SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[FEE REQUIRED]
For the Fiscal Year Ended September 30, 1996
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 ______________________
Commission File Number: 0-27304
CHARTER FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 37-1345386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
114 West Broadway, Sparta, Illinois 62286-1683
(Address of Principal Executive Offices) Zip Code
(618) 443-2166
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X[ NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X].
As of December 23, 1996, there were issued and outstanding 4,253,459
shares of the Registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, which amount includes voting stock held by officers and
directors, computed by reference to the last sale price on December 23, 1996, as
reported by the Nasdaq National Market, was approximately $41.2 million.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Stockholders for the fiscal year ended September 30, 1996
(Parts II and IV).
2. Proxy Statement for the January 16, 1997 Annual Meeting of Stockholders
(Part III).
<PAGE>
PART I
ITEM 1. Business
Charter Financial, Inc.
Charter Financial, Inc. (the "Company") is a Delaware corporation that
was organized in June 1995. The only significant assets of the Company are the
investment in Charter Bank, S.B. (the "Bank") and $4.4 million invested with the
Bank. The Company is registered as a savings and loan holding company with the
Office of Thrift Supervision (the "OTS").
The Company employs executive officers and a support staff if and as
the need arises. Such personnel are provided by the Bank and are not paid
separate remuneration for such services. The Company reimburses the Bank for the
use of Bank personnel. At September 30, 1996, the Company had total consolidated
assets of $388.4 million, total consolidated deposits of $248.7 million, and
consolidated stockholders' equity of $56.4 million. The Company's executive
office is located at 114 West Broadway, Sparta, Illinois 62286 and its telephone
number is (618) 443-2166.
Charter Bank, S.B.
Charter Bank, S.B. (the "Bank") is an Illinois-chartered savings bank
headquartered in Sparta, Illinois. The Bank conducts its business from its main
office and [six] full-service branches located in Carbondale, Murphysboro,
Steeleville, DuQuoin, Anna, and Marion, Illinois. The Bank was originally
chartered in 1894. The Bank has been a member of the Federal Home Loan Bank
System since 1936. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC").
The Bank is a community-oriented savings bank engaged primarily in the
business of attracting retail deposits from the general public in the Bank's
market area and using such funds together with borrowings and funds from other
sources to primarily originate mortgage loans secured by one- to four-family
residential real estate and consumer loans. The Bank also originates commercial
real estate loans, multi-family real estate loans and commercial business loans.
Additionally, the Bank invests in mortgage-backed securities primarily issued or
guaranteed by the United States Government or agencies thereof, and maintains a
portion of its assets in liquid investments, such as overnight funds at the
Federal Home Loan Bank ("FHLB"). The Bank invests in obligations of the United
States Government or agencies thereof, collateralized mortgage obligations,
corporate debentures, mutual funds and municipal bonds.
The Bank's principal sources of funds are deposits, FHLB advances,
reverse repurchase agreements, funds received from the repayment and prepayment
of loans and mortgage-backed securities, on-going operations, and the sale or
maturity of investment securities. Principal sources of income are interest
income on residential, commercial and consumer loans, interest on investments,
commissions and fees. The Bank's principal expenses are interest paid on
deposits, interest paid on borrowed money and employee compensation and
benefits.
The Bank's principal executive office is located at 114 West Broadway,
Sparta, Illinois, and its telephone number at that address is (618) 443-2166.
<PAGE>
Recent Development
On December 28, 1995, the Company acquired 100% of the capital stock
of Charter Bank, S.B. (the "Bank"), sold 2,919,414 shares of common stock in a
subscription offering for a purchase price of $10.00 per share (the "Offering"),
and issued 2,054,832 shares of common stock in exchange for 986,051 shares of
the Bank's common stock held by shareholders other than Charter Bancorp, M.H.C.
(together with the Offering, the "Conversion").
In May 1996, the Bank completed its acquisition of Community Savings
Bank, Marion, Illinois ("Community"), whereby it assumed deposit liabilities
totaling $49.7 million and $1.5 million in borrowed money. The Bank acquired
loans receivable of $45.4 million, mortgage-backed securities of $1.3 million,
investment securities of $6.3 million and building and equipment with a value of
$2.0 million. The Bank is operating Community's office as a branch of the Bank.
The total purchase price to acquire Community was approximately $7.5 million.
On August 12, 1996, the Company, the Bank, and Charter Interim Savings
Bank entered into an Agreement and Plan of Merger (the "Agreement") with Home
Federal Savings Bank, Carbondale, Illinois ("Home Federal"), which provides,
among other things, for the (i) acquisition of Home Federal by the Bank, and
(ii) the payment of $21.00 per share (subject to adjustment if transaction costs
exceed $100,000) for each share of Community's Common Stock issued and
outstanding (the "Acquisition"). The holders of Home Federal stock options shall
receive cash equal to the difference between their option exercise price and
$21.00 multiplied by the number of shares underlying the stock option. It is
expected that the total purchase price to acquire Home Federal will be
approximately $6.3 million.
Consummation of the Acquisition is subject to certain conditions,
including the approval of Home Federal's stockholders and receipt of all
regulatory approvals. With those approvals, it is expected that the Acquisition
will be completed during the first quarter of calendar year 1997.
Market Area/Local Economy
The Bank is a community-oriented savings bank offering a range of
retail banking services to residents of its market area. The Bank's market area
includes all of Randolph, Jackson, Williamson, Perry and Union counties and
portions of Monroe, Washington, Alexander, Pulaski, Jefferson, Johnson, Franklin
and St. Clair counties. Management believes that its offices are located in
communities that can generally be characterized as stable residential
communities of predominantly one- to four-family residences. The Bank's market
for deposits is concentrated in the communities surrounding its main office and
six full-service branches. The Bank is the largest independent financial
institution headquartered in its market area.
The local economy of the Bank's market area consists primarily of coal
mining, agriculture, light commercial industry and government. The largest
employers in the Bank's primary market area are Southern Illinois
University-Carbondale and Gilster Mary-Lee Corp., a food packaging company.
The Bank's business and operating results are significantly affected by
the general economic conditions prevalent in its primary market area. The
population in the Bank's market area is expected to remain stable in the
foreseeable future.
<PAGE>
The Bank faces significant competition in attracting deposits from
commercial banks, other savings institutions and credit unions. The Bank faces
additional competition for deposits from short-term money market funds, from
other corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies. Notwithstanding
the foregoing, the Bank's deposit market share has remained stable. The Bank
also faces significant competition in the origination of loans from savings
institutions, mortgage banking companies, credit unions, insurance companies and
commercial banks.
Lending Activities
General. The Bank's loan portfolio consists primarily of conventional
mortgage loans secured by one- to four-family residences. At September 30, 1996,
the Bank's loans receivable, net totaled $275.5 million, of which $193.3
million, or 68.78% consisted of one- to four-family residential mortgage loans.
The remainder of the Bank's loans receivable at such date consisted of
multi-family loans (0.62%), commercial real estate loans (4.51%), commercial
business loans (2.76%) and consumer loans (23.33%). Historically, the principal
lending activity of the Bank has been the origination of mortgage loans for the
purpose of financing or refinancing one- to four-family residential properties
in the Bank's primary market area. For the fiscal year ended September 30, 1996,
the Bank's residential loan originations (excluding equity lines of credit) were
$21.8 million. For the fiscal year ended September 30, 1996, the Bank's one- to
four-family residential mortgage loans increased by $58.7 million, or 43.6%,
from September 30, 1995. In order to expand its loan portfolio, the Bank has
emphasized consumer lending and the purchase of adjustable rate mortgage ("ARM")
loans secured primarily by residential properties located outside of the Bank's
market area.
The Bank has managed to make its interest-earning assets more interest
rate sensitive by, among other things, originating variable interest rate loans,
such as ARM loans and medium-term consumer loans, and by investing primarily in
short and medium-term securities. The Bank continues to originate fixed-rate
mortgage loans secured by one- to four-family residential properties with terms
ranging up to 20 years. The ability of the Bank to originate ARM loans is
substantially affected by market interest rates and consumer preference for
fixed-rate loans in a relatively low interest rate environment. At September 30,
1996, approximately $164.6 million, or 58.6% of the Bank's total loans
receivable consisted of loans with variable interest rates.
During the fiscal year ended September 30, 1996, the Bank sold $1.5
million of student loans. During the fiscal year ended September 30, 1996, the
Bank purchased $37.4 million of residential one- to four-family mortgage loans.
Loan purchases consist primarily of ARM loans secured by properties located
outside the Bank's market area. Purchased loans in the aggregate totaled $68.1
million and represented 32.8% of the Bank's total real estate loans at the end
of the fiscal year. For the years ended September 30, 1995 and 1994,
respectively, the Bank purchased $25.9 million and $2.4 million of residential
mortgage loans.
The Bank also invests in mortgage-backed securities with adjustable
interest rates. At September 30, 1996, the Bank's mortgage-backed securities
portfolio totaled $16.6 million or 4.3% of total assets. At that date, $6.1
million or 36.44% of the mortgage-backed securities had adjustable interest
rates. Mortgage-backed securities with remaining terms of five years or less
represent $2.9 million, or 17.42% of the mortgage-backed securities portfolio.
<PAGE>
Analysis of Loan Portfolio. Set forth below is data relating to the
composition of the Bank's loan portfolio by type of loan as of the dates
indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
1-4 family (1)......................... $193,301 68.78% $134,640 63.45% $116,124 62.83%
Multi-family........................... 1,749 .62 1,479 0.70 1,671 0.90
Commercial................................. 12,677 4.51 9,186 4.33 7,385 4.00
-------- ------ -------- ------ -------- -----
Total real estate loans.............. 207,727 73.91 145,305 68.48 125,180 67.73
Commercial business loans.................. 7,768 2.76 6,634 3.13 6,452 3.49
Consumer loans:
Automobile............................... 50,292 17.90 49,918 23.52 43,091 23.31
Mobile home loans........................ 170 0.06 145 0.07 67 0.04
Education loans.......................... 1,373 0.49 2,755 1.30 3,853 2.08
Loans secured by deposit accounts........ 1,590 0.57 1,117 0.53 1,001 0.54
Other (2)................................ 12,120 4.31 6,312 2.97 5,185 2.81
-------- ------ -------- ------ -------- -----
Total consumer loans................... 65,545 23.33 60,247 28.39 53,197 28.78
-------- ------ -------- ------ -------- -----
Total loans receivable............... 281,040 100.00% 212,186 100.00% 184,829 100.00%
====== ====== ======
Less:
Loans in process..................... 36 37 1,417
Unearned discounts, net.............. 2,648 3,429 2,674
Deferred loan fees................... 205 105 214
Allowance for loan losses............ 2,419 2,232 2,129
Purchase accounting discounts........ 245 309 337
-------- -------- --------
Total loans receivable, net.......... $275,487 $206,074 $178,058
======== ======== ========
- ------------------------------------
(1) Includes home equity lines of credit of $1.6 million, $1.8 million, and $2.0
million at September 30, 1996, 1995, and 1994, respectively.
(2) Includes personal loans and credit line checking.
</TABLE>
<PAGE>
Residential Real Estate Loans. The Bank's primary lending activity is
the origination of one- to four-family, owner-occupied, residential mortgage
loans secured by property located in the Bank's market area. Loans are generated
through the Bank's marketing efforts, its existing customers and referrals from
mortgage bankers, real estate brokers, builders and local businesses. The Bank
generally has limited its real estate loan originations to finance properties
located within its market area. When local loan demand has been insufficient to
meet desired levels of mortgage loan originations, which has been the case in
recent years, the Bank has purchased ARM loans secured by residential properties
located outside of its market area. The Bank uses similar underwriting criteria
in evaluating residential mortgage loans for purchase as it uses in evaluating
residential mortgage loans that it originates directly. At September 30, 1996,
the Bank had $193.3 million, or 68.78% of its total loans receivable invested in
mortgage loans secured by one- to four-family residences.
Historically, the delinquency rate on purchased loans has been higher
than that of loans originated by the Bank. However, in fiscal year 1996, the
Bank experienced relatively low delinquency rates on purchased loans. Management
believes this is primarily due to the fact that the Bank generally does not
service most loans which it purchases, thereby making it more difficult to
monitor delinquent borrowers. At September 30, 1996 and 1995, purchased loan
delinquencies totaled $238,000 and $435,000, respectively, and represented 0.3%
and 0.8% of purchased loans outstanding. The delinquency rate on loans
originated by the Bank at September 30, 1996 and 1995 was 0.9% and 0.1%,
respectively, of originated loans outstanding. While the Bank intends to
continue to purchase loans as it deems appropriate, it will attempt to reduce
overall credit risk by increasing the geographic diversity of its loan
portfolio.
The Bank currently originates loans primarily for retention in its
portfolio. However, the Bank has been approved to originate service loans for
Fannie Mae. The Bank's fixed-rate mortgage loans are amortized on a monthly
basis with principal and interest due each month. Residential real estate loans
often remain outstanding for significantly shorter periods than their
contractual terms because borrowers may refinance or prepay loans at their
option.
The Bank currently offers ARM loans for terms ranging up to 30 years.
The Bank also offers fixed-rate residential mortgage loans with terms of up to
20 years. The Bank currently offers ARM loans that adjust every year or every
five years from the date of origination, with interest rate adjustment
limitations up to two percentage points per year and with a cap of up to six
percentage points on total interest rate increases over the life of the loan.
The Bank has used different interest indices for ARM loans in the past, and
currently uses the one-year, three-year or five-year Constant Maturity Treasury
Index. The Bank also has purchased ARM loans with various interest rate indices.
Consequently, the interest rate adjustments on the Bank's portfolio of ARM loans
do not reflect changes in a particular interest rate index. ARM loans secured by
residential one- to four- family real estate totaled $145.1 million, or 75.1%,
of the Bank's total one- to four- family residential real estate loans at
September 30, 1996. The origination of fixed-rate mortgage loans versus ARM
loans is monitored on an ongoing basis and is affected significantly by the
level of market interest rates, customer preference, the Bank's interest rate
gap position and loan products offered by the Bank's competitors. As interest
rates spike upward, borrowers may prefer ARM loans to fixed rate loans due to
ARM loans' lower interest rates. Although it is management's strategy to
emphasize ARM loans, market conditions may occur where there will be a demand
for fixed-rate loans. The Bank will continue to emphasize ARM loans by offering
<PAGE>
competitive pricing and service, and as a result ARM loan originations have
exceeded fixed-rate mortgage loan originations in recent years. During the year
ended September 30, 1996, the Bank originated $11.1 million of fixed-rate
residential and multi-family mortgage loans and $15.9 million of ARM loans.
During fiscal years 1995 and 1994, the Bank originated $1.7 million and $10.0
million of fixed-rate residential and multi-family mortgage loans and $13.4
million and $12.1 million of ARM loans, respectively.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio interest rate sensitive. However, as the interest income earned on ARM
loans varies with prevailing interest rates, such loans do not offer the Bank
predictable cash flows as would long-term, fixed-rate loans. ARM loans carry
increased credit risk associated with potentially higher monthly payments by
borrowers as general market interest rates increase. It is possible, therefore,
during periods of rising interest rates, that the risk of delinquencies and
defaults on ARM loans may increase due to the upward adjustment of interest
costs to the borrower, thereby resulting in increased loan delinquencies and
possibly additional loan losses.
The Bank's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the underlying real property serving as
security for the loan. Due-on-sale clauses are an important means of imposing
assumption fees and increasing the interest rate on the Bank's mortgage
portfolio during periods of rising interest rates.
