FHLB provides advances as a source of funds to each of its members. These
advances are collateralized by a pledge of certain assets, such as
residential mortgage loans. $15 million of the FHLB advances assumed by
Charter Bank, SSB from West Loop S&L which were fixed at rates below current
borrowing rates of similar instruments available in the marketplace. The
$1.8 million adjustment represents the purchase accounting adjustment
allocated to these FHLB advances to reflect their estimated fair value as of
December 31, 1994.
39
<PAGE>
NOTE E - LOANS AND DEPOSITS
The pro forma adjustments in the pro forma financial information include
current information available to management. Purchase accounting
adjustments have been estimated for loans and deposits. Currently, adequate
information is not available to management to fully evaluate the relative
fair value of these financial instruments. The adjustments indicated on the
pro forma balance sheet reflect the impact of rising interest rates on fixed
rate loans and deposits.
NOTE F - OTHER ADJUSTMENTS TO PRO FORMA STATEMENTS OF EARNINGS
Pro forma adjustments related to the pro forma condensed statements of
earnings have been computed assuming the acquisition was consummated as of
January 1, 1994. Included in the historical financial information of West
Loop, in the opinion of Charter's management, are estimates for
non-recurring revenues and reduced provisions for credit losses. The
non-recurring revenues include gains on sales of loans and the accretion of
unearned discount recognized on prepaid loans.
NOTE 3 - REGULATORY MATTERS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") contains important provisions affecting all federally insured
financial institutions ("banking organizations") in such areas as anti-fraud
and anti-abuse enforcement powers, performance and record in meeting
community credit needs, and acquisitions of savings and loan institutions.
Effective January 1, 1990, the phase-in of the risk-based capital guidelines
which were originally adopted in 1989 commenced. Moreover, during 1990 the
Federal Reserve Board provided some additional guidance on application of the
leverage ratio of minimum capital to total assets which had been proposed in
1989. For further discussion of these capital requirements, reference should
be made to the "Capital Resources" presentation beginning on page 28 of this
report; in addition, information relating to Charter's risk-based and
leverage ratios is incorporated herein as a part of this note. Another
regulatory development affecting banking organizations was the imposition by
the FDIC of increased deposit insurance premiums. In 1990, those premiums
increased from 8.3 cents per $100 of insured deposits to 12 cents per $100 of
insured deposits. Deposit insurance premiums were increased twice during
1991, from 12 cents to 19.5 cents per $100 of insured deposits, then to 23
cents per $100 of insured deposits.
During December 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted by Congress and signed into law. The
provisions of FDICIA include a plan to recapitalize the Bank Insurance Fund
that is the source of deposit insurance coverage to FDIC-insured
institutions, authority to ultimately fund such recapitalization plan through
increased deposit insurance premiums, various supervisory reforms which will
increase the frequency of on-site examinations by federal banking regulators,
changes in the deposit insurance system, an array of new consumer lending
requirements, and the adoption of the Truth in Savings Act. FDICIA also
authorizes federal banking regulators to take prompt corrective action
against institutions which are under-capitalized, institute a risk-based
assessment system for deposit insurance, and implement a series of
operational and management-based standards and potential sanctions for
violations of such standards. It clearly is anticipated that FDICIA will
increase the regulatory burden on financial institutions and impose
substantial actual and incidental costs on financial institutions and their
customers. As a consequence of the savings and loan crisis of the 1980s, and
congressionally perceived weaknesses in the banking system, financial
institutions may be expected to encounter further legislative and regulatory
changes in the future.
Congress passed legislation in 1994 to remove geographic restrictions on bank
expansion. The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Branching Act") removes state law barriers to
acquisitions in all states and allows multi-state banking operations to
merge into a single bank with interstate branches. Interstate banking and
branching authority will be subject to certain conditions and restrictions,
such as capital adequacy, management and CRA compliance. The Interstate
Branching Act preempts existing barriers that restrict entry into all
states--such as regional compacts and reciprocity agreements--thus creating
opportunities for expansion into markets that were previously closed. Under
the law, bank holding companies will be able to acquire banks in any state,
subject to certain conditions. When the interstate branching provisions of
the law become effective, banks acquired pursuant to this authority may
subsequently be converted to branches. Interstate branching will be
permitted by allowing banks to merge across state lines to form a single
institution. Interstate merger transactions can be used to consolidate
existing multistate operations or to acquire new branches. Banks will be
able to establish a new branch as its initial entry into a state only if the
state has authorized de nove branching. In addition, out-of-state banks may
merge with a single branch of a bank if the state has authorized such a
transaction. The interstate branching provisions will become effective on
June 1, 1997, unless a state takes action before that time. A state can pass
laws either to opt in early or to opt out completely, as long as they act
before June 1, 1997.
40
<PAGE>
While the Equal Credit Opportunity Act, the Fair Housing Act and the
Community Reinvestment Act ("CRA")--laws that require financial institutions
to practice fair lending and meet the credit needs of the communities in
which they are located--have been in effect for a number of years, regulatory
attention to enforcement of such laws has increased significantly in recent
years. The fair lending laws strictly prohibit discriminatory lending
practice. Using Home Mortgage Disclosure Act and other data which financial
institutions are required to maintain and report to the federal government,
federal and state governmental authorities are vigorously targeting financial
institutions suspected of violating the fair lending laws. Financial
institution may be subject to fair lending enforcement actions, including
civil money penalties, even thought their lending practices unintentionally
have disparate impact or discriminatory effect. Similar to the fair lending
laws, CRA initiatives and enforcement actions have been given increased
attention in recent years. The rules and regulations governing CRA
compliance are in the process of being revised in an effort to establish more
objective measurements of CRA performance. The focus of performance will be
on each institution's actual lending, services and investment records
relative to low and moderate income areas which re located within the
institution's delineated community. The penalties for inadequate CRA
performance may include monetary penalties and severe limitations on any
further acquisition or expansion activities. The board of directors of
Charter and its Subsidiary Banks and Charter's management are firmly
committed to nondiscriminatory lending practices and ensuring that the
Subsidiary Banks meet the credit needs of low and moderate income areas in
our local communities. Charter continues to devote a substantial amount of
time and resources to fair lending and CRA training and compliance.
Bank regulatory authorities have specified Charter's guidelines for purposes
of evaluating a bank's capital adequacy. The following is a summary of
Charter's capital ratios:
<TABLE>
<CAPTION>
ACTUAL
DECEMBER 31, MINIMUM REQUIRED
------------- DECEMBER 31,
1994 1993 1994
----- ----- -----
<S> <C> <C> <C>
Total qualifying capital to risk-based assets . . . . 16.57% 19.07% 8.00%
Tier I capital to risk-based assets . . . . . . . . . 12.55% 14.78% 4.00%
Tangible core capital to total assets (tangible). . . 6.72% 6.64% 3.00%
<FN>
(1) The regulatory authorities may require the Company to maintain a
leverage ratio of up to 200 basis points above the required minimum.
</TABLE>
NOTE 4 - RESERVE REQUIREMENTS
Cash and due from bank demand balances of approximately $14,572,000 and
$14,691,000 at December 31, 1994 and 1993, respectively, were maintained to
satisfy regulatory reserve requirements.
<PAGE>
NOTE 5 - SECURITIES
The amortized cost and fair values of securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------
1994 1993
--------------------------------- ---------------------------------
GROSS GROSS GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COSTS GAINS LOSSES VALUE COST GAINS LOSSES VALUE
------------------------------------------ -----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity:
U.S. Treasury securities
and obligations of U.S. government
corporations and agencies . . . . . . $ 55,571 $225 $ (2,636) $ 53,160 $ 39,808 $ 515 $ (15) $ 40,308
Mortgage-backed securities
issued by U.S. government
agencies and corporations . . . . . . 56,157 194 (4,062) 52,289 36,005 889 (155) 36,739
Collateralized mortgage
obligations . . . . . . . . . . . . . 55,320 19 (2,112) 53,227 59,442 290 (212) 59,520
Obligations of states and
political subdivisions . . . . . . . 1,133 -- (71) 1,062 649 4 (11) 642
Debt securities issued by
foreign governments . . . . . . . . . 280 -- (2) 278 255 -- (1) 254
Other securities . . . . . . . . . . . -- -- -- -- 3,638 -- -- 3,638
-------- ---- -------- -------- -------- ------ ------- --------
Total Securities Held to Maturity . . 168,461 438 (8,883) 160,016 139,797 1,698 (394) 141,101
-------- ---- -------- -------- -------- ------ ------- --------
Securities Available for Sale:
U.S. Treasury securities
and obligations of U.S. government
corporations and agencies . . . . . . 28,397 -- (764) 27,633 38,144 192 (219) 38,117
Mortgage-backed securities
issued by U.S. government
agencies and corporations . . . . . . 51,763 263 (3,422) 48,604 53,090 1,090 (259) 53,921
Collateralized mortgage
obligations . . . . . . . . . . . . . 27,748 69 (1,148) 26,669 52,279 677 (178) 52,778
Corporate Securities . . . . . . . . . 4,413 -- -- 4,413 -- -- -- --
Other securities . . . . . . . . . . . 4,315 219 -- 4,534 419 346 -- 765
-------- ---- -------- -------- -------- ------ ------- --------
Total Securities Held for Sale . . . . 116,636 551 (5,334) 111,853 143,932 2,305 (656) 145,581
-------- ---- -------- -------- -------- ------ ------- --------
Total Securities . . . . . . . . . . . $285,097 $989 $(14,217) $271,869 $283,729 $4,003 $(1,050) $286,682
======== ==== ======== ======== ======== ====== ======= ========
</TABLE>
The collateralized mortgage obligations are secured by certificates backed by
U.S. Government or federal agency guarantees. Proceeds from the sales of
total securities during 1994 were $8,026,000. Gross gains of $50,000 and
gross losses of $30,000 were realized on total sales. Of the total amount
of proceeds from securities sales, all were from sales of securities included
in the available for sale category that was established January 1, 1994.
There were no sales of securities from the held to maturity category.
Proceeds from the sales of total securities during 1993 were $25,629,000.
Gross gains of $465,000 and gross losses of $130,000 were realized on total
sales. Of the total amount of proceeds from securities sales, all were from
sales of securities included in the held for sale category that was
established September 30, 1992. There were no sales of securities from the
held for investment category.