All financial institutions are required to adopt and maintain
comprehensive written real estate lending policies that are consistent with safe
and sound banking practices. These lending policies must reflect consideration
of the Interagency Guidelines for Real Estate Lending Policies adopted by the
federal banking agencies, including the OTS and FDIC, in December 1992
("Guidelines"). The Guidelines set forth, pursuant to the mandates of FDICIA,
uniform regulations prescribing standards for real estate lending. Real estate
lending is defined as extension of credit secured by liens on interests in real
estate or made for the purpose of financing the construction of a building or
other improvements to real estate, regardless of whether a lien has been taken
on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate based upon the size of the institution and the nature and scope of
its operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with an LTV ratio being
the total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loan. If not a first lien, the lender must combine all
senior liens when calculating this ratio. The Guidelines, among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%); construction (commercial, multi-family and nonresidential) (80%);
improved property (85%) and owner occupied one to four family residential (no
maximum ratio, however any LTV ratio in excess of 90% should require appropriate
insurance or readily marketable collateral).
<PAGE>
Certain institutions are permitted to make real estate loans that do
not conform with the established LTV ratio limits up to 100% of the
institution's total capital. Within this aggregate limit, total loans for all
commercial, agricultural, multifamily and other non-one- to four-family
residential properties should not exceed 30% of total capital. An institution
will come under increased supervisory scrutiny as the total of such loans
approaches these levels. Certain loans are exempt from the LTV ratios (e.g.,
those guaranteed by a government agency, loans to facilitate the sale of real
estate owned, loans renewed, refinanced or restructured by the original
lender(s) to the same borrower(s) where there is no advancement of new funds,
etc.).
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. The Bank's lending policies, however, generally
limit the maximum loan-to-value ratio on both fixed-rate loans and ARM loans to
95% of the lesser of the appraised value or the purchase price of the property
securing the loan in the case of loans secured by one to four family
owner-occupied properties. The maximum loan-to-value ratio on other types of
real estate loans is generally the lesser of 80% of the appraisal value or the
purchase price of the property.
When underwriting residential real estate loans, the Bank reviews and
verifies each loan applicant's income and credit history. Management believes
that stability of income and past credit history are integral parts in the
underwriting process. Generally, the applicant's total monthly mortgage payment,
including all escrow amounts, is limited to 28% of the applicant's total monthly
income. In addition, total monthly obligations of the applicant excluding
mortgage payments, are limited to 8% of the applicant's gross monthly income.
Thus, a residential real estate loan applicant's total debt to income ratio
should not exceed 36%. Written appraisals are reviewed on each real estate
property offered to secure an applicant's loan. For real estate loans with
loan-to-value ratios of between 85% and 95%, the Bank requires private mortgage
insurance. The Bank requires fire and casualty insurance, as well as title
insurance, on all properties securing real estate loans.
The Bank also offers home equity lines of credit which are generally
secured by the borrower's principal residence. The maximum amount of a home
equity line of credit can be up to 100% of the appraised value of a borrower's
real estate collateral less the amount of any prior mortgages or related
liabilities. Home equity lines of credit are approved with adjustable interest
rates at a margin above a market index such as the prime interest rate as
published in The Wall Street Journal. The Bank's home equity lines of credit are
currently approved at 1-1/2% to 2-1/2% percentage points above the prime
interest rate as published in The Wall Street Journal. The maximum term for a
home equity line of credit is 15 years.
<PAGE>
Commercial Real Estate and Multi-Family Residential Real Estate Loans.
The Bank originates commercial real estate and multi-family residential real
estate loans. At September 30, 1996, $12.7 million, or 4.51%, of the Bank's loan
portfolio consisted of commercial real estate loans and $1.7 million, or 0.62%,
consisted of multi-family real estate loans. The Bank's commercial real estate
loans are secured primarily by improved properties such as offices, small
building facilities and other non-residential buildings. The maximum
loan-to-value ratio for commercial real estate loans originated or purchased by
the Bank is 80%. At September 30, 1996, approximately 90.9% of the Bank's
commercial real estate loans and multi-family residential real estate loans were
secured by properties located within the State of Illinois. At that date, the
largest commercial real estate loan had a principal balance of $901,000,
substantially all of which is guaranteed by a municipality. At September 30,
1996, the largest multi-family residential real estate loan had a principal
balance of $421,000 and was performing in accordance with its terms.
The underwriting standards employed by the Bank for commercial real
estate and multi-family residential real estate loans include a determination on
the applicant's credit history and an assessment of the applicant's ability to
meet existing obligations and payments on the proposed loan. The income approach
is primarily utilized to determine whether income generated from the applicant's
business or real estate offered as collateral is adequate to repay the loan. The
value of the real estate offered as collateral is reviewed by the Bank in
relation to the proposed loan amount. Generally, the loan amount cannot be
greater than 80% of the value of the real estate. Written appraisals are
obtained by the Bank from either licensed or certified appraisers on all
multi-family and commercial real estate loans. The Bank assesses the
creditworthiness of the applicant by reviewing a credit report or obtaining
other public records regarding the applicant.
Loans secured by commercial and multi-family real estate generally
involve a greater degree of credit risk than one-to-four family residential
mortgage loans and carry larger loan balances. This increased credit risk is a
result of several factors, including the effects of general economic conditions
on income producing properties and the successful operation or management of the
properties securing the loans. Furthermore, the repayment of loans secured by
commercial and multi-family real estate is typically dependent upon the
successful operation of the related business and real estate property. If the
cash flow from the project is reduced, the borrower's ability to repay the loan
may be impaired.
Commercial Business Loans. The Bank originates commercial business
loans to borrowers located in its market area which are secured by collateral
other than real estate. Such commercial business loans are generally secured by
equipment, inventory and accounts receivable, and generally are offered with
adjustable rates and various terms to maturity. In addition, the Bank, on a
limited basis, originates loans to automobile dealerships for the purpose of
allowing automobile dealerships to finance their inventory. The Bank secures the
automobile dealership loan by perfecting a security interest in the dealership's
used motor vehicles. At September 30, 1996, the Bank had 4 automobile dealership
floor plan loans, the largest of which had an outstanding principal balance of
$675,000. Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
<PAGE>
borrower's business. The Bank generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans. Commercial business loans totaled $7.8 million, or 2.76%, of the Bank's
total loans receivable at September 30, 1996. At that date, the Bank's largest
commercial business loan had a principal balance of $755,000, and was secured by
equipment, fixtures and patents.
The underwriting standards used by the Bank for commercial business
loans include a determination of the applicant's ability to meet existing
obligations and payments on the proposed loan from normal cash flows generated
in the applicant's business. The financial strength of each applicant also is
assessed through review of financial statements provided by the applicant. The
creditworthiness of an applicant is derived from a review of credit reports or a
search of public records. Once originated, commercial business loans are
reviewed periodically by the Bank. Financial statements are requested at least
annually and are reviewed by the Bank for substantial deviations or changes that
might affect repayment of the loan. Loan officers of the Bank also visit the
premises of substantial borrowers to observe the business premises, facilities,
and personnel and to inspect the pledged collateral. Underwriting standards for
commercial business loans are different for each type of loan depending on the
financial strength of the applicant and the value of collateral offered as
security.
Consumer Loans. As of September 30, 1996, consumer loans totaled $65.5
million, or 23.33%, of the Bank's total loans receivable. The principal types of
consumer loans offered by the Bank are automobile loans, loans secured by
deposit accounts, and education loans. Consumer loans generally are offered on a
fixed-rate basis. The largest category of consumer loans in the Bank's portfolio
consists of loans secured by automobiles. At September 30, 1996, consumer loans
secured by automobiles totaled $50.3 million, or 17.90% of the Bank's total
loans receivable. Automobile loans are generally offered with maturities of up
to 60 months for new automobiles. Loans secured by used automobiles will have
maximum terms which vary depending upon the age of the automobile. The Bank
generally will not make an automobile loan with a loan-to-value rate in excess
of 80%, although the loan-to-value rate may be greater or less depending on the
borrower's credit history, debt to income ratio, home ownership and other
banking relationships with the Bank.
Consumer loans entail greater risks than one- to four-family
residential mortgage loans, particularly consumer loans secured by rapidly
depreciable assets such as automobiles or loans that are unsecured. In such
cases, any repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections are dependent on the borrower's continuing
financial stability, and therefore are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Finally, the application of
various Federal and state laws, including Federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans in
the event of a default. At September 30, 1996, consumer loans 90 days or more
delinquent totaled $243,000, or 0.4%, of the Bank's consumer loans receivable.
Management believes that the Bank's level of consumer loan delinquencies is
relatively low in comparison to other financial institutions. No assurance can
be given, however, that the Bank's delinquency rate on consumer loans will
continue to remain low in the future.
<PAGE>
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's credit history and an assessment of
the applicant's ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be determined
by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also
includes a comparison of the value of the collateral in relation to the proposed
loan amount. See "Delinquencies and Classified Assets" and "Allowance for Loan
Losses" below for information regarding the Bank's loan loss experience and
reserve policy.
Loan Maturity Schedule. The following table sets forth certain
information at September 30, 1996 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
1 3 5 10
Within Through Though Through Through Beyond
1 Year 3 Years 5 Years 10 Years 20 Years 20 Years Total
------ ------- ------- -------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
1-4 family..................... $4,147 $2,553 $5,377 $26,015 $68,473 $86,736 $193,301
Multi-family................... 10 64 453 55 936 231 1,749
Commercial ....................... 1,059 342 1,128 4,235 5,139 774 12,677
Commercial business loans........... 2,934 1,281 1,109 1,442 1,002 -- 7,768
Consumer loans...................... 7,198 21,146 33,940 3,127 70 64 65,545
------ ------ ------ ------- ------- ------- -------
Total loans receivable......... $15,348 $25,386 $42,007 $34,874 $75,620 $87,805 $281,040
======= ======= ======= ======= ======= ======= ========
Mortgage-backed securities, net..... $2,061 $ 824 $ --- $ --- $ 5,684 $ 8,063 $16,632
====== ====== ====== ======= ======= ======= =======
</TABLE>
<PAGE>
The following table sets forth the dollar amount of all loans and
mortgage-backed securities at September 30, 1996, which have predetermined
interest rates and have floating or adjustable interest rates which are due
after September 30, 1997.
<TABLE>
<CAPTION>
Floating or
Fixed Rate Adjustable Rate Total
---------- --------------- -----
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
Residential:
1-4 family.............................. $ 44,348 $144,806 $189,154
Multi-family............................ 426 1,313 1,739
Commercial................................ 221 11,397 11,618
Commercial business loans................... 2,253 2,581 4,834
Consumer loans.............................. 58,347 -- 58,347
-------- -------- --------
Total loans receivable................ $105,595 $160,097 $265,692
======== ======== ========
Mortgage-backed securities, net............. $ 8,510 $ 6,061 $ 14,571
======== ======== ========
</TABLE>
Loan Origination, Solicitation and Processing. Loan originations are
derived from a number of sources such as real estate broker referrals, existing
customers, borrowers, builders, attorneys and walk-in customers. Upon receipt of
a loan application, a credit report is made to verify specific information
relating to the applicant's employment, income, and credit standing. In the case
of a real estate loan, an appraisal of the real estate intended to secure the
proposed loan is undertaken by an independent appraiser approved by the Bank. A
loan application file is first reviewed by a loan officer in the Bank's loan
department who checks applications for accuracy and completeness, and verifies
the information provided. The financial resources of the borrower and the
borrower's credit history, as well as the collateral securing the loan, are
considered an integral part of each risk evaluation prior to approval. The loan
is then reviewed by at least one other loan officer. Residential real estate
loans with principal balances of $125,000 or less may be approved by either (i)
two of the Bank's loan officers, or (ii) four members of the Board of Directors
who have reviewed the loan application submitted by a loan officer. Loans
secured by single family residences with principal balances in excess of
$125,000 but not more than $250,000 must be approved by a loan officer and
either the President or Executive Vice President of the Bank. A real estate loan
on a single residence exceeding $250,000 must also be approved by one outside
director. Loans on two- to four-family dwellings in excess of $350,000 must be
approved by a loan officer, the President or Executive Vice President of the
Bank and one outside director. Once the loan is approved a loan commitment is
promptly issued to the borrower.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral which insurance must be
maintained during the full term of the loan. Title insurance or an attorney's
opinion based on a title search of the property is required on all loans secured
by real property.
<PAGE>
Origination, Purchases and Sale of Loans and Mortgage-Backed
Securities. Set forth below is a table showing the Bank's loan originations and
the purchases, sales and repayments of loans and mortgage-backed securities for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Loans receivable, net at beginning of year $ 206,074 $ 178,058 $ 157,342
Originations:
Real Estate:
Residential (1) ........................ 26,987 15,070 22,116
Commercial ............................. 3,149 1,560 1,646
Commercial business loans (2) ............ 18,806 15,090 13,161
Consumer ................................. 40,336 35,338 46,440
--------- --------- ---------
Total originations ................. 89,278 67,058 83,363
Loans purchased .......................... 37,363 28,213 2,389
Loans acquired from Community Savings Bank 45,753 -- --
Repayments ............................... (102,481) (67,037) (65,949)
Loans sold ............................... (1,549) (1,723) --
Increase (decrease) in other items, net .. 1,049 1,505 913
--------- --------- ---------
Total loans receivable, net
at end of year .................... $ 275,487 $ 206,074 $ 178,058
========= ========= =========
Mortgage-backed securities, net
at beginning of year .................. $ 16,670 $ 16,071 $ 20,950
Purchases ................................ 3,096 2,543 3,310
Mortgage-backed securities acquired from
Community Savings Bank ................ 1,296 -- --
Sales .................................... (64) -- --
Repayments ............................... (4,225) (2,443) (7,564)
Discount (premium) amortization .......... (38) (119) (167)
Unrealized gain/(loss) on mortgage-backed
securities available for sale .......... (103) 618 (458)
--------- --------- ---------
Mortgage-backed securities, net
at end of year .................... $ 16,632 $ 16,670 $ 16,071
========= ========= =========
- ------------------------------------
(1) Includes advances on equity lines of credit of $5.2 million, $3.1 million
and $3.1 million for September 30, 1996, 1995, and 1994, respectively.
(2) Includes advances on non-mortgage commercial lines of credit of $15.6
million, $13.8 million and $9.6 million for September 30, 1996, 1995 and 1994,
respectively.
</TABLE>
<PAGE>
From time to time the Bank purchases real estate mortgage loans in
order to supplement loan originations. During the fiscal year ended September
30, 1996, the Bank purchased $37.4 million in loans. At September 30, 1996,
purchased loans totalled $68.1 million and comprised 24.25% of total loans
receivable. At September 30, 1996, $11.0 million of purchased loans were secured
by properties located within the State of Illinois and $57.1 million were
secured by properties located throughout the United States. Prior to purchasing
loans, Bank personnel will inspect the properties securing the loan and perform
other "due diligence" deemed necessary. All purchased loans secured by property
outside the Bank's market area must be approved by the Bank's Board of
Directors.
Loan Origination and Other Fees. In addition to interest earned on loans, the
Bank may charge loan origination fees. The ability of the Bank to charge loan
origination fees is influenced by the demand for mortgage loans and competition
from other lenders in the Bank's market area. At September 30, 1996, the Bank
had $205,000 of net deferred loan fees. The Bank offered loans with and without
fees during the fiscal year ended September 30, 1996. Loan origination fees are
volatile sources of income. Such fees vary with the volume and type of loans and
commitments made and purchased and with competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Bank also receives other loan
fees including late charges. The Bank recognized fees and late charges of
$391,000, $241,000 and $266,000 for the years ended September 30, 1996, 1995,
and 1994, respectively.
Loan Concentration. With certain exceptions, an Illinois-chartered
savings bank may not make a loan or extend credit for secured and unsecured
loans for business, commercial, corporate or agricultural purposes to a single
borrower in excess of 15% of the bank's total assets. At September 30, 1996, the
Bank had no loans in excess of its loan to one borrower limitation. At that
date, the largest concentration of loans to one borrower totaled $994,000.
Mortgage-Backed Securities
The Bank occasionally invests in mortgage-backed securities issued or
guaranteed by the United States Government or agencies thereof. These
securities, which consist primarily of mortgage-backed securities issued or
guaranteed by FHLMC, FNMA and GNMA, had a total carrying value of $16.6 million
at September 30, 1996. Included in this amount are $2.9 million of
mortgage-backed securities with remaining terms of five years or less. Total
mortgage-backed securities consisted of $10.6 million of fixed rate
mortgage-backed securities and $6.0 million of adjustable-rate mortgage-backed
securities.
<PAGE>
Set forth below is a table showing the composition of the Bank's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities, net
Available for sale (at market value):
Adjustable............................... $ 5,693 34.23% $ 4,052 24.31% $ 1,987 12.36%
Fixed.................................... 9,424 56.66 12,203 73.20 13,607 84.67
-------- ------ ------- ------ -------- ------
Total mortgage-backed securities
available for sale.................. 15,117 90.89 16,255 97.51 15,594 97.03
Held to maturity (at cost):
Adjustable............................... 368 2.21 415 2.49 477 2.97
Fixed.................................... 1,147 6.90 -- -- -- --
-------- ------ ------- ------ -------- ------
Total mortgage-backed securities
held to maturity.................... 1,515 9.11 415 2.49 477 2.97
-------- ------ ------- ------ -------- ------
Total mortgage-backed securities, net $ 16,632 100.00% $16,670 100.00% $ 16,071 100.00%
======== ====== ======= ====== ======== ======
</TABLE>
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgage loans with varying interest
rates and maturities. The mortgage loans backing the mortgage-backed securities
can be either fixed-rate mortgage loans or ARM loans. The interest rate risk
characteristics of the underlying pool of mortgages as well as the prepayment
risk are passed on to the holder of the mortgage-backed securities.
Consequently, in a declining interest rate environment there is a risk that
mortgage-backed securities will prepay faster than anticipated thereby adversely
affecting the yield to maturity and the related market value of the
mortgage-backed securities. Moreover, there can be no assurance that the Bank
would be able to reinvest the cash flow from prepaid mortgage-backed securities
into comparable yielding investments. In a rising interest rate environment, the
value of the mortgage-backed securities with fixed-rate underlying mortgage
loans will be less as investors seek higher yielding investments, and the value
of mortgage-backed securities with adjustable-rate underlying mortgage loans may
be impaired due to contractual limits on interest rate adjustments.
<PAGE>
Delinquencies and Classified Assets
The Bank's collection procedures provide that when a mortgage loan is
15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment plus a late charge. If the mortgage loan remains
delinquent after 30 days, a telephone call is made or a letter is sent to the
borrower, stressing the importance of reinstating the loan and obtaining reasons
for the delinquency. Older mortgage loans receive a 30-day grace period before a
late charge is assessed. When a loan continues in a delinquent status for 90
days or more, and a repayment schedule has not been made or kept by the
borrower, a notice of intent to foreclose upon the underlying property is then
sent to the borrower, giving 30 days to cure the delinquency. If not cured,
foreclosure proceedings are initiated. Consumer loans receive a 10-day grace
period before a late charge is assessed. Collection efforts begin after the
grace period expires.
In recent years the Bank has increased its collection efforts by more
closely monitoring delinquent loans and management believes that these efforts
have contributed to the loan portfolio's low delinquency levels. At September
30, 1996 the percentage of loans receivable delinquent 90 days or more to total
loans receivable, net was 0.78%.
Delinquent Loans and Non-Performing Assets. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Mortgage loans
are placed on non-accrual status generally when either principal or interest is
90 days or more past due and management considers the interest uncollectible.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
management's assessment of the ultimate collectability of the loan.
During fiscal year 1996, non-performing loans as a percentage of total
loans receivable, net, increased from 0.32% as of September 30, 1995 to 0.78% as
of September 30, 1996.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold. When real estate owned is acquired, it is recorded at the lower of the
unpaid principal balance of the related loan, or its fair market value, less
estimated selling expenses. Any further write-down of real estate owned is
charged against earnings. At September 30, 1996, 1995 and 1994, the Bank owned
approximately $428,000, $140,000 and $210,000, respectively, of property
acquired as a result of foreclosure or by deed in lieu of foreclosure and
classified as real estate owned. In recent years, the Bank believes it has
worked aggressively to minimize real estate owned property by improving
collection procedures and tightening loan underwriting standards.
Classified Assets. Federal regulations require that each insured
savings institution classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, Federal examiners have the
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
<PAGE>
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. For assets classified "substandard" and "doubtful", the institution
is required to establish general loan loss reserves in accordance with generally
accepted accounting principles. Assets classified "loss" must be either
completely written off or supported by a 100% specific reserve. A classification
category designated "special mention" also must be established and maintained
for assets not currently requiring classification but having potential
weaknesses or risk characteristics that could result in future problems. An
institution is required to develop an in-house program to classify its assets,
including investments in subsidiaries, on a regular basis and set aside
appropriate loss reserves on the basis of such classification. As part of the
periodic examinations of the Bank by regulatory agencies, the staff of such
agencies review the Bank's classifications and determine whether such
classifications are adequate. Such agencies have, in the past, and may in the
future, require the Bank to classify certain assets which management has not
otherwise classified or require a classification more severe than established by
management. At September 30, 1996, the Bank's classified assets totaled $2.2
million, of which $1.6 million were classified substandard and $543,000 were
classified loss. The assets or portions thereof which are classified as loss
have been specifically reserved for. At September 30, 1996, the Bank had no
assets classified as special mention.
<PAGE>
The following table sets forth information regarding loans delinquent
for more than 90 days and real estate acquired by foreclosure by the Bank at the
date indicated. As of the dates indicated, the Bank did not have any material
restructured loans within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At September 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Residential real estate............ $ 1,069 $ 544 $ 290 $2,023 $ 1,187
Commercial real estate............. 850 -- 16 32 21
Consumer........................... 243 119 97 150 78
Commercial business................ -- -- -- -- --
------- ------ ------ ------ -------
Total nonperforming loans....... 2,162 663 403 2,205 1,286
Total real estate acquired through
foreclosure (1)................. 428 140 210 241 464
------- ------- ------ ------ -------
Total nonperforming assets...... $ 2,590 $ 803 $ 613 $2,446 $ 1,750
======= ====== ====== ====== =======
Total nonperforming loans
to loans receivable, net........... 0.78% 0.32% 0.23% 1.40% 0.95%
======= ======= ====== ====== =======
Total nonperforming loans
to total assets.................... 0.56% 0.23% 0.15% 0.85% 0.56%
======= ======= ====== ====== =======
Total nonperforming assets
to total assets................... 0.67% 0.27% 0.24% 0.94% 0.76%
======= ======= ====== ====== =======
- ------------------------------------
(1) Represents the book value of property acquired by the Bank through
foreclosure, real estate in judgment or in-substance foreclosures, net of
valuation reserves.
</TABLE>
At September 30, 1996, the Bank's largest nonperforming loan had a
principal balance of $386,000 and was secured by commercial real estate. At
September 30, 1996, the Bank's largest property constituting real estate owned
by the Bank had a book value of $156,000. During the year ended September 30,
1996, the Bank would have recorded $88,000 in gross interest income on loans
accounted for on a nonaccrual basis if such loans had performed in accordance
with their original terms. During the year ended September 30, 1996, the Bank
did not record any interest income attributable to such non-accrual loans.
<PAGE>
Allowance for Loan Losses
Management's policy is to provide for estimated losses on the Bank's
loan portfolio based on management's evaluation of the potential losses that may
be incurred. Management regularly reviews the Bank's loan portfolio, including
problem loans, to determine whether any loans require classification or the
establishment of appropriate reserves or allowances for losses. Such evaluation,
which includes a review of all loans of which full collectability of interest
and principal may not be reasonably assured, considers, among other matters, the
estimated net realizable value of the underlying collateral. Other factors
considered by management include the size and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods. Management calculates the general allowance for loan losses in part
based on past experience, and in part based on specified percentages of loan
balances. While both general and specific loss allowances are charged against
earnings, a portion of general loan loss allowances are added back to capital to
the extent permitted in computing risk-based capital under federal and state
regulations.
During the years ended September 30, 1996, 1995 and 1994, the Bank
provided $170,000, $360,000 and $140,000, respectively, to the allowance for
loan losses. The Bank's allowance for loan losses totaled $2.4 million, $2.2
million and $2.1 million at September 30, 1996, 1995 and 1994, respectively. The
provisions for loan losses in recent years reflected management's decision to
increase the emphasis on factors in addition to past loan loss experience in
evaluating the adequacy of the allowance for loan losses. Accordingly, the
increased provision in fiscal year 1995 was necessary to establish loan loss
reserves to cover the credit risk associated with one commercial loan and the
collateralization of a commercial real estate project based on management's
current estimate of the value of the underlying collateral. The decreased
provisions in fiscal year 1994, reflected, among other factors, the termination
of the selective strike of area coal mines by the United Mine Workers of America
which began in May 1993 and was resolved on December 14, 1993, the continued low
level of delinquencies relative to other savings institutions, and management's
effort to closely monitor the level of delinquencies. Although the Bank
maintains its allowance for loan losses at a level which it considers to be
adequate to provide for potential losses, there can be no assurance that such
losses will not exceed the estimated amounts or that the Bank will not be
required to make additions to the allowance for loan losses in the future.
Future additions to the Bank's allowance for loan losses and changes in the
related ratio of the allowance for loan losses to nonperforming loans are
dependent upon the economy, changes in real estate values and interest rates,
the view of the regulatory authorities toward adequate loan loss reserve levels,
and inflation. Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss provisions
may be deemed necessary.
Analysis of the Allowance For Loan Losses. The following table sets
forth the breakdown of the allowance for loan losses by loan category for the
periods indicated. The table reflects the allowance for loan losses as a
percentage of net loans receivable. Management believes that the allowance can
be allocated by category only on an approximate basis. The allocation of the
allowance by category is not necessarily indicative of future losses and does
not restrict the use of the allowance to absorb losses in any category.
<PAGE>
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ---------- --------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding............... $ 281,040 $ 212,186 $ 184,829 $ 163,365 $ 140,581
Average loans receivable, net
outstanding........................ 230,765 188,897 168,391 144,923 138,062
========= ========== ========= ========== =========
Allowance balance (at beginning
of year)........................... $ 2,232 $ 2,129 $ 2,207 $ 1,315 $ 860
Provision for loan losses............. 170 360 140 1,003 653
Reserves from Community Savings
Bank............................... 265 -- -- -- --
Charge-offs:
Residential real estate............ 13 57 116 30 67
Commercial real estate............. -- -- -- -- 87
Consumer........................... 409 293 160 139 104
Commercial business................ -- -- -- -- 18
--------- ---------- --------- ---------- ---------
Total charge-offs............... 422 350 276 169 276
--------- ---------- --------- ---------- ---------
Recoveries:
Residential real estate............ -- 1 6 21 9
Consumer.......................... 174 92 52 37 4
--------- ---------- --------- ---------- ---------
Total recoveries................ 174 93 58 58 13
--------- ---------- --------- ---------- ---------
Transfers............................. -- -- -- -- 65(1)
--------- ---------- --------- ---------- -------
Allowance balance (at end of year).... $ 2,419 $ 2,232 $ 2,129 $ 2,207 $ 1,315
========= ========== ========= ========== =========
Allowance for loan losses as a
percent of total loans outstanding
at end of year..................... 0.86% 1.05% 1.15% 1.35% 0.94%
========= ========== ========= ========== =========
Net loans charged off as a percent
of average loans receivable, net... 0.11% 0.14% 0.13% 0.08% 0.19%
========= ========== ========= ========== =========
Ratio of allowance for loan losses
to total nonperforming loans
at end of year..................... 111.89% 336.65% 528.29% 100.09% 102.26%
========= ========== ========= ========== =========
- ------------------------------------
(1) Consists of a transfer of unallocated allowance for losses on investments to
the allowance for losses on loans.
</TABLE>
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- --------------------
% of Loans % of Loans % of Loans
in Each in Each in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of year
applicable to:
Residential real estate................ $ 557 69.40% $ 723 64.15% $ 792 63.73%
Commercial real estate................. 544 4.51 152 4.33 123 4.00
Consumer............................... 1,148 23.33 1,120 28.39 1,038 28.78
Commercial business.................... 170 2.76 187 3.13 176 3.49
Credit enhancement..................... -- -- 50 -- -- --
------ ------ ------ ----- ------ ------
Total allowance for
loan losses....................... $2,419 100.00% $2,232 100.00% $2,129 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Investment Activities
The Bank's investment portfolio consists primarily of obligations of
the United States Government and agencies thereof, collateralized mortgage
obligations, corporate debentures, mutual funds and FHLB stock. The Bank's
portfolio of investment securities totaled $67.5 million at September 30, 1996.
The Bank's holdings of FHLB stock totaled $3.0 million at September 30, 1996.
The Bank's total investment in interest-bearing deposits was $7.5 million at
September 30, 1996. Total investments at September 30, 1996 were $78.0 million.
The Bank is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short-term securities
and certain other investments. The Bank generally has maintained a liquidity
portfolio in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short-term demand for funds to be used in the Bank's loan origination and
other activities. The Bank's average liquidity ratio for September 1996 was
9.41%, which was adequate to meet its normal business activities.
Investment Portfolio. The following table sets forth the carrying value
of the Bank's investment securities portfolio, interest-bearing deposits and
FHLB stock at the dates indicated. At September 30, 1996, the market value of
the Bank's investment securities was approximately $67.4 million. At September
30, 1996 the market value of the FHLB stock and interest-bearing deposits was
approximately equal to the book value of such investments.
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------
1996 1995 1994
------- ------- --------
(In Thousands)
<S> <C> <C> <C>
Investment securities:
Available for sale (at market value):
U.S. Government and agencies............ $43,794 $ 23,281 $ 15,706
Corporate debentures.................... 2,116 -- --
Collateralized mortgage obligations..... 6,157 -- --
Equity securities-mutual funds.......... 6,546 6,167 6,023
------- ------- --------
Total investment securities
available for sale.................. 58,613 29,448 21,729
------ ------ ------
Held to maturity (at cost):
U.S. Government and agencies............ 1,000 5,000 5,000
Corporate debentures.................... 3,275 7,632 9,683
Collateralized mortgage obligations..... 2,335 8,948 11,018
Municipal bonds......................... 2,250 1,756 2,516
Equity securities - mutual funds........ -- -- --
------- ------- --------
Total investment securities held to
maturity........................... 8,860 23,336 28,217
------- ------- --------
Total investment securities........... 67,473 52,784 49,946
Interest-bearing deposits................... 7,476 5,250 7,290
FHLB stock, at cost......................... 3,050 2,140 1,562
------- ------- --------
Total investments..................... $77,999 $ 60,174 $ 58,798
======= ======== ========
</TABLE>
<PAGE>
Investment Securities Maturities. The following table sets forth the
scheduled maturities, carrying values and average yields for the Bank's
investment securities, excluding equity securities, at September 30, 1996.
Equity securities consisting of $6.5 million invested in mutual funds have been
excluded since such instruments have no stated maturity.