Proceeds from sales of total securities during 1992 were $34,979,000. Gross
gains of $1,226,000 and gross losses of $128,000 were realized on total
sales. Of the total amount of proceeds from securities sales $2,736,000 were
from sales of securities included in the held for sale category that was
established September 30, 1992. Gross gains of $121,000 and no losses were
realized on the sale of securities classified as held for sale. There were
no sales of securities from the held for investment category after September
30, 1992. Securities with carrying values of $209,089,000 and $156,453,000 at
December 31, 1994 and 1993, respectively, were pledged to secure public
deposits and repurchase agreements with customers and for other purposes as
required by law. The section on page 25 entitled "Securities" is
incorporated herein as part of this note as it relates to the maturities and
yields on investment securities.
42
<PAGE>
NOTE 6 - LOANS
Set forth in the following table are loans classified by major type.
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1993
----------------------
(IN THOUSANDS)
<S> <C> <C>
Commercial, financial and industrial. . . . . . $ 75,113 $ 58,421
Commercial real estate. . . . . . . . . . . . . 40,923 50,467
Real estate - construction. . . . . . . . . . . 90,478 6,477
Real estate - multi-family. . . . . . . . . . . 10,611 16,573
Real estate - 1-4 family. . . . . . . . . . . . 66,300 101,375
Loans to individuals (net of unearned discounts of
$2,861,000 in 1994 and $3,235,000 in 1993) . . 60,336 57,361
-------- --------
Total Loans . . . . . . . . . . . . . . . . . . $343,761 $290,674
======== ========
</TABLE>
Included in total loans as of December 31, 1994 and 1993 were mortgage
warehouse loans available for sale of $17,906,000 and $71,201,000,
respectively. There were no realized or unrealized losses on loans available
for sale. During 1994, Charter saw growth in its real estate loans in the
real estate construction category primarily as a result of the purchase of
residential construction loans from Roosevelt Financial Group as discussed
earlier. Included in the total of real estate-construction loans are $79
million of loans secured by one-to-four family residential properties, which
amount comprises approximately 87% of the total of construction loans.
As of December 31, 1994 and 1993, loans outstanding to directors, officers
and their affiliates were approximately $1,735,000 and $2,951,000,
respectively. All such transactions were made, in the opinion of management,
in the ordinary course of business on substantially the same terms as to
interest rate and collateral as those prevailing at the time for comparable
transactions with other persons and did not involve more than a normal risk
of collectibility. The following is a detail of the activity in loans to
officers and directors for the year ended December 31, 1994:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Beginning of period . . . . . . . . . . . . . . . . . $2,951
Additions . . . . . . . . . . . . . . . . . . . . . . 511
Payments. . . . . . . . . . . . . . . . . . . . . . . 1,727
Charge-offs . . . . . . . . . . . . . . . . . . . . . --
------
End of Period . . . . . . . . . . . . . . . . . . . . $1,735
======
</TABLE>
The maturities of loans as of December 31, 1994, excluding mortgages and
loans to individuals, based on remaining scheduled repayments of principal
appear below:
<TABLE>
<CAPTION>
MATURING MATURING MATURING
IN 1 YEAR AFTER 1 YEAR AFTER
OR LESS THROUGH 5 YEARS FIVE YEARS
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Commercial, financial and
industrial . . . . . . . . . . . . . $ 40,508 $29,090 $ 5,515
Commercial real estate. . . . . . . . 2,802 29,184 8,937
Real estate - construction. . . . . . 82,163 1,657 6,658
-------- ------- -------
Total. . . . . . . . . . . . . . . . $125,473 $59,931 $21,110
======== ======= =======
</TABLE>
With respect to loans due after one year, as of December 31, 1994,
$56,324,000 of such loans had a variable interest rate and $24,717,000 of
such loans had a fixed interest rate.
43
<PAGE>
The following table sets forth the components of non-performing assets and
past due loans for the last five years:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1994 199 1992 1991 1990
---------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Real estate . . . . . . . . . . . . . . . . $ 688 $1,172 $ 352 $ 110 $ 690
Commercial and industrial . . . . . . . . . 227 464 537 1,085 1,466
Individual . . . . . . . . . . . . . . . . 32 98 37 37 81
Total non-accrual loans . . . . . . . . . 947 1,734 926 1,232 2,237
------- ------ ------ ------- -------
Restructured loans:
Real estate . . . . . . . . . . . . . . . . -- 213 -- 832 1,880
Commercial and industrial . . . . . . . . . 1,203 -- -- -- --
Other . . . . . . . . . . . . . . . . . . . -- -- -- -- 137
------- ------ ------ ------- -------
Total restructured loans . . . . . . . . 1,203 213 -- 832 2,017
------- ------ ------ ------- -------
Other real estate, net and collateral
acquired . . . . . . . . . . . . . . . . . . 1,662 2,218 5,088 8,164 11,178
------- ------ ------ ------- -------
Total non-performing assets . . . . . . . $ 3,812 $4,165 $6,014 $10,228 $15,432
======= ====== ====== ======= =======
Loans past due 90 days or more
and still accruing interest:
Real estate . . . . . . . . . . . . . . . . $ 313 $ 207 $ 149 $ 618 $ 105
Commercial and industrial . . . . . . . . . 226 19 452 690 239
Individual . . . . . . . . . . . . . . . . 159 342 142 454 252
All other loans . . . . . . . . . . . . . . 2 9 -- 3 40
------- ------ ------ ------- -------
Total loans past due 90 days or more
and still accruing interest . . . . . . . $ 700 $ 577 $ 743 $ 1,765 $ 636
======= ====== ====== ======= =======
Ratios:
Allowance for credit losses as a percentage
of loans . . . . . . . . . . . . . . . . . 1.3% 1.6% 1.6% 1.4% 1.5%
Allowance for credit losses as a
percentage of non-accrual loans . . . . . 469.24 266.2 409.5 252.9 124.8
Allowance for credit losses as a percentage
of non-performing loans . . . . . . . . . 156.0 182.9 227.2 81.4 57.1
Non-performing loans as a percentage of
total loans . . . . . . . . . . . . . . . 0.8 0.9 0.7 1.5 2.6
Total non-performing assets as a
percentage of total assets . . . . . . . . 0.5 0.6 1.0 1.8 2.7
</TABLE>
The preceding table provides historical data highlighting the improvement in
Charter's overall level of non-performing assets and its levels of allowances
relative to non-performing assets. At December 31, 1994, Charter's level of
non-performing assets continued to decline, falling by $353,000 or 8.5% from
fiscal year-end 1993 levels. The reduction in non-performing assets is
primarily a result of continued liquidation and writedowns of ORE owned.
44
<PAGE>
NOTE 7 - ALLOWANCE FOR CREDIT LOSSES
An analysis of activity in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year. . . . . $4,616 $3,792 $3,116
Provision for credit losses . . . . . 233 911 1,465
Allowance of acquired bank. . . . . . -- 522 --
Loans charged off . . . . . . . . . . (939) (861) (1,417)
Less recoveries . . . . . . . . . . . 536 252 628
------ ------ ------
Net charge-offs . . . . . . . . . . (403) (609) (789)
------ ------ ------
Balance at End of Year. . . . . . . . $4,446 $4,616 $3,792
====== ====== ======
</TABLE>
NOTE 8 - ALLOWANCE FOR OTHER REAL ESTATE LOSSES
Other real estate is reflected on the consolidated balance sheets net of an
allowance for anticipated losses on other real estate. An analysis of
activity in the allowance for losses on other real estate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year. . . . . $2,418 $3,569 $2,144
Provision for losses. . . . . . . . . 16 1,463 2,228
Allowance of acquired bank. . . . . . -- 10 --
Reductions. . . . . . . . . . . . . . (72) (2,624) (803)
------ ------ ------
Balance at End of Year. . . . . . . . $2,362 $2,418 $3,569
====== ====== ======
</TABLE>
45
<PAGE>
NOTE 9 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993
----------------------
(IN THOUSANDS)
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . $ 3,399 $ 3,399
Buildings. . . . . . . . . . . . . . . . . . 8,288 8,262
Equipment. . . . . . . . . . . . . . . . . . 11,361 11,023
Construction in progress . . . . . . . . . . 362 105
Leasehold improvements . . . . . . . . . . . 4,649 3,646
------- -------
Total premises and equipment . . . . . . . 28,059 26,435
Less accumulated depreciation
and amortization. . . . . . . . . . . . . . 13,796 13,429
------- -------
Premises and Equipment, net. . . . . . . . . $14,263 $13,006
======= =======
</TABLE>
Rental expense for the years ended December 31, 1994, 1993 and 1992 totalled
approximately $1,781,000, $1,286,000 and $1,185,000, respectively. A
summary of non-cancelable future operating lease commitments follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
PERIOD LEASE COMMITMENTS
------ -----------------
(IN THOUSANDS)
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . $1,755
1996 . . . . . . . . . . . . . . . . . . . . . . . . 1,085
1997 . . . . . . . . . . . . . . . . . . . . . . . . 689
1998 . . . . . . . . . . . . . . . . . . . . . . . . 497
1999 . . . . . . . . . . . . . . . . . . . . . . . . 369
Thereafter . . . . . . . . . . . . . . . . . . . . . 367
------
Total. . . . . . . . . . . . . . . . . . . . . . . $4,763
======
</TABLE>
It is expected that, in the normal course of business, leases that expire
will be renewed or replaced by leases on other property or equipment. It
is anticipated that future minimum lease commitments will not be less than
the amounts recorded for 1994.
In October 1993, University purchased a 1.91 acre tract of land adjacent to
its West 61st Street branch for a purchase price of approximately $463,000.
During 1994, construction and operation of a motor banking facility comprised
initially of three drive-in lanes was completed.
During 1985, a Subsidiary Bank sold the land and improvements that comprise a
banking facility and operations center to a third party and simultaneously
leased back the facilities. The initial term is for a fifteen-year period
with options to repurchase the facility (including land) in years five, seven
and ten of the term of the lease. The minimum lease payments are included in
the table above. The gain of approximately $1.2 million on the sale was
deferred for financial statement purposes and is being amortized into income
over a ten-year period.