<TABLE>
<CAPTION>
At September 30, 1996
-----------------------------------------------------------------------
One Year of Less One to Five Years Five to Ten Years
-----------------------------------------------------------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Available for sale:
U.S. Government and agencies...................... $ 8,257 6.43% $22,159 6.68% $ 5,378 7.35%
Corporate debentures.............................. -- -- 2,116 5.95 -- --
Collateral mortgage obligations................... -- -- -- -- 617 5.35
Held to maturity:
U.S. Government and agencies...................... -- -- -- -- 1,000 6.50
Corporate debentures.............................. 2,265 7.29 1,010 6.01 -- --
Collateralized mortgage obligations............... -- -- -- -- -- --
Municipal bonds................................... 496 6.29 1,454 4.71 195 6.08
-------- ---- ------- ---- ------- ----
Total investment securities................... $ 11,018 6.60% $26,739 6.49% $ 7,190 7.03%
======= ==== ====== ==== ====== ====
<CAPTION>
At September 30, 1996
---------------------
More than Ten Years
-------------------
Annualized
Weighted
Carrying Average
Value Yield
----- -----
<S> <C> <C>
Investment securities:
Available for sale:
U.S. Government and agencies...................... $ 8,000 7.81%
Corporate debentures.............................. -- --
Collateral mortgage obligations................... 5,540 5.77
Held to maturity:
U.S. Government and agencies...................... -- --
Corporate debentures.............................. -- --
Collateralized mortgage obligations............... 2,335 5.79
Municipal bonds................................... 105 5.85
-------- ----
Total investment securities................... $ 15,980 6.79%
======== ====
</TABLE>
<PAGE>
Sources of Funds
General. Deposits and borrowings are the major sources of the Bank's
funds for lending and other investment purposes. In addition, the Bank derives
funds from the repayment and prepayment of loans and mortgage-backed securities,
operations, and the sale or maturity of investment securities. Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Other sources of funds include
advances from the FHLB and reverse repurchase agreements. For further
information see "Borrowings" below. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds from other sources or
on a longer term basis for general business purposes.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including interest-bearing checking accounts,
noninterest-bearing checking accounts, savings accounts, money market demand
accounts, term certificate accounts and individual retirement accounts. The Bank
accepts deposits of $100,000 or more and may offer negotiated interest rates on
such deposits. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. The Bank regularly evaluates its internal cost of
funds, surveys rates offered by competing institutions, reviews the Bank's cash
flow requirements for lending and liquidity and executes rate changes when
deemed appropriate. The Bank does not obtain funds through brokers, nor does it
solicit funds outside its market area. Further, the Bank has rarely used
premiums to attract deposits. The Bank does not participate in marketing
promotions to attract individual retirement account funds, nor does it pay
premium rates for individual retirement account deposits. The Bank also enters
into reverse repurchase agreements with large balance depositors, particularly
those with maturing certificates of deposit which enable the depositor to
reinvest the maturing deposit in reverse repurchase agreements. See
"--Borrowings." In recent years the Bank's total deposits have increased
steadily.
<PAGE>
The following table sets forth the net change in deposits of the Bank
for the periods indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------
1996 1995 1994
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Deposits.................................... $ 658,951 $ 672,364 $ 549,315
Deposits acquired, net of premium........... 49,724 19,795 --
Withdrawals (1)............................. (663,674) (690,467) (562,907)
--------- --------- ---------
Net increase (decrease) before
interest credited....................... 45,001 1,692 (13,592)
Interest credited........................... 6,619 5,464 5,356
-------- --------- ---------
Net increase (decrease) in deposits..... $ 51,620 $ 7,156 $ (8,236)
========= --------- =========
- ------------------------------------
(1) During the years ending September 30, 1994, $1.8 million of certificates of
deposit were converted into reverse repurchase agreements and, therefore,
are not reflected in totals.
</TABLE>
<PAGE>
Deposit Portfolio. Deposits in the Bank as of September 30, 1996, were
represented by the various types of deposit programs described below.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Minimum of Total
Rate Minimum Term Checking and Savings Amount Balance Deposits
---- ------------ -------------------- ------ ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
0.00% None Noninterest-bearing checking $ 100 $ 9,796 3.94%
2.44 None Interest-bearing checking 100 26,013 10.46
3.71 None Money market demand 100 17,449 7.01
2.79 None Savings accounts 100 25,956 10.44
4.43 None Savings accounts 5,000 9,739 3.91
-------- ------
88,953 35.76
-------- ------
Certificates of Deposit
4.43 91 days Fixed term, fixed rate 500 1,234 0.50
5.03 6 months Fixed term, fixed rate 500 20,742 8.34
5.99 9 months Fixed term, fixed rate 5,000 7,589 3.05
5.36 1 year Fixed term, fixed rate 500 33,578 13.50
5.68 11/2years Fixed term, fixed rate 500 6,938 2.79
5.54 21 months Fixed term, fixed rate 2,000 1,227 0.49
5.82 2 years Fixed term, fixed rate 500 10,735 4.32
6.26 2 years Fixed term, adj. rate (1) 1,000 277 0.11
5.58 21/2years Fixed term, fixed rate 500 18,451 7.42
5.67 21/2years Fixed term, adj. rate (2) 2,500 10,899 4.38
6.82 25 months Fixed term, fixed rate 5,000 8,406 3.38
5.47 3 years Fixed term, fixed rate 500 7,603 3.06
5.42 4 years Fixed term, fixed rate 500 5,721 2.30
6.44 5 to 10 years Fixed term, fixed rate (3) -- 4,535 1.82
5.74 Various IRA/QRP 50-100 16,831 6.77
6.16 Various Negotiated jumbo 100,000 5,004 2.01
-------- ------
159,770 64.24
-------- ------
Total $248,723 100.00%
------- ======
- ------------------------------------
(1) This deposit product adjusts the interest rate paid at each six month
interval. This product is no longer offered and is nonrenewable.
(2) This deposit product allows the depositor to elect to adjust the interest
rate paid once during the initial term of the certificate of deposit.
(3) Certificates are only available on a renewal basis.
</TABLE>
<PAGE>
Deposit Flow
The following table sets forth the change in dollar amount of deposits
in the various types of deposit accounts offered by the Bank between the dates
indicated.
<TABLE>
<CAPTION>
Balance Balance Balance
at % Increase at % Increase at % Increase
9/30/96 Deposits (Decrease) 9/30/95 Deposits (Decrease) 9/30/94 Deposits (Decrease)
------- -------- --------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits:
Noninterest-bearing checking $ 9,796 3.94% $ 2,158 $ 7,638 3.87% $ (488) $ 8,126 4.28% $ 1,499
Interest-bearing checking... 26,013 10.46 (377) 26,390 13.39 925 25,465 13.41 1,126
Money market demand......... 17,449 7.01 226 17,223 8.74 (3,641) 20,864 10.98 (1,441)
Savings accounts............ 35,695 14.35 9,006 26,689 13.54 (1,611) 28,300 14.90 1,056
-------- ----- ------- -------- ----- -------- ------- ----- -------
Total demand deposits..... 88,953 35.76 11,013 77,940 39.54 (4,815) 82,755 43.57 2,240
-------- ----- ------- -------- ----- -------- ------- ----- -------
Certificates of deposit which mature
in the period ending: (1)
Within 1 year............... $109,803 44.15 36,685 73,118 37.10 2,231 70,887 37.32 (6,876)
Within 3 years.............. 43,817 17.62 (537) 44,354 22.50 9,988 34,366 18.09 (3,148)
Over 3 years................ 6,150 2.47 4,459 1,691 0.86 (248) 1,939 1.02 (452)
------ -------- ----- -------- -------- ------ -------
Total certificates of deposit 159,770 64.24 40,607 119,163 60.46 11,971 107,192 56.43 (10,476)
-------- ----- ------- -------- ----- ------- -------- ------ -------
Total deposits......... $248,723 100.00% $51,620 $197,103 100.00% $ 7,156 $189,947 100.00% $(8,236)
======== ====== ======= ======== ====== ======= ======== ====== ========
<PAGE>
<CAPTION>
Balance
at %
9/30/93 Deposits
------- --------
<S> <C> <C>
Demand deposits:
Noninterest-bearing checking
Interest-bearing checking... $ 6,627 3.34%
Money market demand......... 24,339 12.28
Savings accounts............ 22,305 11.25
27,244 13.75
Total demand deposits..... -------- -----
80,515 40.62
-------- -----
Certificates of deposit which mature
in the period ending: (1)
Within 1 year...............
Within 3 years.............. 77,763 39.24
Over 3 years................ 37,514 18.93
2,391 1.21
Total certificates of deposit --------- ------
117,668 59.38
Total deposits......... --------- ------
$ 198,183 100.00%
========= ======
</TABLE>
(1) During the years ended September 30, 1994 and 1993, $1.8 million and $7.6
million, respectively, of certificates of deposit were converted into reverse
repurchase agreements and therefore are not reflected in deposit totals.
<PAGE>
Certificates of Deposit by Rates. The following table sets forth the
balances of certificates of deposit in the Bank classified by rates as of the
dates indicated:
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------
1996 1995 1994
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Less than 3.00%............................. $ 26 $ 24 $ 100
3.00 - 4.99%................................ 14,827 42,104 92,260
5.00 - 6.99%................................ 141,335 73,668 10,680
7.00 - 8.99%................................ 3,086 2,704 3,521
9.00 - 10.99%............................... 496 663 631
-------- -------- --------
$159,770 $119,163 $107,192
======== ========= ========
</TABLE>
Certificates of Deposit Maturity Schedule. The following table sets
forth the balances and maturities of certificates of deposit in the Bank at
September 30, 1996.
<TABLE>
<CAPTION>
Balance Due
------------------------------------------------------------
Less Than 1-2 2-3 3 Years
1 Year Years Years or More Total
------ ----- ----- ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Less than 3.00% $ -- $ -- $ -- $ 26 $ 26
3.00 - 4.99% . 13,914 800 72 41 14,827
5.00 - 6.99% . 94,054 31,036 10,917 5,328 141,335
7.00 - 8.99% . 1,735 596 -- 755 3,086
9.00 - 10.99% 100 396 -- -- 496
-------- -------- -------- -------- --------
$109,803 $ 32,828 $ 10,989 $ 6,150 $159,770
======== ======== ======== ======== ========
</TABLE>
Large Certificates of Deposit. The following table indicates the
balances of certificates of deposit of $100,000 or more by time remaining until
maturity as of September 30, 1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ----------
(In Thousands)
<S> <C>
Three months or less................................. $ 1,975
Three through six months............................. 3,283
Six through twelve months............................ 2,392
Over twelve months................................... 4,187
----------
Total............................................ $ 11,837
==========
</TABLE>
<PAGE>
Borrowings
Deposits are the primary source of funds for the Bank's lending and
investment activities. If the need arises, the Bank may rely upon advances from
the FHLB to supplement its supply of available funds and to fund deposit
withdrawals. Advances from the FHLB are typically secured by the Bank's one- to
four-family residential mortgage loans, United States Government and agency
securities and mortgage-backed securities. The FHLB functions as a central
reserve bank providing credit for the Bank and other member savings associations
and financial institutions. As a member, the Bank is required to own capital
stock in the FHLB and is authorized to apply for advances on the security of
such stock and certain of its home mortgages and other assets (principally
securities which are obligations of, or guaranteed by, the United States
Government) provided certain standards related to creditworthiness have been
met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. At September 30, 1996, the Bank had $61.0
million of FHLB advances. From time to time the Bank also enters into agreements
to sell securities under terms which require it to purchase the same or
substantially similar securities by a specified date ("reverse repurchase
agreements"). Reverse repurchase agreements are considered borrowings which are
secured by the sold securities. The Bank's reverse repurchase agreements have
terms that do not exceed the legal limit of 330 days. At September 30, 1996, the
Bank had reverse repurchase agreements totalling $14.8 million.
The following table sets forth certain information regarding borrowings
by the Bank at the end of and during the periods indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Weighted average rate paid on: (1)
Reverse repurchase agreements ......... 5.48% 5.64% 3.73%
FHLB advances ......................... 5.33 5.51 4.71
ESOP borrowings ....................... 8.35 8.60 6.28
Reverse repurchase agreements:
Maximum balance ....................... $14,782 $15,406 $15,404
Average balance ....................... 13,510 14,242 14,246
FHLB advances:
Maximum balance ....................... 60,996 42,800 30,510
Average balance ..................... 34,303 33,607 19,410
ESOP borrowings:
Maximum balance ....................... 844 1,152 1,440
Average balance ....................... 751 1,033 1,283
- ------------------------------------
(1) Calculated using the daily weighted average interest rates.
</TABLE>
<PAGE>
Subsidiary Activities
The Bank has one wholly owned subsidiary, Sparta First Service
Corporation ("Sparta First"), an Illinois corporation. Sparta First is engaged
primarily in the business of offering investment products (consisting primarily
of equity securities, fixed and variable annuities and mutual funds) through
INVEST and INSURE. Both INVEST and INSURE are service marks owned by the
brokerage and insurance agency that contracts with Sparta First to provide
services to customers.
At September 30, 1996, the Bank had a $804,000 equity investment in
Sparta First. For the year ended September 30, 1996 Sparta First had net income
of $148,000.
Competition
The Bank encounters strong competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, other savings banks,
savings associations and credit unions in its market area, and the Bank expects
continued strong competition from such financial institutions in the foreseeable
future. The Bank competes for savings by offering depositors a high level of
personal service and expertise together with a wide range of financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings banks and savings
associations. This competition for loans has increased substantially in recent
years as a result of the large number of institutions competing in the Bank's
market area as well as the increased efforts by commercial banks to expand
mortgage loan originations.
The Bank competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels and
the volatility of the mortgage markets.
The Bank's market area includes all of Randolph, Jackson, Williamson,
Perry and Union counties, and portions of Monroe, Washington, Alexander,
Pulaski, Jefferson, Johnson, Franklin and St. Clair counties, all of which are
in Illinois. The Bank's market area has a large number of financial
institutions.
REGULATION AND SUPERVISION
General. The Bank is an Illinois-chartered savings bank and its deposit
accounts are insured up to applicable limits by the Federal government under the
SAIF of the FDIC. The Bank is subject to extensive regulation by the Illinois
Commissioner of Savings and Residential Finance (the "Commissioner") and the
FDIC. The Bank must file reports with the Commissioner and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers or
acquisitions with other depository institutions. There are periodic examinations
of the Bank by the Commissioner and the FDIC to review the Bank's compliance
<PAGE>
with various regulatory requirements. The Bank is also subject to certain
reserve requirements established by the Board of Governors of the Federal
Reserve (the "FRB"). This regulation and supervision establishes a comprehensive
framework of activities in which a savings bank can engage and is intended
primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Commissioner, the FDIC, or Congress
could have a material impact on the operations of the Holding Company and the
Bank. The Company, as a mutual savings bank holding company, will also be
required to file certain reports with, and otherwise comply with the rules and
regulations of the OTS and the Commissioner. Certain of the regulatory
requirements applicable to the Bank and to the Company are referred to below or
elsewhere herein.
Capital Maintenance. Under FDIC regulations, the Bank must maintain
minimum levels of capital. The regulations establish a minimum leverage capital
requirement of not less than 3% core capital to total assets for banks in the
strongest financial and managerial condition, with a CAMEL Rating of 1 (the
highest rating of the federal regulators for banks). For all other banks, the
minimum leverage capital requirement is between 4% and 5% of total assets. Core
capital is composed of the sum of common stockholders' equity, noncumulative
perpetual preferred stock (including any related surplus) and minority interests
in consolidated subsidiaries, minus all intangible assets (other than qualifying
mortgage servicing rights and qualifying supervisory intangible core deposits),
identified losses and investments in certain subsidiaries. At September 30,
1996, the Bank's ratio of core capital to total adjusted assets was 13.01%,
which exceeded the minimum leverage requirement.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as core capital and supplementary capital) to risk
weighted assets of 8.0%. In determining the amount of risk-weighted assets, all
assets, including certain off balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the federal regulators believe are
inherent in the type of asset. The components of core capital are equivalent to
those discussed earlier under the 3% leverage requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and allowance for loan and
lease losses. Allowance for loan and lease losses includible in supplementary
capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the
amount of capital counted toward supplementary capital cannot exceed 100% of
core capital. At September 30, 1996, the Bank's risk-based capital to total
assets ratio was 23.67% and as a result, the Bank exceeded its minimum
risk-based capital requirements.
<PAGE>
Set forth below is a summary of the Bank's compliance with its capital
requirements as of September 30, 1996.