46
<PAGE>
NOTE 10 - SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase generally mature within one
day to one year from the transaction date. Information relating to these
borrowings is shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
-------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Daily average balance . . . . . . . . $12,335 $13,837 $14,467
Daily average rate. . . . . . . . . . 4.01% 2.37% 3.03%
Maximum month-end balance . . . . . . $19,594 $19,068 $20,719
Balance at end of year. . . . . . . . 19,594 12,941 20,719
Average rate on balance at end
of year . . . . . . . . . . . . . . 4.76% 2.02% 2.22%
</TABLE>
At December 31, 1994, Charter had $19,594,000 in securities sold under
agreements to repurchase, all of which were transactions effected with
existing deposit customers.
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 2, were provided by
advances funded on June 30, 1994 from the FHLB. Charter continues to utilize
FHLB advances in concert with its daily funds management. Accordingly, at
December 31, 1994, there was a $13 million advance outstanding at a
prepayable floating rate based on the one month LIBOR plus 10 basis points,
due December 30, 1996.
47
<PAGE>
NOTE 11 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1993
-------------------
(IN THOUSANDS)
<S> <C> <C>
Parent company-secured borrowing from an
insurance company . . . . . . . . . . . . . . $ 2,100 $ 2,300
Parent company-unsecured borrowing from a bank
holding company . . . . . . . . . . . . . . . 10,000 7,500
Subordinated capital notes of subsidiary
banks . . . . . . . . . . . . . . . . . . . . 2,750 2,750
Subordinated debenture of Charter Venture
Group, Inc. . . . . . . . . . . . . . . . . . -- 1,000
------- -------
Total . . . . . . . . . . . . . . . . . . . $14,850 $13,550
======= =======
</TABLE>
The $2,100,000 insurance company loan is secured by 66% of the capital stock
of Charter-Houston and a $500,000 life insurance policy on the largest
shareholder of Charter. As a result of increases in the net worth of
Charter-Houston, portions of the securities pledged may be released; however,
51% of the common stock of Charter-Houston must be pledged at all times. The
loan bears interest at 10-7/8% payable quarterly and, pursuant to a
renegotiation of terms that took place during 1991, is repayable in annual
installments of $200,000 in 1995 through 1997, with a final payment of
$1,500,000 due when the loan matures on December 1, 1998. Terms of the loan
agreement specify a minimum voting control requirement for the largest
shareholder of Charter, minimum net worth requirements, dividend restrictions
and other customary covenants. Pursuant to such dividend restrictions, at
December 31, 1994, approximately $2,306,000 of the consolidated retained
earnings were available for the payment of dividends on common stock.
The subordinated capital notes of the Subsidiary Banks represent unsecured
obligations which are subordinated to depositors and other creditors. These
notes contain several restrictive covenants, including limitations on funded
debt which may be incurred and specified capital requirements. During the
second quarter of 1990, Charter reduced the aggregate principal balance of
the subordinated capital notes of the Subsidiary Banks from $5,122,000 to
$2,750,000, and extended the remaining term to maturity of the unpaid capital
notes from 1992 to 1997. The notes bear interest payable quarterly at a
floating rate of prime plus one-half percent (prime rate was 8.5% at December
31, 1994).
Unsecured bank holding company debt in the amount of $7,500,000 matures April
2005 and bears interest at 7.2% per annum, payable semiannually. Unsecured
bank holding company debt in the amount of $2,500,000 matures April 2006 and
bears interest at 8.11% per annum, payable semiannually.
The $1,000,000 subordinated debenture guaranteed by the Small Business
Administration was paid March 31, 1994.
Aggregate future principal payments on long-term debt as of December 31,
1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING BANK
DECEMBER 31, CHARTER SUBSIDIARIES TOTAL
-----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
1995. . . . . . . . . . . . . . . . . $ 200 $ -- $ 200
1996. . . . . . . . . . . . . . . . . 200 -- 200
1997. . . . . . . . . . . . . . . . . 200 2,750 2,950
1998. . . . . . . . . . . . . . . . . 1,500 -- 1,500
1999. . . . . . . . . . . . . . . . . -- -- --
Thereafter. . . . . . . . . . . . . . 10,000 -- 10,000
------- ------ -------
Total . . . . . . . . . . . . . . . $12,100 $2,750 $14,850
======= ====== =======
</TABLE>
48
<PAGE>
NOTE 12 - MANDATORY CONVERTIBLE SUBORDINATED DEBENTURES
Effective October 24, 1983, Charter sold $1,540,000 of mandatory convertible
subordinated debentures ("Debentures") to existing shareholders. The
Debentures are convertible into either Common Stock or Class B Special Common
Stock of Charter (at the option of the holder at the time of purchase) and
are callable by Charter. The Debentures bear interest at the rate of 3/4 of
1% less than the average of the prior six-months ninety-day Treasury bill
auction rates or 1-1/4% less than such rate for those Debentures convertible
into Class B Special Common Stock, subject in both cases to a maximum rate of
12% and a minimum rate of 7%. Interest is payable semiannually and the
Debentures matured March 31, 1994, and were converted to Common Stock or
Class B Special Common Stock depending upon the class of Debentures
purchased. The conversion price of the Debentures, as adjusted for a stock
split subsequent to issuance and the 5% stock dividends paid on September 30,
1993 and August 10, 1992, was $14.40 through September 30, 1989, $16.20
through July 31, 1992, and $15.43 through September 30, 1993, and $14.70
thereafter through maturity.
At December 31, 1994 and December 31, 1993, Charter had outstanding none and
$257,000, respectively, of the Debentures. The reduction in the original
principal amount of outstanding Debentures was due to the conversion of
$1,181,000 of Debentures into 57,644 shares of Common Stock and 91,804 shares
of Class B Special Common Stock. The conversion was pursuant to an exchange
offer made solely to existing holders of the Debentures with an effective
conversion date of May 31, 1990. On March 31, 1994, the outstanding balance
of the Debentures matured and 18,040 shares of Common Stock and 19 shares of
Class B Special Common Stock were issued. Further reference is made to the
section on page 28 entitled "Capital Resources" as it relates to this note.
NOTE 13 - CAPITAL STOCK
PREFERRED STOCK
There are 400,000 shares of $50 par value preferred stock authorized, of
which 200,000 shares are authorized to be issued in the initial series,
60,000 shares are authorized to be issued in a second series designated as
Series B Nonvoting Cumulative Convertible Preferred Stock ("Series B
Preferred Stock") and 60,000 shares are authorized to be issued in a third
series designated as Series C Nonvoting Cumulative Preferred Stock ("Series C
Preferred Stock").
At December 31, 1994 and 1993, 14,201 shares of the initial series were
outstanding. The reduction in the number of outstanding shares of the
initial series resulted from the acquisition of three shares by
Charter-Houston in partial satisfaction of a loan obligation. The holders of
the initial series are entitled to receive cumulative semiannual dividends at
the annual rate of 8%. At December 31, 1994, there were no accumulated and
unpaid dividends on the initial series of preferred stock. Each share
carries one vote. During 1985 the shares became redeemable at par value plus
accrued but unpaid dividends at the option of the Board of Directors of
Charter, subject to receipt of prior approval from the Federal Reserve Board.
None of the shares have been redeemed.
At December 31, 1994 and 1993, there were no shares of Series B Preferred
Stock issued and outstanding. On December 17, 1986, 60,000 shares were
originally issued to NationsBank Corporation, Charlotte, North Carolina
("NationsBank") for cash consideration of $6,000,000. The reduction in the
amount of outstanding Series B Preferred Stock was due to (i) the August 1,
1990 conversion of 18,667 shares of Series B Preferred Stock into 282,382
shares of Common Stock and 9,210 shares of Series C Special Common Stock and
(ii) the September 30, 1992 conversion of 41,333 shares of Series B Preferred
Stock into 652,919 shares of Common Stock and 21,294 shares of Series C
Special Common Stock.
The entire series of Series C Preferred Stock designated by the Board of
Directors of Charter comprises 60,000 authorized but unissued shares of
Series C Preferred Stock . The powers, preferences and rights of the Series
C Preferred Stock are substantially similar to those of the Series B
Preferred Stock, provided that the Series C Preferred Stock is
nonconvertible.
The liquidation preference of the initial series of preferred stock is its
par value plus accrued unpaid dividends. The liquidation preference of the
Series B Preferred Stock is its purchase price of $100 per share plus
accumulated and unpaid dividends and interest. The liquidation preference of
the Series C Preferred Stock is its stated value of $100 per share plus
accrued but unpaid dividends and interest.
49
<PAGE>
COMMON STOCK AND SPECIAL COMMON STOCK
There are 12,000,000 shares of $1 par value Common Stock authorized and
300,000 shares of $1 par value Special Common Stock authorized. The
authorized shares of Common Stock were increased from 6,000,000 to 12,000,000
shares pursuant to an amendment to the articles of incorporation of Charter
approved at the 1992 annual meeting of shareholders. Pursuant to the
articles of incorporation of Charter, the Board of Directors has created two
series of Special Common Stock: 250,000 shares have been designated "Class B
Special Common Stock" and 50,000 shares have been designated "Series C
Special Common Stock." At December 31, 1994 and 1993, there were 5,773,216
and 5,481,153 shares, respectively, of Common Stock issued and outstanding;
209,261 and 199,282 shares, respectively, of Class B Special Common Stock
issued and outstanding; and 47,160 and 44,915 shares, respectively, of Series
C Special Common Stock issued and outstanding. The increase in the
outstanding shares of Common Stock and Special Common Stock was due to
(i) October 31, 1994 payment of a 5% stock dividend resulting in the issuance
of 282,769, 9,960 and 2,245 shares of common stock, class B Special Common
Stock and Series C Special Common Stock respectively, (ii) the March 31, 1994
mandatory conversion of outstanding Debentures resulting in the issuance of
18,040 shares of Common Stock and 19 shares of Class B Special Common Stock,
(iii) the September 30, 1993 payment of a 5% stock dividend resulting in the
issuance of 268,472, 9,484 and 2,138 shares of Common Stock, Class B Special
Common Stock and Series C Special Common Stock, respectively, (iv) the August
10, 1992 payment of a 5% stock dividend resulting in the issuance of 224,589,
9,030 and 1,203 shares of Common Stock, Class B Special Common Stock and
Series C Special Common Stock, respectively, and (v) the September 30, 1992
conversion of 41,333 shares of Series B Preferred Stock into 652,919 shares
of Common Stock and 21,294 shares of Series C Special Common Stock. The
holders of Special Common Stock are entitled to dividends at a rate equal to
the rate of the dividend paid on Common Stock, except that dividends on Class
B Special Common Stock are limited to one-half the dividend rate on Common
Stock for five years from original issuance. The Common Stock carries one
vote per share and the Special Common Stock carries fourteen votes per share.
The Series C Special Common Stock is identical in all respects to the Class
B Special Common Stock, except that it is convertible on a share-for-share
basis into Common Stock and it is not subject to the five-year dividend
restriction on the Class B Special Common Stock described above. The Board
of Directors of Charter is authorized to establish voting rights, dividend
rights, preferences in liquidation and other aspects with respect to the
Special Common Stock, which is issuable in series.
TREASURY STOCK
In the third quarter of 1988, Charter-Houston acquired 148,810 shares of
Charter's Common Stock and $90,000 in principal amount of Debentures as
partial satisfaction of a loan obligation. The treasury stock was acquired
at a cost of $4.25 per share which approximated common book value per share
at the time of acquisition. On December 30, 1988, Charter issued 39,808
shares of such treasury stock at a price of approximately $4.10 per share in
exchange for the outstanding minority common stock of Charter-Houston,
resulting in Charter becoming the owner of 100% of the capital stock of
Charter-Houston, rather than of 99.1% as previously had been the case. In
the second quarter of 1989, Charter-Houston acquired an additional 6,000
shares of Charter's Common Stock as partial satisfaction of a loan
obligation. This treasury stock was acquired at a cost of $4.00 per share,
which approximated common book value at the time of acquisition. Effective
May 31, 1990, the $90,000 in principal amount of Debentures held by
Charter-Houston was converted into 11,405 shares of Common Stock pursuant to
the conversion offer as discussed in Note 12. During the second quarter of
1992, Charter- Houston acquired 20,106 shares of Charter's Common Stock as
partial satisfaction of two unrelated loan obligations. This treasury stock
was acquired at a cost of $156,000, which approximated current market value
at the times of acquisition. On October 31, 1994, September 30, 1993 and
August 10, 1992, 8,107, 7,691 and 7,325 shares, respectively, of Common Stock
were issued to Charter- Houston with respect to the above described treasury
stock pursuant to a 5% stock dividend paid to holders of record of Charter's
common stock as of October 15, 1994, September 15, 1993 and July 31, 1992.
50
<PAGE>
NOTE 14 - INCOME TAXES
Effective January 1, 1993, Charter provides for income taxes in accordance
with SFAS No. 109. The components of income tax expense (benefit) consist of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
---------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion - expense (benefit):
Federal. . . . . . . . . . . . . . . $1,804 $ 101 $ 303
State . . . . . . . . . . . . . . . -- -- (167)
------ ------ -----
Deferred portion - expense (benefit):
Federal. . . . . . . . . . . . . . . 1,957 1,234 --
State. . . . . . . . . . . . . . . . -- (30) --
------ ------ -----
Total Income Tax Expense . . . . . . . $3,761 $1,305 $ 136
====== ====== =====
</TABLE>
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to earnings before income taxes for the
reasons set forth in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
---------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at statutory rate . . . . . . $3,892 $ 2,887 $ 2,305
Increase (decrease) in taxes resulting from:
Utilization of operating loss carryforwards. . -- (1,438) (2,177)
Tax-exempt interest income . . . . . . . . . . (19) (3) (5)
Amortization of intangibles. . . . . . . . . . 59 49 152
Non-deductible expenses. . . . . . . . . . . . 58 18 19
Other, net . . . . . . . . . . . . . . . . . . (229) (178) 9
------ ------- -------
Total . . . . . . . . . . . . . . . . . . . $3,761 $ 1,335 $ 303
====== ======= =======
</TABLE>
Deferred income taxes and benefits are provided for differences between the
financial statement carrying amount of existing assets and liabilities and
their respective tax bases. Significant deferred tax assets and liabilities
at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses. . . . . . . . . . $1,457 $1,431
Allowance for other real estate losses . . . . 810 822
Allowance for securities losses. . . . . . . . 126 118
Other. . . . . . . . . . . . . . . . . . . . . 155 194
------ ------
Total deferred tax assets . . . . . . . . . 2,548 2,565
------ ------
Deferred tax liabilities:
Depreciable assets . . . . . . . . . . . . . . 361 552
Unrealized loss on securities available
for sale . . . . . . . . . . . . . . . . . . 781 543
Amortization of certain intangible assets. . . 432 69
Other. . . . . . . . . . . . . . . . . . . . . 75 35
------ ------
Total deferred tax liabilities . . . . . . . 1,649 1,199
------ ------
Net deferred asset before valuation allowance. . 899 1,366
------ ------
Valuation allowance. . . . . . . . . . . . . . . -- 237
------ ------
Net Deferred Tax Asset . . . . . . . . . . . . $ 899 $1,129
====== ======
</TABLE>
As discussed in Note 1, Summary of Significant Accounting and Reporting
Policies, SFAS No. 109 was adopted effective as of the beginning of fiscal
year 1993. Management elected to adopt this statement on a prospective
basis, and therefore, prior years' financial statements were not restated to
apply the provisions of SFAS No. 109.
51
<PAGE>
SFAS No. 109, "Accounting for Income Taxes," was adopted by Charter effective
January 1, 1993. The new standard provides for a deferred tax asset to be
recognized for the estimated future tax effects attributable to temporary
differences and carryforwards. The principal effect is to allow a tax
benefit for cumulative book loss reserves in excess of tax reserves. SFAS
No. 109 provides that deferred tax assets may be reduced by a valuation
allowance if, based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Management has measured the total deferred tax asset for
deductible temporary differences using the applicable tax rate (currently at
34% for all future periods) and measured the deferred tax assets for each
type of tax credit carry forward and determined that a total deferred tax
asset of $3,300,000 should be realized as of January 1, 1993. Management
further reduced these deferred tax assets by a valuation allowance of
$350,000, based upon the weight of available evidence, and determined that a
net deferred tax asset of approximately $2,950,000 should be realized as of
January 1, 1993. The adoption of SFAS No. 109 has been reported as the
effect of a change in accounting principle.
Income earned subsequent to the application of this statement will be reduced
by the amount of any tax benefit that may have been recognized from the
utilization of deductible temporary differences under SFAS No. 96, which was
applied by Charter from January 1, 1989 through December 31, 1992.
On October 1, 1987, Charter purchased from the Federal Deposit Insurance
Corporation ("FDIC") certain assets and insured deposits of a failed Houston
bank, Western Bank-Westheimer ("Western Bank"). Charter paid the FDIC a
premium of $4,055,000. Previously, this premium had been recorded as an
intangible asset and amortized over ten years on a straight-line basis for
financial reporting purposes. Due to uncertainties prior to the recent
decision by the U.S. Supreme Court, the amortization of this intangible asset
had not been deducted as a business expense on Charter's tax returns or in
its computations for book federal income tax expenses. Charter has engaged
the services of outside valuation experts to assist management in determining
the value and the useful life of this core deposit intangible. This
valuation study was completed in October 1993, and it supports management's
conclusion that the original purchase premium of $4,055,000 is deductible
over its determined useful life. The remaining $1.6 million core deposit
intangible associated with this acquisition was fully amortized in accordance
with the revised estimated useful life established by the valuation study. A
corresponding tax benefit for the entire premium of $4.055 million, or $1.379
million after applying a 34% tax rate, was recognized in the third quarter of
1993.
Charter files a consolidated federal income tax return with its subsidiaries.
The federal income tax credit for the parent company reflected in Note 19
represents the excess of amounts payable by subsidiaries in lieu of paying
federal income taxes on a separate return basis over the taxes of Charter and
subsidiaries on a consolidated return basis.
NOTE 15 - PROFIT-SHARING TRUST AND PLAN
The profit-sharing trust and plan includes all full-time employees.
Contributions to the plan are made at the discretion of the Board of
Directors. Total profit-sharing expense for the years ended 1994, 1993 and
1992 was $295,000, $271,000 and $230,000, respectively.
During 1987 Charter adopted and incorporated into its profit-sharing plan a
thrift plan qualified pursuant to Section 401(k) of the Internal Revenue
Code. Under the thrift plan an employee, after specified periods of service,
may contribute up to 6% of his or her base compensation, which amount then
may be matched up to 100% by the employer. Amounts needed to fund this
matching contribution, which through December 31, 1987 was set at 40% and as
of January 1, 1988, was set at 25% of the employee's contribution, are drawn
first from amounts retained in the plan due to employee forfeitures.
Accordingly, because such forfeitures covered all or part of the amount of
such matching contributions, approximately $68,000, $39,000 and $36,000 in
matching contributions were charged to expenses in 1994, 1993 and 1992,
respectively.
52
<PAGE>
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business Charter is a party to various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit and interest rate future contracts. These instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized on the balance sheet. The contract or
notional amounts of those instruments reflect the extent of the involvement
Charter has in particular classes of financial instruments.
Charter's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount
of those instruments. Charter uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance sheet
instruments. For interest rate caps and floors, the contract or notional
amounts do not represent exposure to credit loss. Charter is exposed to
credit-related losses in the event of nonperformance by counterparties to
financial instruments but does not expect any counterparties to fail to meet
their obligations. The credit exposure of derivatives is represented by the
fair value of contracts with a positive fair value at the reporting date.
The following is a summary of the various off-balance sheet financial
instruments entered into by Charter:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1993
----------------------------------
CONTRACT OR CONTRACT OR
NOTIONAL AMOUNT NOTIONAL AMOUNT
----------------------------------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Unfunded commitments to extend credit . . . . . $ 90,803 $41,371
Standby letters of credit . . . . . . . . . . . 7,732 4,165
Financial instruments whose notional or
contract amounts exceed the amount of
credit risk:
Interest rate caps and floors . . . . . . . . . $110,000 $90,000
-------- -------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being fully drawn upon, the total commitment
amounts disclosed above do not necessarily represent future cash
requirements. Management of Charter evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
considered necessary, upon extension of credit is based on management's
credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the
Subsidiary Banks to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to its customers.