<TABLE>
<CAPTION>
At September 30, 1996
-------------------------
Percent of
Amount Assets
------ ------
(Dollars in Thousands)
<S> <C> <C>
Tier 1(Core) Capital Leverage Ratio:
Actual level .................................. $49,129 13.01%
Required level ................................ 11,325 3.00
------- -----
Excess ........................................ $37,804 10.01%
======= =====
Tier 1 Risk-based Capital Ratio:
Actual level .................................. $49,129 22.80%
Required level ................................ 8,619 4.00
------- -----
Excess ........................................ $40,510 18.80%
======= =====
Tier 2 Risk-based Capital Ratio:
Actual level .................................. $51,004 23.67%
Required level ................................ 17,238 8.00
------- -----
Excess ........................................ $33,766 15.67%
======= =====
</TABLE>
Illinois Savings Bank and Savings Bank Holding Company Law and
Regulation. In August 1990, Illinois enacted the Savings Bank Act ("SBA"), which
establishes Illinois-chartered savings banks. Under the SBA, savings banks are
chartered and regulated by the Commissioner and possess all of the powers of
federal and Illinois-chartered savings and loan associations. The SBA permits
Illinois-chartered savings and loan associations, as well as federally chartered
savings and loan associations and commercial banks, to merge with or convert
directly into an Illinois-chartered savings bank. Pursuant to this authority,
effective May 26, 1993, the Bank converted from a federally chartered mutual
savings bank into an Illinois-chartered mutual savings bank.
As an Illinois-chartered savings bank, the Bank is subject to
regulation and supervision by the Commissioner. This regulation covers, among
other things, the Bank's internal organization (i.e., charter, bylaws, capital
requirements, transactions with directors and officers, and composition of the
board of directors), as well as supervision of permissible activities and
mergers and acquisitions. The Bank is required to file periodic reports with,
and is subject to periodic examinations at least once within every 18-month
period by the Commissioner. The lending and investment authority of the Bank is
prescribed by Illinois law and regulations, as well as applicable Federal laws
and regulations, and the Bank is prohibited from engaging in any activities not
permitted by such laws and regulations.
<PAGE>
Under Illinois law, savings banks are required to maintain a minimum
core capital to total assets ratio of 3%. The Commissioner is authorized to
require a savings bank to maintain a higher minimum capital level if the
Commissioner determines that the savings bank's financial condition or history,
management or earnings prospects are not adequate. If a savings bank's core
capital ratio falls below the required level, the Commissioner may direct the
savings bank to adhere to a specific written plan established by the
Commissioner to correct the savings bank's capital deficiency, as well as a
number of other restrictions on the savings bank's operations, including a
prohibition on the declaration of dividends by the savings bank's board of
directors. As a matter of policy, the Commissioner requires that savings
associations that convert to savings banks under the SBA have a minimum core
capital to assets ratio of 6%. At September 30, 1996, the Bank's core capital
ratio was 13.01% of total adjusted assets, which substantially exceeded the
required amount.
Under Illinois law, a savings bank may make both secured and unsecured
loans. However, loans for business, corporate, commercial or agricultural
purposes, whether secured or unsecured, may not in the aggregate exceed 15% of a
savings bank's total assets unless authorized by the Commissioner. With the
prior written consent of the Commissioner, savings banks may also engage in real
estate development activities, provided that the total investment in any one
project may not exceed 15% of total capital, and the total investment in all
projects may not exceed 50% of total capital. The total loans and extensions of
credit outstanding at one time, both direct and indirect, by a savings bank to
any borrower may not exceed 15% of the savings bank's total capital. At
September 30, 1996, the Bank did not have any loans-to-one borrower which
exceeded this limitation. For information about the largest borrowers of the
Bank, see "Lending Activities--Loan Concentration" above.
Illinois-chartered savings banks generally have all lending, investment
and other powers which are possessed by federal savings banks based in Illinois.
Recent federal and state legislative developments have reduced distinctions
between commercial banks and savings institutions in Illinois with respect to
lending and investment authority. As federal law has expanded the authority of
federally chartered savings institutions to engage in activities previously
reserved for commercial banks, Illinois legislation and regulations ("parity
legislation") have given Illinois-chartered savings institutions such as the
Bank the powers of federally chartered savings institutions.
The board of directors of a savings bank may declare dividends on its
capital stock based upon the savings bank's annualized net profits except that
until the paid-in surplus of the savings bank equals its capital stock, a
dividend may not be declared unless there has been transferred to paid-in
surplus not less than 10% of the net profits of the preceding half year in the
case of quarterly or semiannual dividends, or not less than 10% of the net
profits for the preceding year in the case of annual dividends. Dividends may
not be declared if a savings bank fails to meet its capital requirements.
Further written approval of the Commissioner is required before any dividends
exceeding 50% of a savings bank's profits for any calendar year may be declared.
A dividend may be declared out of retained earnings at any time.
<PAGE>
An Illinois-chartered savings bank may not make a loan to a person
owning 10% or more of its stock, an affiliated person, an agent or an attorney
of the savings bank, either individually or as an agent or partner of another,
except under the rules of the Commissioner and regulations of the FDIC. This
restriction does not apply, however, to loans made (i) on the security of
single-family residential property used by the borrower as his or her residence,
and (ii) to a non-profit, religious, charitable or fraternal organization or a
corporation in which the savings bank has been authorized to invest by the
Commissioner. Furthermore, a savings bank may not purchase, lease or acquire a
site for an office building or an interest in real estate from an officer,
director, employee or the holder of more than 10% of the savings bank's stock or
certain affiliated persons as set forth in Illinois law, unless the prior
written approval of the Commissioner is obtained.
The SBA provides that any depository institution may merge into a
savings bank operating under the SBA. The Board of Directors of each merging
institution must approve a plan of merger by resolution adopted by majority vote
of all members of the respective boards. After such approval, the plan of merger
must be submitted to the Commissioner for approval. The Commissioner may make an
examination of the affairs of each merging institution (and their affiliates).
The Commissioner shall not approve a merger agreement unless he finds that,
among other things, (i) the resulting institution meets all requirements of the
SBA; (ii) the merger agreement is fair to all persons affected; and (iii) the
resulting institution will be operated in a safe and sound manner. If approved
by the Commissioner, the plan of merger must be submitted to stockholders of the
depository institution for approval, and may be required to be submitted to
members if a mutual savings bank is one of the constituent entities. A
two-thirds affirmative vote is required for approval of the plan of merger.
The SBA permits an Illinois savings bank holding company to control or
own more than 5% of the voting shares or rights of a savings bank only if the
principal place of business of the savings bank is located in those states in
which a savings bank holding company is permitted to acquire an Illinois savings
bank. When requested, the Commissioner will review the laws of the state to
determine whether the laws of that state expressly authorize an Illinois savings
bank holding company to acquire a savings bank in that state.
A savings bank holding company may invest in the stock of or other form
of equity ownership of any company which the board of directors determines to be
in the best interests of stock owners and depositors, and such investment must
be documented in the holding company's minutes with reference to such items as
price/earning ratios, future prospects, sources of income and compatibility with
the overall business plan of the holding company.
Community Reinvestment Act
Federal Regulation. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
<PAGE>
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") amended the CRA to require, effective July 1, 1990,
public disclosure of an institution's CRA rating and require the FDIC to provide
a written evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system which replaced the five-tiered numerical rating
system.
The Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") recapitalized the BIF, which insures the deposits of commercial banks
and savings associations, in addition, to establishing a number of new mandatory
supervisory measures for savings associations and banks.
Standards for Safety and Soundness. FDICIA requires the federal bank
regulatory agencies to prescribe regulatory standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that provide excessive compensation, fees or benefits or could lead
to material financial loss. In addition the federal banking regulatory agencies
are required to prescribe by regulation standards specifying: (i) maximum
classified assets to capital ratios; (ii) minimum earnings sufficient to absorb
losses without impairing capital; and (iii) to the extent feasible, a minimum
ratio of market value to book value for publicly traded shares of depository
institutions and depository institution holding companies. In November 1993, the
federal banking agencies, including the FDIC, proposed regulations regarding the
implementation of these standards.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
On September 30, 1996, the President signed into law legislation
designed to reduce the effect of the Bank Insurance Fund ("BIF") and SAIF
premium disparity. Under the legislation a special assessment was imposed on the
amount of deposits held by SAIF-member institutions, including the Bank, as of a
specified date, March 31, 1995, to recapitalize the SAIF. The special assessment
was payable on November 27, 1996. The amount of the special assessment
determined by the FDIC was 65.7 basis points of insured deposits. As a result of
enactment of this legislation on September 30, 1996, the Bank recorded a
one-time non-recurring charge of $1.5 million prior to recognition of a tax
<PAGE>
benefit. The payment of the special assessment had the effect of immediately
reducing the capital of SAIF-member institutions, net of any tax effect;
however, the Bank remains in compliance with its regulatory capital
requirements. This legislation also spreads the obligation for payment of the
Financing Corporation ("FICO") bonds across all SAIF and BIF members. Beginning
on January 1, 1997, BIF deposits will be assessed for FICO payments at a rate of
20% of the rate assessed by SAIF deposits. Based upon current estimates by the
FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points, while
SAIF deposits will pay an estimated 6.5 basis points on the FICO bonds. Full pro
rata sharing of the FICO payments will occur on the earlier of January 1, 2000
or the date the BIF and SAIF are merged. This legislation specifies that the BIF
and SAIF will be merged on January 1, 1999 provided no savings associations
remain as of that time.
As a result of this legislation, the FDIC proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the higher FICO payments described above. Management cannot predict the level of
FDIC insurance assessments on an on-going basis whether the savings association
charter will be eliminated or whether the BIF and SAIF will eventually be
merged.
Holding Company Regulation
The Company is a non-diversified savings and loan holding company
within the meaning of the HOLA, as amended. As such, the Company is registered
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Company and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution. The Bank is required
to notify the OTS 30 days before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. See
"--Federal Regulation of Savings Institutions--Qualified Thrift Lender Test" for
a discussion of the QTL requirements. Upon any nonsupervisory acquisition by the
Company of another savings association or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the
prior approval of the OTS, and activities authorized by OTS regulation. The OTS
is prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions.
<PAGE>
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
Federal and State Taxation
Federal Taxation. For federal income tax purposes, the Bank files a
federal income tax return based upon a tax year ended September 30. Because the
Company owns 100% of the outstanding Common Stock of the Bank it is permitted to
file a consolidated federal income tax return with the Bank.
The Company and the Bank are subject to the rules of federal income
taxation generally applicable to corporations under the Code. Most corporations
are not permitted to make tax deductible additions to bad debt reserves under
the Code. However, savings and loan associations and savings banks such as the
Bank, which meet certain tests prescribed by the Code may benefit from favorable
provisions regarding deductions from taxable income for annual additions to
their bad debt reserve. For purposes of the bad debt reserve deduction, loans
are separated into "qualifying real property loans," which generally are loans
secured by interests in real property, and non-qualifying loans, which are all
other loans. The bad debt reserve deduction with respect to non-qualifying loans
must be based on actual loss experience. The amount of the bad debt reserve
deduction with respect to qualifying real property loans may be based upon
actual loss experience (the "experience method") or a percentage of taxable
income determined without regard to such deduction (the "percentage of taxable
income method").
<PAGE>
The Bank has elected to use the method that results in the greatest
deduction for Federal income tax purposes, which historically had been the
percentage of taxable income method (8% for tax years 1996, 1995 and 1994). The
amount of the bad debt deduction that a thrift institution may claim with
respect to additions to its reserve for bad debts is subject to certain
limitations. First, the full deduction is available only if at least 60% of the
institution's assets fall within certain designated categories. Second, under
the percentage of taxable income method the bad debt deduction attributable to
"qualifying real property loans" cannot exceed the greater of (i) the amount
deductible under the experience method or (ii) the amount which, when added to
the bad debt deduction for non-qualifying loans, equals the amount by which 12%
of the sum of the total deposits and the advance payments by borrowers for taxes
and insurance at the end of the taxable year exceeds the sum of the surplus,
undivided profits, and reserves at the beginning of the taxable year. Third, the
amount of the bad debt deduction attributable to qualifying real property loans
computed using the percentage of taxable income method is permitted only to the
extent that the institution's reserve for losses on qualifying real property
loans at the close of the taxable year does not exceed 6% of such loans
outstanding at such time.
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in which they
are recognized in the consolidated financial statements.
The Bank is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds the Bank's regular income tax for the year. The
alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base will be a number of preference items,
including the following: (i) 100% of the excess of a thrift institution's bad
debt deduction over the amount that would have been allowable on the basis of
actual experience; and (ii) for years beginning in 1988 and 1989 an amount equal
to one-half of the amount by which an institution's "book income" (as specially
defined) exceeds its taxable income with certain adjustments, including the
addition of preference items (for taxable years commencing after 1989 this
adjustment item is replaced with a new preference item relating to "adjusted
current earnings" as specially computed). In addition, for purposes of the new
alternative minimum tax, the amount of alternative minimum taxable income that
may be offset by net operating losses is limited to 90% of alternative minimum
taxable income.
The Bank was last audited by the Internal Revenue Service for the tax
year ended September 30, 1991. No changes were necessary to the reported tax as
a result of the audit. For additional information regarding taxation, see Note
10 of Notes to Consolidated Financial Statements.
Illinois Taxation. The State of Illinois imposes a tax on the Illinois
taxable income of corporations, including savings banks, at the rate of 7.3%.
Illinois taxable income is generally similar to federal taxable income except
that interest from state and municipal obligations is taxable and no deduction
is allowed for state income taxes. However, a deduction is allowed for certain
U.S. Government and agency obligations. The Bank's state income tax returns for
the tax years ended September 30, 1991, 1990 and 1989, have been audited by the
Illinois tax authorities. Such returns did not have to be amended as a result of
such audit.
<PAGE>
Personnel
As of September 30, 1996, the Bank and its subsidiary had a total of 86
full-time and 18 part-time employees. None of the Bank's employees is
represented by a collective bargaining group. Management believes that its
relationship with the Bank's employees is good.
<PAGE>
ITEM 2. Properties
The Bank conducts its business through its main office located in
Sparta, Illinois and six branch offices. The following table sets forth certain
information concerning the main office and each branch office of the Bank at
September 30, 1996. At September 30, 1996, the Bank's premises and equipment had
an aggregate net book value of approximately $6.0 million. The Bank believes
that its current facilities are adequate to meet the present and immediately
foreseeable needs of the Bank and the Holding Company.
All facilities are owned.
<TABLE>
<CAPTION>
Year Book Value at
Location Occupied September 30, 1996
- -------- -------- ------------------
<S> <C> <C>
Main Office............................................... 1958 $ 660,364
114 West Broadway
Sparta, Illinois 62286
Branch Office............................................. 1988 $ 39,063
358 South Main
Anna, Illinois 62906
Branch Office............................................. 1983 $ 631,484
500 West Main
Carbondale, Illinois 62901
Branch Office............................................. 1995 $ 377,096
Southtown Shopping Center
DuQuoin, Illinois 62832
Branch Office............................................. 1978 $ 418,946
1101 Walnut
Murphysboro, Illinois 62966
Branch Office............................................. 1991 $ 320,397
424 West Broadway
Steeleville, Illinois 62288
Branch Office............................................. 1996(1) $1,591,540
1706 West DeYoung Street
Marion, Illinois 62959
- ------------------
(1) Acquired in May, 1996
</TABLE>
ITEM 3. Legal Proceedings
There are various claims and lawsuits to which the Bank is periodically
involved incident to the Bank's business. In the opinion of management, such
claims and lawsuits in the aggregate are immaterial to the Bank's financial
condition and results of operations.
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report,
the Company did not submit any matters to the vote of security holders.
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
The section titled "Common Stock and Related Matters" of the 1996
Annual Report to Stockholders is incorporated herein by reference. No other
sections of such Annual Report are incorporated herein by this reference.
ITEM 6. Selected Financial Data
The section titled "Selected Consolidated Financial and Other Data" of
the 1996 Annual Report to Stockholders is incorporated herein by reference. No
other sections of such Annual Report are incorporated herein by this reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The section titled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the 1996 Annual Report to Stockholders
is incorporated herein by reference. No other sections of such Annual Report are
incorporated herein by this reference.
ITEM 8. Financial Statements and Supplementary Data
The sections titled "Consolidated Statements of Financial Condition,"
"Consolidated Statements of Operations," "Consolidated Statements of
Stockholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to
Consolidated Financial Statements" of the 1996 Annual Report to Stockholders are
incorporated herein by reference.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information concerning the Directors of the Registrant is incorporated
herein by reference from the Registrant's definitive Proxy Statement dated
December 10, 1996 (the "Proxy Statement").
ITEM 11. Executive Compensation
Information concerning the Executive Compensation of the Registrant is
incorporated herein by reference from the Registrant's Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain owners and
management is incorporated herein by reference from the section titled "Voting
Securities and Principal Holders Thereof" of Registrant's Proxy Statement.
<PAGE>
ITEM 13. Certain Relationships and Related Transactions
Information concerning relationships and transactions is incorporated
herein by reference from the section titled "Certain Transactions with the
Company" of Registrant's Proxy Statement.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on From 8-K
(a)(1) Financial Statements
The following information appearing in the Registrant's 1996 Annual
Report is incorporated by reference as Exhibit 13 to this Annual Report on Form
10-K.
Annual Report Sections
Independent Auditors Report
Consolidated Balance Sheets
as of September 30, 1996 and 1995
Consolidated Statements of Income for the years ended
September 30, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
(a)(3) Exhibits
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-K Report
-------------- -------- ------ ----------------
<S> <C> <C> <C>
2 Plan of acquisition, (1) Not Applicable
reorganization, arrangement,
liquidation or succession
3.1 Certificate of Incorporation (1) Not Applicable
3.2 Bylaws (1) Not Applicable
4 Instruments defining the (1) Not Applicable
rights of security holders,
including debentures
9 Voting trust agreement None Not Applicable
10.1 Employment Agreement between (1) Not Applicable
the Bank and John A. Becker,
President and Chief Executive
Officer
10.2 Employment Agreement between ______________
the Bank and Michael R. Howell,
Executive Vice President and
Treasurer
10.3 Employment Agreement between ______________
the Bank and Linda M. Johnson,
Senior Vice President and Secretary
10.4 Net Worth Maintenance Agreement (1) Not Applicable
10.5 Employee Severance Compensation (1) Not Applicable
Plan
10.6 1993 Incentive Stock Option Plan (1) Not Applicable
10.7 1993 Stock Option Plan for (1) Not Applicable
Outside Directors
10.8 Management Recognition and (1) Not Applicable
Retention Plan and Trust
10.9 Recognition and Retention Plan (1) Not Applicable
and Trust for Outside Directors
10.10 Supplemental Executive Retirement (1) Not Applicable
Plan
<PAGE>
<CAPTION>
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-K Report
<S> <C> <C> <C>
11 Statement re: computation Not Not Applicable
of per share earnings Required
12 Statement re: computation Not Not Applicable
of ratios Required
13 Annual Report to Security Holders 13 _______
16 Letter re: change in certifying None Not Applicable
accountants
18 Letter re: change in accounting None Not Applicable
principles
21 Subsidiaries of Registrant 21 _______
22 Published report regarding None Not Applicable
matters submitted to vote of
security holders
24 Power of Attorney Not Required Not Applicable
27 Financial Data Schedule Not Required Not Applicable
28 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
99 Additional Exhibits None Not Applicable
(1) Filed as exhibits to the Registrant's Registration Statement on Form
S-1 filed with the SEC on June 22, 1995 as amended on July 12, 1995.
All such previously filed documents are hereby incorporated by
reference in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
</TABLE>
The registrant filed a Form 8-K to report the acquisition or
disposition of assets as required by Item 2. The financial statements required
to be filed were not available when the Form 8-K was filed.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHARTER FINANCIAL, INC.
Date: December 24, 1996 By: /S/ John A. Becker
------------------
John A. Becker
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange 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>
<S> <C>
By: /S/ John A. Becker By: /S/ Michael R. Howell
------------------ ---------------------
John A. Becker Michael R. Howell
President, Chief Executive Executive Vice President,
Officer and Chairman of the Board Treasurer and Director
(Principal Executive Officer) (Principal Financial Officer)
Date: December 24, 1996 Date: December 24, 1996
By: /S/ Karen P. Jacobus By: /S/ James Clutts
-------------------- ----------------
Karen P. Jacobus James Clutts
Vice President and Controller Director
(Principal Accounting Officer)
Date: December 24, 1996 Date: December 24, 1996
By: /S/ Carl S. Schlageter By: /S/ Linda M. Johnson
---------------------- --------------------
Carl S. Schlageter Linda M. Johnson
Director Senior Vice President and Director
Date: December 24, 1996 Date: December 24, 1996
By: /S/ William A. Norton By: /S/ John Petkas, Jr.
--------------------- --------------------
William A. Norton John Petkas, Jr.
Director Director
Date: December 24, 1996 Date: December 24, 1996
<PAGE>
<CAPTION>
<S> <C>
By: /S/ Klondis T. Pirtle By: /S/ Dennis F. Doelitzch
--------------------- -----------------------
Klondis T. Pirtle Dennis F. Doelitzch
Director
Date: December 24, 1996 Date: December 24, 1996
By: /S/ Ralph Eugen Watson
----------------------
Ralph Eugene Watson
Date: December 24, 1996
</TABLE>
EXHIBIT 10.2
<PAGE>
CHARTER BANK, S.B.
EMPLOYMENT AGREEMENT
This Agreement is made effective as of the 25th day of March, 1996, by
and between Charter Bank, S.B., an Illinois chartered stock savings bank (the
"Bank"), with its principal administrative office at 114 West Broadway, Sparta,
Illinois 62286-1633 and Michael R. Howell (the "Executive"). Any reference to
"Company" herein shall mean Charter Financial, Inc., the stock holding company
parent of the Bank or any successor thereto.
WHEREAS, the Bank wishes to assure itself of the services of Executive
for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to
serve as Executive Vice President and Treasurer of the Bank. During said period,
Executive also agrees to serve, if elected, as an officer and director of any
subsidiary or affiliate of the Bank. Failure to reelect Executive as Executive
Vice President and Treasurer in accordance with the terms of Section 2(a)
without the consent of the Executive during the term of this Agreement, shall
constitute an Event of Termination.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall
begin as of the date first above written and shall continue for a period of
thirty-six (36) full calendar months thereafter. During said term the Executive
shall perform the normal and customary duties associated with the positions of
Executive Vice President and Treasurer. Commencing on the first anniversary date
of this Agreement, and continuing at each anniversary date thereafter, the
Agreement shall renew for an additional year such that the remaining term shall
be three (3) years unless written notice is provided to Executive at least ten
(10) days and not more than thirty (30) days prior to any such anniversary date,
that this Agreement shall not renew, in which case this Agreement shall expire
on the next following anniversary date. Prior to each anniversary date, the
disinterested members of the Board of Directors of the Bank ("Board") will
conduct a comprehensive performance evaluation and review of the Executive for
purposes of determining whether to extend the Agreement, and the results thereof
shall be included in the minutes of the Board's meeting.
<PAGE>
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, business companies or business
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Bank, or materially affect the performance of Executive's
duties pursuant to this Agreement (it being understood that membership in
social, religious, charitable or similar organizations does not require Board
approval pursuant to this Section 2(b)).
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Section 2(b). The Bank
shall pay Executive as compensation a salary of not less than $87,241 per year
("Base Salary"). Such Base Salary shall be payable on the 15th and the last day
of the month. During the period of this Agreement, Executive's Base Salary shall
be reviewed at least annually; the first such review will be made no later than
October 1, 1996. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase or decrease the Executive's Base Salary in
connection with such review (any increase or decrease in Base Salary shall
become the "Base Salary" for purposes of this Agreement). In addition to the
Base Salary provided in this Section 3(a), the Bank shall provide Executive at
no cost to Executive with all such other benefits as are provided uniformly to
permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites as are normal and customary for the Bank. It is
expressly understood by the parties that any change in benefit plans,
arrangements or perquisites that are applicable to all participating employees
may be made without obtaining the Executive's prior consent. Without limiting
the generality of the foregoing provisions of this Section 3(b), Executive will
be entitled to participate in or receive benefits under any employee benefit
plans including but not limited to, retirement plans, supplemental retirement
plans, pension plans, profit-sharing plans, health-and-accident plans, medical
coverage or any other employee benefit plan or arrangement made available by the
Bank in the future to its senior executives and key management employees,
subject to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of the Bank in which
Executive is eligible to participate (and he shall be entitled to a pro rata
distribution under any incentive compensation or bonus plan as to any year in
which a termination of employment occurs, other than termination for Cause).
Nothing paid to the Executive under any such plan or arrangement will be deemed
to be in lieu of other compensation to which the Executive is entitled under
this Agreement.
<PAGE>
(c) In addition to the Base Salary provided for by Section 3(a), the
Bank shall pay or reimburse Executive for all reasonable travel and other
reasonable expenses incurred by Executive performing his obligations under this
Agreement and may provide such additional compensation in such form and such
amounts as the Board may from time to time determine in accordance with
standards set by the Board of Directors.
(d) In addition to the foregoing, Executive shall be entitled to
receive fees for serving as a director of the Bank in the same amount and on the
same terms as fees are paid to other directors of the Bank.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section 4 shall in all respects be subject to
the terms and conditions stated in Sections 8 and 15.
(a) The provisions of this Section 4 shall apply upon the occurrence of
an Event of Termination (as herein defined) during the Executive's term of
employment under this Agreement. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following:
(i) the termination by the Bank of Executive's full-time employment
hereunder for any reason other than (A) Disability or Retirement, as defined in
Section 6 hereof, (B) following a Change in Control, as defined in Section 5(a)
hereof, or (C) Termination for Cause as defined in Section 7 hereof; or
(ii) Executive's resignation from the Bank's employ, upon any
(A) failure to elect or reelect or to appoint or reappoint
Executive as Executive Vice President and Treasurer during the
term of this Agreement in accordance with Section 2(a) hereof;
(B) change in Executive's function, duties, or
responsibilities, which change would cause Executive's
position to become one of materially lesser responsibility,
importance, or scope from the position and attributes thereof
described in Section 1 hereof;
(C) a relocation of Executive's principal place of employment
by more than 50 miles from its location at the effective date
of this Agreement, or a material reduction in the benefits and
perquisites to Executive from those being provided as of the
effective date of this Agreement; provided, however, that the
Board may reduce the benefits and perquisites to Executive if
such reduction occurs in connection with an institution-wide
reduction in benefits for valid business purposes and which
bears a uniform relationship to, or is no greater than, such
institution-wide reductions;
(D) liquidation or dissolution of the Bank other than
liquidations or dissolutions that are caused by
reorganizations that do not affect the status of Executive; or
(E) breach of this Agreement by the Bank.
<PAGE>
Upon the occurrence of any event described in clauses (ii) (A), (B),
(C), (D) or (E) of this Section 4(a), Executive shall have the right to elect to
terminate his employment under this Agreement by resignation upon forty-five
(45) days prior written Notice of Termination (as defined in Section 6), which
notice must be given by Executive within a reasonable period of time not to
exceed four calendar months after the initial event giving rise to said right to
elect, which shall be determined to constitute an "Event of Termination;"
provided however, that pursuant to an agreement in writing between the Bank and
the Executive, the Executive may consent to waive his right to terminate
employment in connection with any specific event set forth in (ii) (A), (B),
(C), (D), or (E) above, and such waiver shall be binding on the Executive,
provided further, that upon receipt of said Notice of Termination, the Bank
shall have thirty (30) days in which to remedy the event giving rise to
Executive's right to terminate (other than if Notice of Termination is given as
a result of (ii)(A) above), and if it does so and the Executive is returned to
the position he was in immediately before such event, the Executive's right to
terminate shall be extinguished. Notwithstanding the preceding sentences, in the
event of a continuing breach of this Agreement by the Bank, Executive, after
giving due notice within the prescribed time frame of an initial event specified
above, shall not waive any of his rights solely under this Agreement and this
Section 4 by virtue of the fact that Executive has submitted his resignation but
has remained in the employment of the Bank and is engaged in good faith
discussions to resolve any occurrence of an event described in clauses (ii) (A),
(B), (C), (D) and (E) of this Section 4(a).
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall pay Executive, or, in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to the greater of the payments due for the remaining term of this Agreement or
three (3) times the average of the five preceding years' Base Salary, including
bonuses and any other cash compensation paid to the Executive during each of
such years and, in addition, the Executive shall be entitled to the amount of
any benefits received pursuant to any employee benefit plans maintained by the
Bank during such years; provided however, that if the Bank is not in compliance
with its minimum capital requirements or if such payments would cause the Bank's
capital to be reduced below its minimum capital requirements, such payments
shall be deferred until such time as the Bank is in capital compliance. At the
election of Executive, which election is to be made on an annual basis during
the month of January, and which election is irrevocable for the year in which
made and upon the occurrence of an event of Termination, such payment shall be
made in a lump sum or paid monthly during the remaining term of this Agreement
following Executive's termination. In the event that no election is made,
payment to Executive will be made on a monthly basis during the remaining term
of this Agreement. Such payments shall not be reduced in the event Executive
obtains other employment following termination of employment.
<PAGE>
(c) Upon the occurrence of an Event of Termination the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination for a period of twelve (12) months following the Executive's
termination of employment. Provided, however, that in the event that (i) the
Executive becomes employed by another employer during the term that such
benefits are provided hereunder, and (ii) the new employer provides benefits to
the Executive that are substantially the same or superior to the benefits
provided under this Section 4(c) and which cost to the Executive is equal to or
less than the cost of such benefits provided by the Bank, and (iii) the
Executive if fully covered under such benefit programs without regard to any
pre-existing conditions which may exclude coverage, then the benefit or benefits
provided under this Section 4(c) that are also provided by such new employer
shall be discontinued under the provisions of this Section.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
Disability. For these purposes, temporary Disability shall include Disability
for any period less than that required to receive payment under the applicable
long-term disability plan maintained by the Bank, or if no such plan applies,
which would qualify Executive for disability benefits under the Federal Social
Security System. At the Bank's discretion, the Executive shall be required to
provide a note from a physician which shall be deemed satisfactory proof of such
temporary Disability.
5. CHANGE IN CONTROL
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank or Company, as set forth below. For
purposes of this Agreement, a "Change in Control" of the Bank or Company shall
mean an event of a nature that: (i) would be required to be reported in response
to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act'); or (ii) results in a Change in Control of the Bank or the
Company within the meaning of the Bank Holding Company Act of 1956, as amended,
and applicable rules and regulations promulgated thereunder as in effect at the
time of the Change in Control (collectively, the BHCA"); or (iii) shall be
deemed to have occurred at such time as (a) any "Person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Company representing 25% or more of
the Bank's or the Company's outstanding securities except for any securities of
the Bank purchased by the Company in connection with the conversion of the Bank
to stock form and any securities purchased by the Bank's employee stock
ownership plan and trust; or (b) a plan of reorganization, merger,
consolidation, or sale of all or substantially all the assets of the Bank or the
Company shall be agreed to and consummated; or (c) a proxy statement soliciting
proxies from stockholders of the Company, by someone other than the current
management of the Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Company or Bank or similar
transaction with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan or transaction are
<PAGE>
exchanged for or converted into cash or property or securities not issued by the
Bank or the Company shall be distributed and irrevocable proxies representing
more than 25% of the voting common stock of the Company or the Bank, approving
such plan of reorganization, merger or consolidation of the Company or Bank are
received and voted in favor of such transactions; or (d) a tender offer is made
for 25% or more of the outstanding securities of the Bank or Company and
shareholders owning beneficially or of record 25% or more of the outstanding
securities of the Bank or Company have tendered or offered to sell their shares
pursuant to such tender offer and such tendered shares have been acquired by the
tender offeror.
(b) If any of the events described in Section 5(a) hereof constituting
a Change in Control have occurred, and (i) Executive's employment is
involuntarily terminated or (ii) during the remaining term of this Agreement,
there occurs one of the events set forth in Section 4(a)(ii) of this Agreement,
then Executive shall be entitled to the benefits provided in paragraphs Sections
5(c), 5(d), 5(e), 5(f), and 5(g) upon his subsequent termination of employment
at any time during the term of this Agreement (regardless of whether such
termination results from (i) his resignation or (ii) his dismissal), unless such
termination is because of his death, Retirement, Termination for Cause or
Disability.