Realized and unrealized gains and losses on interest rate caps and floors
designated and effective as hedges of interest rate exposure are deferred and
recognized as interest income or interest expense over the lives of the
hedged assets or liabilities.
NOTE 17 - LEGAL FEES AND CONTINGENCIES
Various lawsuits are pending against Charter's subsidiaries. Management of
Charter, after reviewing these lawsuits with outside counsel, considers that
the aggregate liabilities, if any, will not be material to the consolidated
financial statements.
NOTE 18 - DIVIDENDS FROM SUBSIDIARIES
Dividends paid by the Subsidiary Banks are subject to restrictions by certain
regulatory agencies. There was approximately $5,047,000 available for
payment of dividends at December 31, 1994, by the Subsidiary Banks under
these restrictions. Undistributed earnings of the Subsidiary Banks included
in retained earnings of Charter (parent company only) were $12,741,000 at
December 31, 1994.
53
<PAGE>
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION
The following are parent company only condensed balance sheets as of December
31, 1994 and 1993, condensed statements of earnings and cash flows for each
of the three years in the period ended December 31, 1994:
CONDENSED BALANCE SHEETS
(Parent Company Only)
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets
Investments in subsidiaries:
Bank subsidiaries . . . . . . . . . . . . . . . $44,203 $48,620
Non-bank subsidiaries . . . . . . . . . . . . . 8 6
Cash and cash equivalents with subsidiary banks . 19,162 8,485
Investment securities . . . . . . . . . . . . . . 165 165
Other assets. . . . . . . . . . . . . . . . . . . 1,373 1,420
------- -------
Total Assets. . . . . . . . . . . . . . . . . . . . $64,911 $58,696
======= =======
Liabilities and Shareholders' Equity
Liabilities:
Accrued expenses and other liabilities. . . . . . $ 3,923 $ 2,858
Long-term debt. . . . . . . . . . . . . . . . . . 12,100 9,800
Mandatory convertible subordinated debentures
constituting regulatory capital. . . . . . . . . -- 266
------- -------
Total Liabilities . . . . . . . . . . . . . . . 16,023 12,924
------- -------
Shareholders' Equity (1). . . . . . . . . . . . . . 48,888 45,772
------- -------
Total Liabilities and Shareholders' Equity. . . . . $64,911 $58,696
======= =======
<FN>
(1) Excluding the effect of the net unrealized loss on securities
available for sale of $3,352,000, shareholders' equity would have
been $52,240,000 at December 31, 1994.
</TABLE>
54
<PAGE>
CONDENSED STATEMENTS OF EARNINGS
(Parent Company Only)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from bank subsidiaries . . . $ 9,128 $ 7,052 $ 3,797
Interest income. . . . . . . . . . . . 427 139 139
Management fee income. . . . . . . . . 2,430 2,177 2,065
Other. . . . . . . . . . . . . . . . . 7 28 43
------- ------- -------
Total Income . . . . . . . . . . . . 11,992 9,396 6,044
------- ------- -------
Expenses:
Interest . . . . . . . . . . . . . . . 933 685 401
Employee compensation. . . . . . . . . 1,681 1,717 1,484
Depreciation and amortization costs. . 98 100 101
Other operating expenses . . . . . . . 1,039 882 1,149
------- ------- -------
Total Expenses . . . . . . . . . . . 3,751 3,384 3,135
------- ------- -------
Earnings Before Income Tax (Benefit) and
Equity in Undistributed Earnings of
Subsidiaries. . . . . . . . . . . . . 8,241 6,012 2,909
Income tax expense (benefit) . . . . . (349) (1,505) (1,014)
------- ------- -------
Earnings Before Equity in Undistributed
Earnings of Subsidiaries . . . . . . . 8,590 7,517 3,923
------- ------- -------
Equity in Undistributed Earnings of
Subsidiaries. . . . . . . . . . . . . . (904) 689 2,722
------- ------- -------
Net Earnings. . . . . . . . . . . . . $ 7,686 $ 8,206 $ 6,645
======= ======= =======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
(Parent Company Only)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . $ 7,686 $ 8,206 $ 6,645
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . 98 100 101
Provisions for possible asset losses . . . . 344 (30) 302
Net (increase) decrease in other assets
and interest receivable . . . . . . . . . . (280) (1,278) 473
Net increase (decrease) in other
liabilities and interest payable. . . . . . 752 880 178
Equity in undistributed earnings of
subsidiaries. . . . . . . . . . . . . . . . . 904 (689) (2,722)
-------- ------- -------
Total Adjustments. . . . . . . . . . . . . . 1,818 (1,017) (1,668)
-------- ------- -------
Net Cash Provided by Operating
Activities. . . . . . . . . . . . . . . . 9,504 7,189 4,977
-------- ------- -------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing
deposits. . . . . . . . . . . . . . . . . . . 1,000 392 590
Proceeds from maturities of investment
securities. . . . . . . . . . . . . . . . . . (1,003) -- --
Purchase of investment securities. . . . . . . -- -- --
Capital expenditures . . . . . . . . . . . . . (11) (18) (8)
Increase in investments in subsidiaries. . . . -- (9,678) (1)
-------- ------- -------
Net Cash Provided by (Used in) Investing
Activities. . . . . . . . . . . . . . . . (14) (9,304) 581
-------- ------- -------
Cash flows from financing activities:
Increase in long-term debt . . . . . . . . . . 2,500 7,500 --
Payment of long-term debt. . . . . . . . . . . (200) (1,461) (246)
Payment of preferred dividends . . . . . . . . (57) (57) (2,060)
Payment of common dividends. . . . . . . . . . (1,055) (1,015) --
-------- ------- -------
Net Cash Provided by (Used in) Financing
Activities. . . . . . . . . . . . . . . . 1,188 4,967 (2,306)
-------- ------- -------
Net Increase in Cash and Cash Equivalents. . . . 10,678 2,852 3,252
-------- ------- -------
Cash and Cash Equivalents at Beginning of
Period. . . . . . . . . . . . . . . . . . . . . 8,485 5,633 2,381
-------- ------- -------
Cash and Cash Equivalents at End of Period . . . $ 19,163 $ 8,485 $ 5,633
======== ======= =======
Supplemental disclosure:
Interest paid. . . . . . . . . . . . . . . . . $ 906 $ 616 $ 406
Net income taxes paid. . . . . . . . . . . . . 800 1,305 264
</TABLE>
55
<PAGE>
NOTE 20 - EARNINGS PER COMMON SHARE
Earnings per common share are computed in the following table. All per share
figures and weighted average shares outstanding have been adjusted for the 5%
stock dividends paid on October 31, 1994, September 30, 1993 and August 10,
1992.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
--------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Earnings before cumulative effect of a
change in accounting principle. . . . . . . . $ 7,686 $ 5,256 $ 6,645
Cumulative effect on prior years of a
change in accounting for income taxes . . . . -- 2,950 --
--------- --------- --------
Net earnings . . . . . . . . . . . . . . . . . 7,686 8,206 6,645
--------- --------- --------
Less preferred dividend requirements:
Preferred stock, initial series. . . . . . . . 57 57 57
Series B preferred stock . . . . . . . . . . -- -- 191
--------- --------- --------
Total preferred dividend requirements . . 57 57 248
--------- --------- --------
Primary earnings applicable to common
shareholders. . . . . . . . . . . . . . . . . 7,629 8,149 6,397
Interest expense on debentures . . . . . . . . 4 19 19
Assumed conversion of Series B preferred
stock eliminating dividends thereon . . . . . -- -- 191
--------- --------- --------
Fully diluted earnings applicable to common
shareholders. . . . . . . . . . . . . . . . . $ 7,633 $ 8,168 $ 6,607
========= ========= ========
Primary earnings per common share:
Earnings before cumulative effect of a
change in accounting principle. . . . . . . $ 1.27 $ 0.86 $ 1.17
Cumulative effect of a change in accounting
for income taxes. . . . . . . . . . . . . . -- 0.49 --
--------- --------- --------
Net earnings . . . . . . . . . . . . . . . . $ 1.27 $ 1.35 $ 1.17
========= ========= ========
Fully diluted earnings per common share:
Earnings before cumulative effect of a
change in accounting principle. . . . . . . $ 1.27 $ 0.86 $ 1.10
Cumulative effect of a change in accounting
for income taxes. . . . . . . . . . . . . . -- 0.49 --
--------- --------- --------
Net earnings . . . . . . . . . . . . . . . . $ 1.27 $ 1.35 $ 1.10
========= ========= ========
Weighted average common shares outstanding:
Primary. . . . . . . . . . . . . . . . . . . 6,025,389 6,011,283 5,476,604
Fully diluted . . . . . . . . . . . . . . . 6,029,637 6,029,514 5,996,214
</TABLE>
Primary earnings per common 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, except as
described below, the pro forma effect from conversion of Charter's other
potentially dilutive securities. All of the remaining issued shares of Series
B preferred stock were converted into an aggregate of 674,212 shares of
common stock and Series C special common stock effective September 30, 1992.
Accordingly, for the year ended December 31, 1992, the indicated fully
diluted earnings per share amount is calculated assuming the conversion of
the Series B preferred stock as of the beginning of the period.
56
<PAGE>
NOTE 21 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION
The following quarterly financial information is unaudited. However, in the
opinion of management, the information fairly presents the financial
condition and results of operations for such periods. All per share figures
and weighted average shares outstanding have been adjusted for the 5% stock
dividends paid on October 31, 1994 and September 30, 1993.