(c) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Bank shall pay Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to the greater of the payments due for the remaining term of this Agreement or
2.99 times the average of the five preceding years' Base Salary, including
bonuses and any other cash compensation paid to the Executive during such years.
At the election of the Executive, which election is to be made on an annual
basis during the month of January, and which election is irrevocable for the
year in which made and upon the occurrence of a Change in Control, such payment
may be made in a lump sum or paid in equal monthly installments during the
thirty-six (36) months following the Executive's termination. In the event that
no election is made, payment to Executive will be made on a monthly basis during
the remaining term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Bank will cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his severance for a period of
eighteen (18) months; provided, however, that in the event that (i) the
Executive becomes employed by another employer during the term that such
benefits are provided hereunder, and (ii) the new employer provides benefits to
the Executive that are substantially the same or superior to the benefits
provided under this Section 5(d) and which cost to the Executive is equal to or
less than the cost of such benefits provided by the Bank, and (iii) the
Executive if fully covered under such benefit programs without regard to any
pre-existing conditions which may exclude coverage, then the benefit or benefits
provided under this Section 5(d) that are also provided by such new employer
shall be discontinued under the provisions of this Section.
<PAGE>
(e) Notwithstanding the preceding paragraphs of this Section 5, in the
event that:
(i) the aggregate payments or benefits to be made or
afforded to Executive under said paragraphs (the
"Termination Benefits") would be deemed to include an
"excess parachute payment" under Section 280G of the
Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to the total amount of payments permissible under
Section 280G of the Code or any successor thereto.
then the Termination Benefits to be paid to Executive shall be
so reduced so as to be a Non-Triggering Amount.
(f) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
Disability. For these purposes, temporary Disability shall include Disability
for any period less than that required to receive payment under the applicable
long-term disability plan maintained by the Bank, or if no such plan applies,
which would qualify Executive for disability benefits under the Federal Social
Security System. At the Bank's discretion, the Executive shall be required to
provide a note from a physician which shall be deemed satisfactory proof of such
temporary Disability.
(g) Notwithstanding the foregoing, if after the application of
subparagraph (g) above, it is determined that the Executive received an excess
parachute payment despite the reduction in the Executive's Termination Benefits,
the excess of such Termination Benefits paid to the Executive over 2.99 times
the Executive's "base amount", as defined in Section 280G of the Code, shall be
treated as a loan to the Executive and the Executive shall be required to repay
such amount to the Bank, or the successor of the Bank, within two years of the
date of such determination, with interest at the prime rate, as set forth from
time to time in The Wall Street Journal.
(h) Executive shall not be entitled to any payments pursuant to this
Section 5 if the Bank is not in compliance with its minimum capital requirements
or if such payments would cause the Bank's capital to be reduced below its
minimum capital requirements. In such event, such payments shall be deferred
until such times as the Bank is in capital compliance.
6. TERMINATION UPON RETIREMENT, DISABILITY OR DEATH
Termination by the Bank of Executive based on "Retirement" shall mean
termination in accordance with the Bank's retirement policy or in accordance
with any retirement arrangement established with Executive's consent with
respect to him. Upon termination of Executive upon Retirement, Executive shall
be entitled to all benefits under any retirement plan of the Bank and other
employee or executive benefit plans to which Executive is a party and in which
Executive has a benefit which is vested or which vests upon Retirement.
<PAGE>
Termination by the Bank of Executive's employment based on "Disability"
shall mean termination because of any physical or mental impairment which
qualifies Executive for disability benefits under the applicable long-term
disability plan maintained by the Bank or, if no such plan applies, which would
qualify Executive for disability benefits under the federal social security
system. In the event Executive is unable to perform his duties under this
Agreement on a full-time basis for a period of six (6) consecutive months by
reason of Disability, the Bank may terminate this Agreement, provided that the
Bank shall continue to be obligated to pay Executive his Base Salary, including
bonuses and any other cash compensation paid to Executive during such period for
the remaining term of this Agreement, or one (1) year, whichever is the longer
period of time, and provided further that any amounts actually paid to Executive
pursuant to any disability insurance or other similar such program which the
Bank has provided or may provide on behalf of its employees or pursuant to any
workman's or social security disability program shall reduce the compensation to
be paid to Executive pursuant to this paragraph.
In the event of Executive's death during the term of this Agreement,
his estate, legal representatives or named beneficiaries (as directed by
Executive in writing) shall be paid Executive's Base Salary at the rate in
effect at the time of Executive's death for a period of one (1) year from the
date of Executive's death, and the Bank will continue to provide medical,
dental, family and other benefits normally provided for Executive's family for
one (1) year after Executive's death.
7. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations, regulations that do not adversely affect the Bank, or its employees,
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. In determining incompetence, the acts or omissions
shall be measured against standards generally prevailing in the savings
institutions industry. For purposes of this Section 7, no act or failure to act
on the part of Executive shall be considered "willful" unless done, or omitted
to be done, by Executive not in good faith and without rea sonable belief that
Executive's action or omission was in the best interest of the Bank.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice, in writing, to Executive and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars thereof
in detail. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause. Any stock options granted
to Executive under any stock option plan of the Bank, the Company or any
subsidiary or affiliate thereof, shall not be exercisable from the date of the
written notice to Executive set forth above, unless and until the matter is
successfully resolved in Executive's favor, and such stock options shall become
entirely null and void effective upon a determination in arbitration that there
was Termination for Cause.
<PAGE>
8. NOTICE
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination due to
a Termination for Cause is given, the Executive notifies the Bank that a dispute
exists concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, either by mutual written agreement of
the parties or by a binding arbitration award, and provided further that the
Date of Termination shall be extended by a notice of dispute only if such notice
is given in good faith and the party giving such notice pursues the resolution
of such dispute with reasonable diligence. No compensation or benefits shall be
paid to Executive during the pendency of any such dispute. In the event it is
determined by arbitration that "cause" for termination did not exist or such
dispute is otherwise decided in Executive's favor, Executive shall be entitled
to receive all compensation and benefits which should have been paid under
either Section 4 or 5, with interest at the prime rate on such cash payments
that should have been made during such period.
9. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with Section 9(b) during the term of this
Agreement and for one (1) full year after the expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to the Bank as may reasonably be required by the Bank in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
<PAGE>
10. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder as a
result of which the Bank is paying Executive benefits under Section 4, Executive
agrees not to compete with the Bank for a period of one (1) year following such
termination in any city, town or county in which the Bank has an office or has
filed an application for regulatory approval to establish an office, determined
as of the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank. The parties hereto, recognizing that
irreparable injury will result to the Bank, its business and property in the
event of Executive's breach of this Section 10(a) agree that in the event of any
such breach by Executive, the Bank will be entitled, in addition to any other
remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employers,
employees and all persons acting for or with Executive. Executive represents and
admits that Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Bank, and that the enforcement of a remedy by way of injunction
will not prevent Executive from earning a livelihood. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available to
the Bank for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever (except
for such disclosure as may be required to be provided to the Securities Exchange
Commission, the Federal Deposit Insurance Corporation, or other federal or state
banking agency with jurisdiction over the Bank, the Company or Executive).
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank, and
Executive may disclose any information regarding the Bank which is otherwise
publicly available. In the event of a breach or threatened breach by Executive
of this Section 10, the Bank will be entitled to an injunction restraining
Executive from disclosing, in whole or in part, the knowledge of the past,
present, planned or considered business activities of the Bank or affiliates
thereof, or from rendering any services to any person, firm, corporation, other
entity to whom such knowledge, in whole or in part, has been disclosed or is
threatened to be disclosed. Nothing herein will be construed as prohibiting the
Bank from pursuing any other remedies available to the Bank for such breach or
threatened breach, including the recovery of damages from Executive.
11. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank.
<PAGE>
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
13. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. REQUIRED PROVISIONS
(a) The Bank's Board of Directors may terminate Executive's employment
at any time, but any termination by the Bank's Board of Directors, other than
Termination for Cause, shall not prejudice Executive's right to compensation or
other benefits under this Agreement. Executive shall not have the right to
receive compensation or other benefits for any period after Termination for
Cause.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 U.S.C. ss.ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of
the Federal Deposit Insurance Act, the Bank's obligations under this contract
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay Executive all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
<PAGE>
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 U.S.C. ss.ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the
Federal Deposit Insurance Act, all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. ss.
1813(x)(1)) of the Federal Deposit Insurance Act, all obligations of the Bank
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the institution, by the Federal Deposit
Insurance Corporation ("FDIC") at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) (12 U.S.C. ss.1823(c)) of the Federal Deposit Insurance Act, or
when the Bank is determined by the FDIC to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
16. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Illinois
but only to the extent not superseded by federal law.
19. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
the compensation provided under Sections 3(a) and 3(b) until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
<PAGE>
20. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank and/or the Company, provided that the dispute or
interpretation has been settled by Executive and the Bank and/or the Company or
resolved in Executive's favor.
21. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, and shall indemnify Executive (and
his heirs, executors and administrators) to the fullest extent permitted under
federal and state law against all expenses and liabilities reasonably incurred
by him in connection with or arising out of any action, suit or proceeding in
which he may be involved by reason of his having been a director or officer of
the Bank (whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements (such settlements must be approved by the
Board of Directors of the Bank). If such action, suit or proceeding is brought
against Executive in his capacity as an officer or director of the Bank,
however, such indemnification shall not extend to matters as to which Executive
is finally adjudged to be liable for willful misconduct in the performance of
his duties. No indemnification shall be paid that would violate 12 U.S.C.
Section 1828(K) or any regulations promulgated thereunder.
22. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed
and its seal to be affixed hereunto by its duly authorized officers, and
Executive has signed this Agreement, on the day and date first above written.
ATTEST: CHARTER BANK, S.B.
/s/John A. Becker
-----------------
Secretary John A. Becker, President
WITNESS: EXECUTIVE:
CHARTER BANK, S.B.
EMPLOYMENT AGREEMENT
This Agreement is made effective as of the 25th day of March, 1996, by
and between Charter Bank, S.B., an Illinois chartered stock savings bank (the
"Bank"), with its principal administrative office at 114 West Broadway, Sparta,
Illinois 62286-1633 and Linda M. Johnson (the "Executive"). Any reference to
"Company" herein shall mean Charter Financial, Inc., the stock holding company
parent of the Bank or any successor thereto.
WHEREAS, the Bank wishes to assure itself of the services of Executive
for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to
serve as Senior Vice President and Secretary of the Bank. During said period,
Executive also agrees to serve, if elected, as an officer and director of any
subsidiary or affiliate of the Bank. Failure to reelect Executive as Senior Vice
President and Secretary in accordance with the terms of Section 2(a) without the
consent of the Executive during the term of this Agreement, shall constitute an
Event of Termination.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall
begin as of the date first above written and shall continue for a period of
thirty-six (36) full calendar months thereafter. During said term the Executive
shall perform the normal and customary duties associated with the positions of
Senior Vice President and Secretary. Commencing on the first anniversary date of
this Agreement, and continuing at each anniversary date thereafter, the
Agreement shall renew for an additional year such that the remaining term shall
be three (3) years unless written notice is provided to Executive at least ten
(10) days and not more than thirty (30) days prior to any such anniversary date,
that this Agreement shall not renew, in which case this Agreement shall expire
on the next following anniversary date. Prior to each anniversary date, the
disinterested members of the Board of Directors of the Bank ("Board") will
conduct a comprehensive performance evaluation and review of the Executive for
purposes of determining whether to extend the Agreement, and the results thereof
shall be included in the minutes of the Board's meeting.
<PAGE>
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, business companies or business
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Bank, or materially affect the performance of Executive's
duties pursuant to this Agreement (it being understood that membership in
social, religious, charitable or similar organizations does not require Board
approval pursuant to this Section 2(b)).
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Section 2(b). The Bank
shall pay Executive as compensation a salary of not less than $84,696 per year
("Base Salary"). Such Base Salary shall be payable on the 15th and the last day
of the month. During the period of this Agreement, Executive's Base Salary shall
be reviewed at least annually; the first such review will be made no later than
October 1, 1996. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase or decrease the Executive's Base Salary in
connection with such review (any increase or decrease in Base Salary shall
become the "Base Salary" for purposes of this Agreement). In addition to the
Base Salary provided in this Section 3(a), the Bank shall provide Executive at
no cost to Executive with all such other benefits as are provided uniformly to
permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites as are normal and customary for the Bank. It is
expressly understood by the parties that any change in benefit plans,
arrangements or perquisites that are applicable to all participating employees
may be made without obtaining the Executive's prior consent. Without limiting
the generality of the foregoing provisions of this Section 3(b), Executive will
be entitled to participate in or receive benefits under any employee benefit
plans including but not limited to, retirement plans, supplemental retirement
plans, pension plans, profit-sharing plans, health-and-accident plans, medical
coverage or any other employee benefit plan or arrangement made available by the
Bank in the future to its senior executives and key management employees,
subject to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of the Bank in which
Executive is eligible to participate (and he shall be entitled to a pro rata
distribution under any incentive compensation or bonus plan as to any year in
which a termination of employment occurs, other than termination for Cause).
Nothing paid to the Executive under any such plan or arrangement will be deemed
to be in lieu of other compensation to which the Executive is entitled under
this Agreement.
(c) In addition to the Base Salary provided for by Section 3(a), the
Bank shall pay or reimburse Executive for all reasonable travel and other
reasonable expenses incurred by Executive performing his obligations under this
Agreement and may provide such additional compensation in such form and such
amounts as the Board may from time to time determine in accordance with
standards set by the Board of Directors.
<PAGE>
(d) In addition to the foregoing, Executive shall be entitled to
receive fees for serving as a director of the Bank in the same amount and on the
same terms as fees are paid to other directors of the Bank.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section 4 shall in all respects be subject to
the terms and conditions stated in Sections 8 and 15.
(a) The provisions of this Section 4 shall apply upon the occurrence of
an Event of Termination (as herein defined) during the Executive's term of
employment under this Agreement. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following:
(i) the termination by the Bank of Executive's full-time employment
hereunder for any reason other than (A) Disability or Retirement, as defined in
Section 6 hereof, (B) following a Change in Control, as defined in Section 5(a)
hereof, or (C) Termination for Cause as defined in Section 7 hereof; or
(ii) Executive's resignation from the Bank's employ, upon any
(A) failure to elect or reelect or to appoint or reappoint
Executive as Senior Vice President and Secretary during the
term of this Agreement in accordance with Section 2(a) hereof;
(B) change in Executive's function, duties, or
responsibilities, which change would cause Executive's
position to become one of materially lesser responsibility,
importance, or scope from the position and attributes thereof
described in Section 1 hereof;
(C) a relocation of Executive's principal place of employment
by more than 50 miles from its location at the effective date
of this Agreement, or a material reduction in the benefits and
perquisites to Executive from those being provided as of the
effective date of this Agreement; provided, however, that the
Board may reduce the benefits and perquisites to Executive if
such reduction occurs in connection with an institution-wide
reduction in benefits for valid business purposes and which
bears a uniform relationship to, or is no greater than, such
institution-wide reductions;
(D) liquidation or dissolution of the Bank other than
liquidations or dissolutions that are caused by
reorganizations that do not affect the status of Executive; or
(E) breach of this Agreement by the Bank.