<TABLE>
Caption>
1994 BY QUARTER 1993 BY QUARTER
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income . . . . . . . $ 12,121 $ 12,050 $ 10,439 $ 9,246 $ 9,706 $ 10,090 $ 10,829 $ 8,602
Interest expense. . . . . . . 4,083 3,974 3,388 3,160 3,395 3,613 3,555 3,223
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income . . . . 8,038 8,076 7,051 6,086 6,311 6,477 7,274 5,379
Provision for credit losses . 42 82 42 67 252 52 322 285
Non-interest income . . . . . 3,970 4,179 4,049 2,130 2,454 2,308 2,066 1,871
Non-interest expense. . . . . 8,882 8,850 8,278 5,889 5,860 7,674 6,535 6,599
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings before income tax
expense (benefit). . . . . . 3,084 3,323 2,780 2,260 2,653 1,059 2,483 366
Income tax expense (benefit). 849 1,147 1,008 757 904 (664) 901 164
--------- --------- --------- --------- --------- --------- --------- ---------
Net earnings before effect
of change in accounting
principle. . . . . . . . . . 2,235 2,176 1,772 1,503 1,749 1,723 1,582 202
Cumulative effect on prior
years of a change in
accounting for income
taxes. . . . . . . . . . . . -- -- -- -- -- -- -- 2,950
--------- --------- --------- --------- --------- --------- --------- ---------
Net Earnings. . . . . . . . . $ 2,235 $ 2,176 $ 1,772 $ 1,503 $ 1,749 $ 1,723 $ 1,582 $ 3,152
========= ========= ========= ========= ========= ========= ======== =========
NET EARNINGS PER COMMON
SHARE
Weighted average common
shares outstanding:
Primary . . . . . . . . . . 6,029,637 6,029,637 6,029,637 6,012,411 6,011,346 6,011,337 6,011,223 6,011,223
Fully diluted . . . . . . . 6,029,637 6,029,637 6,029,637 6,029,637 6,029,514 6,028,634 6,028,643 6,028,643
Earnings per common share:
Primary . . . . . . . . . . $ 0.37 $ 0.35 $ 0.30 $ 0.25 $ 0.29 $ 0.28 $ 0.26 $ 0.52
Fully diluted . . . . . . . 0.37 0.35 0.30 0.25 0.29 0.28 0.26 0.52
SELECTED AVERAGES
Total assets. . . . . . . . . $ 687,345 $ 711,553 $ 672,976 $ 648,992 $ 658,373 $ 653,753 $ 655,110 $ 571,327
Loans-net . . . . . . . . . . 324,924 316,332 250,595 253,091 283,299 281,887 275,789 212,695
Deposits. . . . . . . . . . . 583,134 593,082 587,594 568,880 573,073 577,470 572,306 501,620
Long-term debt. . . . . . . . 14,983 15,050 14,226 13,782 13,874 13,909 11,721 7,770
Shareholders' equity. . . . . 49,281 48,385 48,509 46,582 44,937 43,435 42,056 41,114
</TABLE>
57
<PAGE>
NOTE 22 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values were estimated by management as of December 31, 1994 and 1993,
which required 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.
CASH AND SHORT-TERM INSTRUMENTS - For short-term instruments, the carrying
amount is a reasonable estimate of fair value. Short-term instruments
include federal funds sold or purchased, securities purchased under
agreements to resell, short-term interest-bearing deposits and securities
sold under agreements to repurchase.
SECURITIES AND TRADING ACCOUNT ASSETS - For securities and derivative
instruments held for trading purposes (which include bonds, caps and
floors) and marketable equity securities held for investment purposes, fair
values are based on quoted market prices or dealer quotes. For other
securities held as investments, fair value equals quoted market price, if
available. In the few instances when market quotations are unavailable,
the securities are stated at cost or appraised values as deemed appropriate
by management.
LOANS - The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES - The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit
is estimated using the rates offered as of December 31, 1994 for deposits
of similar remaining maturities.
LONG-TERM DEBT - Rates currently available to Charter for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN - The fair value of commitments is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present credit
worthiness of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of guarantees and letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date.
DERIVATIVES - The fair value of derivatives generally reflect the
estimated amount Charter would receive or pay to terminate the contracts
at the reporting date, thereby taking into account the current unrealized
gains or losses of open contracts.
The estimated fair values of Charter's financial instruments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------------ -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE VALUE VALUE
-------- ----- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments. $ 73,170 $ 73,170 $ 72,365 $ 72,365
Securities . . . . . . . . . . . 280,314 271,869 283,729 286,682
Loans . . . . . . . . . . . . . 343,761 342,116 290,674 292,602
-------- -------- -------- --------
Less: allowance for loan losses. 4,446 4,446 4,616 4,616
-------- -------- -------- --------
Loans, net . . . . . . . . . . 339,315 337,670 286,058 287,986
Financial Liabilities:
Deposits . . . . . . . . . . . . 616,880 615,695 588,754 589,794
Securities sold under agreements
to repurchase . . . . . . . . . 33,594 33,594 12,941 12,941
Long-term debt and Debentures. . 14,850 13,443 13,550 12,133
-------- -------- -------- --------
Unrecognized financial instruments:
Commitments to extend credit . . 90,803 90,803 41,371 41,371
Standby letters of credit. . . . 7,732 7,732 4,165 4,165
Instruments with off-balance sheet
risk - unrealized gain (loss):
Interest rate caps and floors. . $(640) $ 114
</TABLE>
58
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(Incorporated by reference to the sections entitled "Election of Directors"
and "Executive Officers" of Charter's Proxy Statement for its 1995 Annual
Meeting of Shareholders to be held April 27, 1995.)
ITEM 11. EXECUTIVE COMPENSATION
(Incorporated by reference to the sections entitled "Executive Compensation,"
"Compensation Committee Report on Executive Compensation," and "Comparative
Performance Graph" of Charter's Proxy Statement for its 1995 Annual Meeting
of Shareholders to be held April 27, 1995.)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Incorporated by reference to the sections entitled "Voting Stock and
Principal Holders" and "Stock Ownership" of Charter's Proxy Statement for its
1995 Annual Meeting of Shareholders to be held April 27, 1995.)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(Incorporated by reference to the section entitled "Transactions with
Management" of Charter's Proxy Statement for its 1995 Annual Meeting of
Shareholders to be held April 27, 1995.)
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
(A) List of documents filed as part of this report
(A)(1) Independent Auditors' Report
Charter Bancshares, Inc. and Subsidiaries Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1993
Consolidated Statements of Earnings - Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
(A)(2) No financial statement schedules are required to be filed as a part of this report.
</TABLE>
<TABLE>
<CAPTION>
PAGE NUMBER OR INCORPORATION BY REFERENCE TO
----------------------------------------------------------
<C> <S> <C>
(A)(3)(i) Restated Articles of Incorporation Exhibit 3(a) to report on Form 10-K for fiscal year ended
(with Amendment) December 31, 1992, file no. 0-13496
(ii) Restated Bylaws Exhibit 3(b) to report on Form 10 for fiscal year ended
December 31, 1984, file no. 0-13496
(A)(4) Instruments defining the rights of
security holders:
4(a) Specimen stock certificate, Common Exhibits 4(a), 4(b) and 4(c) to report on Form 10 for
Stock, par value $1.00 fiscal year ended December 31, 1984, file no. 0-13496
4(b) Specimen stock certificate, Class B
Special Common Stock, par value $1.00
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
PAGE NUMBER OR INCORPORATION BY REFERENCE TO
----------------------------------------------------------
<C> <S> <C>
4(c) Specimen stock certificate, Pre-
ferred Stock, initial series, par
value $50.00
4(d) Investment Agreement by and between Exhibit 4(a) to report on Form 8-K
Charter and NCNB Corporation ("NCNB") dated as of December 17, 1986 file no. 0-13496
dated December 17, 1986,
4(e) Registration Rights Agreement be- Exhibit 4(c) to report on Form 8-K
tween Charter and NCNB dated as of dated December 17, 1986, file no. 0-13496
December 17, 1986
4(f) Investment Agreement by and between Exhibit 4(a) to report on Form 10-Q
Charter and NCNB dated as of Novem- for the quarter ended Septem-
ber 6, 1987 ber 30, 1987, file no. 0-13496
4(g) Registration Rights Agreement be- Exhibit 4(b) to report on Form 10-Q
tween Charter and NCNB dated as of for the quarter ended Septem-
November 6, 1987 ber 30, 1987, file no. 0-13496
4(h) Letter Agreement between Charter and Exhibit 4(h) to report on Form 10-K
NationsBank Corporation dated May 15, for fiscal year ended Decem-
1992. ber 31, 1993, File No. 0-13496
4(i) $7.5 million Subordinated Debenture Exhibit 4(i) to report on Form 10-K
Due April 19, 2005 for fiscal year ended December 31,
1993, File No. 0-13496
4(j) $2.5 million Subordinated Debenture Exhibit 4(j) (attached)
Due April 8, 2006
(A)(10) Material Contracts
10(a) Profit-Sharing Plan Exhibit 10(a) to report on Form 10-K
for fiscal year ended December
31, 1987, file no. 0-13496
10(b) 1991 Charter Bancshares, Inc. Stock Exhibit 10(b) to report on Form 10-K
Appreciation Rights Plan for fiscal year ended December
31, 1990, file no. 0-13496
10(c) Management Incentive Compensation Plan Exhibit 10(c) to report on Form 10-K
or fiscal year ended December
31, 1990, file no. 0-13496
(A)(21) Subsidiaries of Registrant Page E-1
</TABLE>
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1994.
A Form 8-K was filed January 24, 1995 to announce the acquisition
of West Loop Savings and Loan Association that was consummated on January 10,
1995.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CHARTER BANCSHARES, INC.
Date: March 23, 1995 By /s/ Jerry E. Finger
-------------- -------------------------------
Jerry E. Finger
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
CAPACITY
--------
<S> <C> <C>
Date: March 23, 1995 By /s/ Andrew M. Alexander Director
-------------- ----------------------------------
Andrew M. Alexander
Date: March 23, 1995 By /s/ Donald R. Collins Director
-------------- ----------------------------------
Donald R. Collins
Date: March 23, 1995 By /s/ Winston C. Davis Senior Vice President
-------------- ---------------------------------- and Director
Winston C. Davis
Date: March 23, 1995 By /s/ Jerry E. Finger President, Chairman and
-------------- ---------------------------------- Director (Principal Executive
Jerry E. Finger Officer)
Date: March 23, 1995 By /s/ Frank L. Gentry Director
-------------- ----------------------------------
Frank L. Gentry
Date: March 23, 1995 By /s/ William M. Hatten Director
-------------- ----------------------------------
William M. Hatten
Date: March 23, 1995 By /s/ R. Steve Letbetter Director
-------------- ----------------------------------
R. Steve Letbetter
Date: March 23, 1995 By /s/ Herschel G. Maltz Director
-------------- ----------------------------------
Herschel G. Maltz
Date: March 23, 1995 By /s/ William S. Shropshire, Jr. Senior Vice President, Chief Financial
-------------- ---------------------------------- Officer and Treasurer (Principal
William S. Shropshire, Jr. Financial and Accounting Officer)
Date: March 23, 1995 By /s/ W. J. Smith, Jr. Director
-------------- ----------------------------------
W. J. Smith, Jr.
</TABLE>
61
<PAGE>
CHARTER BANCSHARES, INC.
SUBORDINATED DEBENTURE DUE APRIL 8, 2006
$2,500,000.00 HOUSTON, TEXAS APRIL 8, 1994
FOR VALUE RECEIVED, Charter Bancshares, Inc., a corporation duly
organized and existing under the laws of the State of Texas and a bank
holding company duly registered under the Bank Holding Company Act of 1956,
as amended (herein referred to as the "Company," which term includes any
successor corporation), hereby promises to pay to NationsBank Corporation, a
North Carolina corporation and a bank holding company duly registered under
the Bank Holding Company Act of 1956, as amended, or registered assigns, the
principal sum of TWO MILLION FIVE HUNDRED THOUSAND AND N0/100 DOLLARS
($2,500,000.00), on April 8, 2006, together with interest on said principal
sum at the rate of eight and 11/100ths percent (8.11%), payable semiannually
in arrears on the last business day of April and October of each year
commencing April 30, 1994, until such principal sum has been paid in full and
at such rate on any overdue principal or on any overdue installment of
interest.
Payment of both principal and interest on this Debenture shall be paid
by wire transfer in immediately available funds to the principal office of
NationsBank Corporation in Charlotte, North Carolina, to an account number
designated in writing from time to time, or such other place and account as
the holder hereof shall designate to the Company in writing, such payments to
be made in coin or currency of the United States of America as at the time of
payment is legal tender for the payment of public and private debts.
This Subordinated Debenture is issued under and pursuant to that certain
Letter Agreement dated May 18, 1992, between NationsBank Corporation and
Charter Bancshares, Inc., as amended, whereby NationsBank Corporation agreed,
among other things, to purchase certain additional securities of Charter
Bancshares, Inc. under certain circumstances. This Subordinated Debenture is
the second and final security issued thereunder and there is no additional
amount available under such letter agreement for further issuance.
THIS SUBORDINATED DEBENTURE IS NOT A DEPOSIT AND IS NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER FEDERAL AGENCY.
THE HOLDER HEREOF REPRESENTS AND WARRANTS THAT HE HAS ACQUIRED THIS
DEBENTURE FOR HIS OWN ACCOUNT FOR INVESTMENT AND NOT WITH A VIEW TOWARD
DISTRIBUTION THEREOF OR ANY DISPOSITION THEREOF WHICH WOULD BE IN VIOLATION
OF THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, OR
ANY RULE OR REGULATION PROMULGATED UNDER SUCH FEDERAL OR STATE LAW. THE
HOLDER HEREOF UNDERSTANDS AND AGREES THAT THIS DEBENTURE MAY BE DISPOSED OF
ONLY IN COMPLIANCE WITH SUCH LAWS, RULES AND REGULATIONS. FURTHERMORE, THE
HOLDER HEREOF AGREES THAT THIS DEBENTURE SHALL NOT BE TRANSFERRABLE EXCEPT
UPON ISSUANCE OF A
<PAGE>
FAVORABLE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT
SUCH TRANSFER MAY BE MADE WITHOUT VIOLATION OF FEDERAL OR STATE SECURITIES
LAWS OR ANY RULE OR REGULATION THEREUNDER. THE HOLDER ALSO ACKNOWLEDGES AND
AGREES THAT ANY SUCH TRANSFER OF THIS DEBENTURE MAY ONLY BE MADE IN
CONFORMANCE WITH THE TRANSFER RESTRICTIONS CONTAINED HEREIN.
ARTICLE I.
SUBORDINATION
1.1 The payment of principal and interest on this Debenture, and any
other amount which may become due and payable hereunder, is hereby expressly
subordinate, to the extent and in the manner hereinafter provided, to the
prior payment in full of all Senior Indebtedness, as hereinafter defined.
For purposes of this Debenture, "Senior Indebtedness" means the principal of,
premium or penalty, if any, and unpaid interest on (a) all indebtedness of
the Company (including indebtedness of others guaranteed by the Company),
other than indebtedness evidenced by this Debenture, whether outstanding on
the date of this Debenture or hereafter created, incurred, assumed or
guaranteed (i) for money borrowed or (ii) in connection with the acquisition
by the Company or by any of its subsidiaries of assets of any kind, unless in
the instrument creating or evidencing the same or pursuant to which the same
is outstanding it is provided that such indebtedness is not superior in right
of payment to this Debenture, and (b) any renewals, extensions, modifications
and refundings of any such indebtedness.
1.2 Upon any dissolution, winding up, liquidation or reorganization of
the Company, whether in bankruptcy, insolvency, reorganization or
receivership proceedings, or upon an assignment for the benefit of creditors
or any other marshaling of assets and liabilities of the Company or
otherwise, and upon the distribution of assets of the Company, if any, in
connection therewith, the rights of the holder(s) of this Debenture shall be
limited as follows:
(a) All principal, premium or penalty, if any, and interest due upon all
Senior Indebtedness shall first be paid in full, or payment thereof
provided for, in money or its equivalent worth, before the holder(s)
of this Debenture is entitled to receive payment upon the principal
of, premium or penalty, if any, or interest on this Debenture.
(b) Any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities of the Company
(other than shares of stock of the Company as reorganized or
readjusted or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, the payment
of which is subordinate to the payment of all Senior Indebtedness
which may at the time be outstanding on terms not less favorable to
the holders thereof than the subordination provisions of this
Article I) to which the holder(s) of this Debenture would be entitled
except for the provisions of this Article I shall be paid by the
liquidating trustee or agent or other person making such payment or
distribution,
Page 2
<PAGE>
directly to the holders of Senior Indebtedness (pro rata to each such
holder on the basis of the respective amounts of Senior Indebtedness
held by each such holder), to the extent necessary to pay in full all
Senior Indebtedness remaining unpaid, after giving effect to any
prior or concurrent payment or distribution, or provision therefor,
on the Senior Indebtedness. In the event that, notwithstanding the
foregoing provisions of this Section 1.2, any payment or distribution
of assets of the Company of any kind or character shall be received
by the holder(s) of this Debenture before all Senior Indebtedness is
paid in full, or provision made for its payment, such payment or
distribution shall be paid over to the holders of the Senior
indebtedness (pro rata to each such holder on the basis of the
respective amounts of Senior Indebtedness held by each such holder),
for application to the payment of all Senior Indebtedness remaining
unpaid until all such Senior Indebtedness shall have been paid in
full, or provision made for its payment, after giving effect to any
prior or concurrent payment or distribution, or provision therefor,
on the Senior Indebtedness.
(c) Notwithstanding the provisions of subparagraphs (a) and (b) of this
Section 1.2, in the event of any dissolution, winding up, liquidation
or reorganization of the Company, whether in bankruptcy, insolvency,
reorganization or receivership proceedings, or upon an assignment for
the benefit of creditors or any other marshaling of assets and
liabilities of the Company or otherwise, and upon the payment and
distribution of assets of the Company, if any, in connection
therewith, and after all Senior Indebtedness has been paid, the
holders of this Debenture and any other subordinated indebtedness
of the Company shall be entitled to payment and distribution of
assets of the Company, if any, before any payment shall be made to
the holders of any preferred or common stock or an equity interest in
the Company.
(d) Upon notice of any proceeding described in this Section 1.2, the
holder(s) of this Debenture agrees to act promptly and with due
diligence to enforce his claim against the Company as a holder of
this Debenture, or to notify the Company in writing of his intention
not to enforce such claim.
(e) Notwithstanding the provisions of this Article I, payment of this
Debenture shall be PARI PASSU with any and all other subordinated
indebtedness of the Company, whether now outstanding or issued
subsequent to the date hereof.
1.3 In the event and during the continuance of any default by the
Company in payment of any Senior Indebtedness when due, whether at a stated
maturity date, upon acceleration or otherwise, no payment of principal of,
premium or penalty, if any, or interest on this Debenture need be made by the
Company and any such suspended payment shall not be considered as an Event of
Default under Article II hereof.
1.4 Subject to the payment in full of all Senior Indebtedness, the
holder(s) of this Debenture shall be subrogated to the rights of the holders
of the Senior Indebtedness to receive payments and distributions of assets of
the Company applicable to the Senior Indebtedness until the principal and
Page 3
<PAGE>
interest in this Debenture shall be paid in full. No such payments or
distributions applicable to the Senior Indebtedness shall, as between the
Company, its creditors other than the holders of the Senior Indebtedness, and
the holder(s) of this Debenture, be deemed to be payment by the Company to or
on account of this Debenture.
1.5 No term or provision of this Debenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of, premium or penalty, if any, and interest on this Debenture at
the time, place and rate, in coin and currency, herein prescribed.
ARTICLE II
EVENTS OF DEFAULT; RIGHTS AND REMEDIES
2.1 Subject to Section 1.3 hereof, the occurrence of any one or more of
the following shall constitute an "Event of Default" under this Debenture:
(a) The Company fails to pay any part of the principal of this Debenture
when the same shall become due and payable, whether at maturity or by
declaration or otherwise; or
(b) The Company fails to pay within five (5) business days after same
shall become due and payable any installment of interest on this
Debenture, unless the time for payment of such interest installment
shall be extended by the holder in his sole discretion; or
(c) The Company or Charter National Bank-Houston, Charter National
Bank-Colonial or University National Bank-Galveston (the "Banking
Subsidiaries," which term as used herein shall include any successor
corporation or any national banking association or other entity
primarily engaged in the business of bank of which the Company, at
any time while this Debenture is outstanding, owns fifty percent
(50%) or more of its outstanding common stock) shall make an
assignment for the benefit of creditors, or shall admit in writing
its inability to pay its debts as they become due, or shall file a
voluntary petition in bankruptcy, or shall be adjudicated a bankrupt
or insolvent, or shall file any petition or answer seeking for
itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or
future statute, law or regulation, or shall seek or consent to or
acquiesce in the appointment of any trustee, receiver or liquidator
of the Company or any of its Banking Subsidiaries or all or
substantially all of the property of the Company or any of its
Banking Subsidiaries; or
(d) Within sixty (60) days of the commencement of any action or
proceeding against the Company or any of its Banking Subsidiaries
seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or
future statute, law or regulation, such action or proceeding shall
not have been dismissed or all orders thereunder affecting the
operation or the business of the Company stayed, or the stay of any
such order shall thereafter be set aside, or, within sixty (60) days
after the appointment, without the consent or acquiescence of the
Page 4
<PAGE>
Company or such Banking Subsidiary, or any trustee, receiver or
liquidator of the Company or such Banking Subsidiary or of all or any
substantial part of the properties of the Company or any Banking
Subsidiary, such appointment shall not have been vacated.
2.2 Upon and following the occurrence of any Event of Default, the
holder(s) of this Debenture may at his or their option, by and upon written
notice or notices to the Company, declare the principal due and payable,
whereupon same shall forthwith mature and become due and payable together
with all accrued and unpaid interest and premium or penalty, if any, without
presentment, demand, protest or notice, all of which are hereby waived.
2.3 If any one or more Events of Default shall occur and be continuing,
the holder(s) of this Debenture may proceed to protect and enforce the rights
of such holder(s) by an action at law, suit in equity, or other appropriate
proceeding, whether for the specific performance of any obligation contained
herein, or for an injunction against a violation of any of the terms hereof,
or in aid of the exercise of any power granted hereby or thereby or by law.
The Company shall pay all reasonable fees and expenses, including attorneys'
fees, incurred by the holder hereof in connection with any such proceedings.
Such fees and expenses may be added to the outstanding principal amount
hereof at the option of the holder hereof upon written notice thereof
accompanied by documentation evidencing the incurrence of such reasonable
fees and expenses.
ARTICLE III
REDEMPTION AND PREPAYMENT
This Debenture may be redeemed and prepaid, at the option of the
Company, at anytime, in whole or from time to time in part, without premium
or penalty, upon not less than thirty (30) nor more than ninety (90) days
prior written notice to the holder(s) at its or their address as reflected in
the register maintained by the Company.
ARTICLE IV
RESTRICTIONS ON TRANSFER
4.1 Subject to satisfaction of the conditions set forth hereinbelow,
upon surrender of this Debenture for registration of transfer at the
principal executive offices of Company, duly endorsed by the registered
holder hereof and accompanied by a proper instrument or instruments of
transfer, in form and substance satisfactory to the Company, one or more
debentures of authorized denominations, but for a like aggregate principal
amount, will be issued to the designated transferee(s) in exchange herefor.
Before any such registration of transfer shall be made, the following
conditions shall have been met to the reasonable satisfaction of the Company:
(a) The proposed transferee shall have represented and warranted in
writing that he is acquiring the Debenture for investment and not
with a view toward distribution thereof;
Page 5
<PAGE>
(b) The proposed transferee shall have agreed in writing to be bound by
all the restrictions on transfer set forth in this Debenture;
(c) The Debenture(s) to be issued to the transferee(s) shall bear the
capitalized legend conspicuously set forth on the first page hereof;
and
(d) The holder or the proposed transferee shall have delivered to the
Company (at his sole expense) an opinion of counsel which shall be
reasonably satisfactory to the Company and its counsel, stating
that such transfer may be effected without registration under the
Securities Act of 1933, as amended, the Securities Exchanges Act of
1934, as amended, and applicable state securities laws, and such
transfer may be made without violation of federal or state securities
laws or any rule or regulation thereunder.
4.2 No transfer or other disposition of this Debenture shall be valid
or effective unless and until the transfer restrictions set forth herein
shall have been fully complied with. Any transferee of this Debenture shall
also be subject to the transfer restrictions herein set forth.
4.3 Upon compliance with the transfer restrictions herein set forth,
one or more new Debentures substantially in the form of this Debenture and of
denominations of any $1,000 multiples, will be issued to the designated
transferee or transferees in the designated and authorized amount(s). Each
such new Debenture shall be dated as of the date to which interest has been
paid on the unpaid principal amount of the Debenture surrendered.
ARTICLE V
REGISTER
The Company shall keep and maintain at its principal office a register
wherein the Company shall reflect the issuance, registration and transfer of
this Debenture. Prior to presentment for registration of transfer in
accordance with the transfer restrictions herein set forth, the Company may
treat the person in whose name this Debenture is registered as the owner and
holder thereof for the purpose of receiving payment as herein provided and
for all other purposes.
ARTICLE VI
NON-RECOURSE
No recourse under or upon any obligation, covenant or agreement of this
Debenture, or for any claim based thereon or otherwise in respect thereof,
shall be had against any shareholder, officer, director, employee or agent,
as such, past, present or future, of the Company, any subsidiary or any
successor corporation, either directly or indirectly through the Company,
whether by virtue of any constitution, statute or rule of law, or by
enforcement of any assessment or penalty or otherwise; it being expressly
understood that this Debenture and the obligations hereunder are solely
corporate obligations of the Company, and no such personal liability whatever
shall attach to, or is or shall be incurred by any shareholder, officer,
director, employee or agent, as such, past, present or future, of the
Company, any subsidiary or successor corporation, or any them, because of the
creation of the
Page 6
<PAGE>
indebtedness hereby authorized, or under or by reason of the obligations,
covenants or agreements contained in this Debenture or implied therefrom; and
that any and all such personal liability of, either at common law or in
equity or by constitution or statute, and any and all such rights and claims
against, every such shareholder, officer, director, employee or agent, as
such, because of creation of the indebtedness evidenced hereby, or under or
by reason of the obligations, covenants or agreements contained herein or
implied therefrom, are hereby expressly waived and released as a condition
of, and as consideration for, the execution and issuance of this Debenture.
ARTICLE VII
MISCELLANEOUS
7.1 No modification, amendment or waiver of any of the provisions of
this Debenture shall be made, and same shall not be valid, effective or
binding, unless evidenced by a written instrument signed by the Company and
the holder hereof.
7.2 Any notice required or permitted to be given under this Debenture
shall be given in writing and shall be deposited, postage prepaid, registered
or certified mail, return receipt requested, in the United States mail, or
personally delivery with a written acknowledgment of receipt, addressed to
the Company at its principal office and to the holder at his most current
address as reflected in the records of the Company. Such notice shall be
deemed to have been given and received on the date of postmark for any mailed
notice, the date of acknowledgment of any personally delivered notice and the
date of postmark of any mailed confirmation of a telecopier facsimile
transmission. Any notice required hereby may be furnished by means of a
telecopier facsimile transmission sent to the principal offices of the holder
and the Company, as the case may be, with confirmation of such telecopier
facsimile transmission to be mailed in accordance with the foregoing notice
provisions of this Section 7.2.
7.3 This Debenture shall be governed by and construed and enforced
under the laws of the State of Texas and the United States of America.
7.4 The article and section headings in and the captions of this
Debenture are intended for reference purposes only and shall not be construed
as limiting or effecting any of the contents of this Debenture or its terms
and provisions.
7.5 The use of the singular or plural form shall include the other
form, and the use of the masculine, feminine or neuter gender shall include
the other gender.
7
<PAGE>
IN WITNESS WHEREOF, Charter Bancshares, Inc. has caused this Debenture
to be executed by its duly authorized officers intending to be bound hereby
as of the date first above written.
CHARTER BANCSHARES, INC.
By:/s/JERRY E. FINGER
-----------------------------------
Jerry E. Finger, Chairman and CEO
Attest:
By:/s/MICHAEL A. ROY
----------------------------
Michael A. Roy, Secretary
[SEAL]
Page 8
<PAGE>
SUBSIDIARIES OF CHARTER BANCSHARES, INC.
The following comprise all the subsidiaries of Charter Bancshares, Inc:
CBH, Inc.
2500 West Fourth Street, Suite 11
Wilmington, Delaware 19899
Charter National Bank-Houston
2600 Citadel Plaza Drive
Houston, Texas 77008
Charter National Bank-Colonial
2301 FM 1960 West
Houston, Texas 77068
University National Bank-Galveston
700 University Blvd.
Galveston, Texas 77550
Charter Venture Group, Inc.
2600 Citadel Plaza Drive
Houston, Texas 77008
Charter-Houston Securities, Inc.
(formerly Charter Leasing, Inc.)
2600 Citadel Plaza Drive
Houston, Texas 77008
Charter-Colonial Securities, Inc.
(formerly Bissonnet West, Inc.)
2600 Citadel Plaza Drive
Houston, Texas 77008
Charter Mortgage Company
(formerly Capital Standard Mortgage Company)
13101 Northwest Freeway, Ste. 120
Houston, Texas 77040-6309
Charter Bank, SSB
(formerly West Loop Savings & Loan)
4672 Beechnut
Houston, Texas 77096
E-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 45,166
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 28,004
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 111,853
<INVESTMENTS-CARRYING> 168,461
<INVESTMENTS-MARKET> 160,016
<LOANS> 343,761
<ALLOWANCE> 4,446
<TOTAL-ASSETS> 722,398
<DEPOSITS> 616,880
<SHORT-TERM> 33,594
<LIABILITIES-OTHER> 8,186
<LONG-TERM> 14,850
<COMMON> 6,200
0
710
<OTHER-SE> 41,948
<TOTAL-LIABILITIES-AND-EQUITY> 722,398
<INTEREST-LOAN> 25,875
<INTEREST-INVEST> 16,647
<INTEREST-OTHER> 1,334
<INTEREST-TOTAL> 43,856
<INTEREST-DEPOSIT> 12,319
<INTEREST-EXPENSE> 14,605
<INTEREST-INCOME-NET> 29,251
<LOAN-LOSSES> 233
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 31,899
<INCOME-PRETAX> 11,447
<INCOME-PRE-EXTRAORDINARY> 7,686
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,686
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
<YIELD-ACTUAL> 7.08
<LOANS-NON> 947
<LOANS-PAST> 700
<LOANS-TROUBLED> 1,203
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,616
<CHARGE-OFFS> 939
<RECOVERIES> 536
<ALLOWANCE-CLOSE> 4,446
<ALLOWANCE-DOMESTIC> 4,446
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