<PAGE>
Upon the occurrence of any event described in clauses (ii) (A), (B),
(C), (D) or (E) of this Section 4(a), Executive shall have the right to elect to
terminate his employment under this Agreement by resignation upon forty-five
(45) days prior written Notice of Termination (as defined in Section 6), which
notice must be given by Executive within a reasonable period of time not to
exceed four calendar months after the initial event giving rise to said right to
elect, which shall be determined to constitute an "Event of Termination;"
provided however, that pursuant to an agreement in writing between the Bank and
the Executive, the Executive may consent to waive his right to terminate
employment in connection with any specific event set forth in (ii) (A), (B),
(C), (D), or (E) above, and such waiver shall be binding on the Executive,
provided further, that upon receipt of said Notice of Termination, the Bank
shall have thirty (30) days in which to remedy the event giving rise to
Executive's right to terminate (other than if Notice of Termination is given as
a result of (ii)(A) above), and if it does so and the Executive is returned to
the position he was in immediately before such event, the Executive's right to
terminate shall be extinguished. Notwithstanding the preceding sentences, in the
event of a continuing breach of this Agreement by the Bank, Executive, after
giving due notice within the prescribed time frame of an initial event specified
above, shall not waive any of his rights solely under this Agreement and this
Section 4 by virtue of the fact that Executive has submitted his resignation but
has remained in the employment of the Bank and is engaged in good faith
discussions to resolve any occurrence of an event described in clauses (ii) (A),
(B), (C), (D) and (E) of this Section 4(a).
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall pay Executive, or, in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to the greater of the payments due for the remaining term of this Agreement or
three (3) times the average of the five preceding years' Base Salary, including
bonuses and any other cash compensation paid to the Executive during each of
such years and, in addition, the Executive shall be entitled to the amount of
any benefits received pursuant to any employee benefit plans maintained by the
Bank during such years; provided however, that if the Bank is not in compliance
with its minimum capital requirements or if such payments would cause the Bank's
capital to be reduced below its minimum capital requirements, such payments
shall be deferred until such time as the Bank is in capital compliance. At the
election of Executive, which election is to be made on an annual basis during
the month of January, and which election is irrevocable for the year in which
made and upon the occurrence of an event of Termination, such payment shall be
made in a lump sum or paid monthly during the remaining term of this Agreement
following Executive's termination. In the event that no election is made,
payment to Executive will be made on a monthly basis during the remaining term
of this Agreement. Such payments shall not be reduced in the event Executive
obtains other employment following termination of employment.
<PAGE>
(c) Upon the occurrence of an Event of Termination the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination for a period of twelve (12) months following the Executive's
termination of employment. Provided, however, that in the event that (i) the
Executive becomes employed by another employer during the term that such
benefits are provided hereunder, and (ii) the new employer provides benefits to
the Executive that are substantially the same or superior to the benefits
provided under this Section 4(c) and which cost to the Executive is equal to or
less than the cost of such benefits provided by the Bank, and (iii) the
Executive if fully covered under such benefit programs without regard to any
pre-existing conditions which may exclude coverage, then the benefit or benefits
provided under this Section 4(c) that are also provided by such new employer
shall be discontinued under the provisions of this Section.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
Disability. For these purposes, temporary Disability shall include Disability
for any period less than that required to receive payment under the applicable
long-term disability plan maintained by the Bank, or if no such plan applies,
which would qualify Executive for disability benefits under the Federal Social
Security System. At the Bank's discretion, the Executive shall be required to
provide a note from a physician which shall be deemed satisfactory proof of such
temporary Disability.
5. CHANGE IN CONTROL
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank or Company, as set forth below. For
purposes of this Agreement, a "Change in Control" of the Bank or Company shall
mean an event of a nature that: (i) would be required to be reported in response
to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act'); or (ii) results in a Change in Control of the Bank or the
Company within the meaning of the Bank Holding Company Act of 1956, as amended,
and applicable rules and regulations promulgated thereunder as in effect at the
time of the Change in Control (collectively, the BHCA"); or (iii) shall be
deemed to have occurred at such time as (a) any "Person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Company representing 25% or more of
the Bank's or the Company's outstanding securities except for any securities of
the Bank purchased by the Company in connection with the conversion of the Bank
to stock form and any securities purchased by the Bank's employee stock
ownership plan and trust; or (b) a plan of reorganization, merger,
consolidation, or sale of all or substantially all the assets of the Bank or the
Company shall be agreed to and consummated; or (c) a proxy statement soliciting
proxies from stockholders of the Company, by someone other than the current
<PAGE>
management of the Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Company or Bank or similar
transaction with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan or transaction are
exchanged for or converted into cash or property or securities not issued by the
Bank or the Company shall be distributed and irrevocable proxies representing
more than 25% of the voting common stock of the Company or the Bank, approving
such plan of reorganization, merger or consolidation of the Company or Bank are
received and voted in favor of such transactions; or (d) a tender offer is made
for 25% or more of the outstanding securities of the Bank or Company and
shareholders owning beneficially or of record 25% or more of the outstanding
securities of the Bank or Company have tendered or offered to sell their shares
pursuant to such tender offer and such tendered shares have been acquired by the
tender offeror.
(b) If any of the events described in Section 5(a) hereof constituting
a Change in Control have occurred, and (i) Executive's employment is
involuntarily terminated or (ii) during the remaining term of this Agreement,
there occurs one of the events set forth in Section 4(a)(ii) of this Agreement,
then Executive shall be entitled to the benefits provided in paragraphs Sections
5(c), 5(d), 5(e), 5(f), and 5(g) upon his subsequent termination of employment
at any time during the term of this Agreement (regardless of whether such
termination results from (i) his resignation or (ii) his dismissal), unless such
termination is because of his death, Retirement, Termination for Cause or
Disability.
(c) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Bank shall pay Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to the greater of the payments due for the remaining term of this Agreement or
2.99 times the average of the five preceding years' Base Salary, including
bonuses and any other cash compensation paid to the Executive during such years.
At the election of the Executive, which election is to be made on an annual
basis during the month of January, and which election is irrevocable for the
year in which made and upon the occurrence of a Change in Control, such payment
may be made in a lump sum or paid in equal monthly installments during the
thirty-six (36) months following the Executive's termination. In the event that
no election is made, payment to Executive will be made on a monthly basis during
the remaining term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Bank will cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his severance for a period of
eighteen (18) months; provided, however, that in the event that (i) the
Executive becomes employed by another employer during the term that such
benefits are provided hereunder, and (ii) the new employer provides benefits to
the Executive that are substantially the same or superior to the benefits
provided under this Section 5(d) and which cost to the Executive is equal to or
less than the cost of such benefits provided by the Bank, and (iii) the
Executive if fully covered under such benefit programs without regard to any
pre-existing conditions which may exclude coverage, then the benefit or benefits
provided under this Section 5(d) that are also provided by such new employer
shall be discontinued under the provisions of this Section.
<PAGE>
(e) Notwithstanding the preceding paragraphs of this Section 5, in the
event that:
(i) the aggregate payments or benefits to be made or
afforded to Executive under said paragraphs (the
"Termination Benefits") would be deemed to include an
"excess parachute payment" under Section 280G of the
Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to the total amount of payments permissible under
Section 280G of the Code or any successor thereto.
then the Termination Benefits to be paid to Executive shall be
so reduced so as to be a Non-Triggering Amount.
(f) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
Disability. For these purposes, temporary Disability shall include Disability
for any period less than that required to receive payment under the applicable
long-term disability plan maintained by the Bank, or if no such plan applies,
which would qualify Executive for disability benefits under the Federal Social
Security System. At the Bank's discretion, the Executive shall be required to
provide a note from a physician which shall be deemed satisfactory proof of such
temporary Disability.
(g) Notwithstanding the foregoing, if after the application of
subparagraph (g) above, it is determined that the Executive received an excess
parachute payment despite the reduction in the Executive's Termination Benefits,
the excess of such Termination Benefits paid to the Executive over 2.99 times
the Executive's "base amount", as defined in Section 280G of the Code, shall be
treated as a loan to the Executive and the Executive shall be required to repay
such amount to the Bank, or the successor of the Bank, within two years of the
date of such determination, with interest at the prime rate, as set forth from
time to time in The Wall Street Journal.
(h) Executive shall not be entitled to any payments pursuant to this
Section 5 if the Bank is not in compliance with its minimum capital requirements
or if such payments would cause the Bank's capital to be reduced below its
minimum capital requirements. In such event, such payments shall be deferred
until such times as the Bank is in capital compliance.
6. TERMINATION UPON RETIREMENT, DISABILITY OR DEATH
Termination by the Bank of Executive based on "Retirement" shall mean
termination in accordance with the Bank's retirement policy or in accordance
with any retirement arrangement established with Executive's consent with
respect to him. Upon termination of Executive upon Retirement, Executive shall
be entitled to all benefits under any retirement plan of the Bank and other
employee or executive benefit plans to which Executive is a party and in which
Executive has a benefit which is vested or which vests upon Retirement.
<PAGE>
Termination by the Bank of Executive's employment based on "Disability"
shall mean termination because of any physical or mental impairment which
qualifies Executive for disability benefits under the applicable long-term
disability plan maintained by the Bank or, if no such plan applies, which would
qualify Executive for disability benefits under the federal social security
system. In the event Executive is unable to perform his duties under this
Agreement on a full-time basis for a period of six (6) consecutive months by
reason of Disability, the Bank may terminate this Agreement, provided that the
Bank shall continue to be obligated to pay Executive his Base Salary, including
bonuses and any other cash compensation paid to Executive during such period for
the remaining term of this Agreement, or one (1) year, whichever is the longer
period of time, and provided further that any amounts actually paid to Executive
pursuant to any disability insurance or other similar such program which the
Bank has provided or may provide on behalf of its employees or pursuant to any
workman's or social security disability program shall reduce the compensation to
be paid to Executive pursuant to this paragraph.
In the event of Executive's death during the term of this Agreement,
his estate, legal representatives or named beneficiaries (as directed by
Executive in writing) shall be paid Executive's Base Salary at the rate in
effect at the time of Executive's death for a period of one (1) year from the
date of Executive's death, and the Bank will continue to provide medical,
dental, family and other benefits normally provided for Executive's family for
one (1) year after Executive's death.
7. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations, regulations that do not adversely affect the Bank, or its employees,
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. In determining incompetence, the acts or omissions
shall be measured against standards generally prevailing in the savings
institutions industry. For purposes of this Section 7, no act or failure to act
on the part of Executive shall be considered "willful" unless done, or omitted
to be done, by Executive not in good faith and without rea sonable belief that
Executive's action or omission was in the best interest of the Bank.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice, in writing, to Executive and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars thereof
in detail. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause. Any stock options granted
to Executive under any stock option plan of the Bank, the Company or any
subsidiary or affiliate thereof, shall not be exercisable from the date of the
written notice to Executive set forth above, unless and until the matter is
successfully resolved in Executive's favor, and such stock options shall become
entirely null and void effective upon a determination in arbitration that there
was Termination for Cause.
<PAGE>
8. NOTICE
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination due to
a Termination for Cause is given, the Executive notifies the Bank that a dispute
exists concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, either by mutual written agreement of
the parties or by a binding arbitration award, and provided further that the
Date of Termination shall be extended by a notice of dispute only if such notice
is given in good faith and the party giving such notice pursues the resolution
of such dispute with reasonable diligence. No compensation or benefits shall be
paid to Executive during the pendency of any such dispute. In the event it is
determined by arbitration that "cause" for termination did not exist or such
dispute is otherwise decided in Executive's favor, Executive shall be entitled
to receive all compensation and benefits which should have been paid under
either Section 4 or 5, with interest at the prime rate on such cash payments
that should have been made during such period.
9. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with Section 9(b) during the term of this
Agreement and for one (1) full year after the expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to the Bank as may reasonably be required by the Bank in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
10. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder as a
result of which the Bank is paying Executive benefits under Section 4, Executive
agrees not to compete with the Bank for a period of one (1) year following such
termination in any city, town or county in which the Bank has an office or has
filed an application for regulatory approval to establish an office, determined
as of the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
<PAGE>
whose business materially competes with the depository, lending or other
business activities of the Bank. The parties hereto, recognizing that
irreparable injury will result to the Bank, its business and property in the
event of Executive's breach of this Section 10(a) agree that in the event of any
such breach by Executive, the Bank will be entitled, in addition to any other
remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employers,
employees and all persons acting for or with Executive. Executive represents and
admits that Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Bank, and that the enforcement of a remedy by way of injunction
will not prevent Executive from earning a livelihood. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available to
the Bank for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever (except
for such disclosure as may be required to be provided to the Securities Exchange
Commission, the Federal Deposit Insurance Corporation, or other federal or state
banking agency with jurisdiction over the Bank, the Company or Executive).
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank, and
Executive may disclose any information regarding the Bank which is otherwise
publicly available. In the event of a breach or threatened breach by Executive
of this Section 10, the Bank will be entitled to an injunction restraining
Executive from disclosing, in whole or in part, the knowledge of the past,
present, planned or considered business activities of the Bank or affiliates
thereof, or from rendering any services to any person, firm, corporation, other
entity to whom such knowledge, in whole or in part, has been disclosed or is
threatened to be disclosed. Nothing herein will be construed as prohibiting the
Bank from pursuing any other remedies available to the Bank for such breach or
threatened breach, including the recovery of damages from Executive.
11. SOURCE OF PAYMENT
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
<PAGE>
13. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. REQUIRED PROVISIONS
(a) The Bank's Board of Directors may terminate Executive's employment
at any time, but any termination by the Bank's Board of Directors, other than
Termination for Cause, shall not prejudice Executive's right to compensation or
other benefits under this Agreement. Executive shall not have the right to
receive compensation or other benefits for any period after Termination for
Cause.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 U.S.C. ss.ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of
the Federal Deposit Insurance Act, the Bank's obligations under this contract
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay Executive all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 U.S.C. ss.ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the
Federal Deposit Insurance Act, all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. ss.
1813(x)(1)) of the Federal Deposit Insurance Act, all obligations of the Bank
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
<PAGE>
(e) All obligations of the Bank under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the institution, by the Federal Deposit
Insurance Corporation ("FDIC") at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) (12 U.S.C. ss.1823(c)) of the Federal Deposit Insurance Act, or
when the Bank is determined by the FDIC to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
16. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Illinois
but only to the extent not superseded by federal law.
19. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
the compensation provided under Sections 3(a) and 3(b) until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
20. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank and/or the Company, provided that the dispute or
interpretation has been settled by Executive and the Bank and/or the Company or
resolved in Executive's favor.
<PAGE>
21. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, and shall indemnify Executive (and
his heirs, executors and administrators) to the fullest extent permitted under
federal and state law against all expenses and liabilities reasonably incurred
by him in connection with or arising out of any action, suit or proceeding in
which he may be involved by reason of his having been a director or officer of
the Bank (whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements (such settlements must be approved by the
Board of Directors of the Bank). If such action, suit or proceeding is brought
against Executive in his capacity as an officer or director of the Bank,
however, such indemnification shall not extend to matters as to which Executive
is finally adjudged to be liable for willful misconduct in the performance of
his duties. No indemnification shall be paid that would violate 12 U.S.C.
Section 1828(K) or any regulations promulgated thereunder.
22. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed
and its seal to be affixed hereunto by its duly authorized officers, and
Executive has signed this Agreement, on the day and date first above written.
ATTEST: CHARTER BANK, S.B.
/s/John A. Becker
-----------------
Secretary John A. Becker, President
WITNESS: EXECUTIVE:
EXHIBIT 13
ANNUAL REPORT TO SECURITY HOLDERS
<PAGE>
1996 ANNUAL REPORT TO STOCKHOLDERS
CHARTER FINANCIAL, INC.
- --------------------------------------------------------------------------------
Table of Contents
Message from the Chairman
Common Stock and Related Matters
Selected Consolidated Financial Information
Management's Discussion and Analysis
Independent Auditors' Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Stockholder Information
<PAGE>
MESSAGE FROM THE CHAIRMAN
- --------------------------------------------------------------------------------
To Our Valued Stockholders:
The reorganization of Charter Bancorp M.H.C. to Charter Financial, Inc. on
December 28, 1995, charted the course for a successful year for Charter Bank,
S.B. During 1996 the acquisition of the $ 58.9 million Community Savings Bank at
Marion, Illinois, was completed. In addition our intent to acquire $30.7 million
Home Federal Savings in Carbondale, Illinois, has been announced and is expected
to close in January, 1997. As acquisition targets become available, the Board
will selectively seek to expand our franchise and build stockholder value.
In 1997, the Bank will pursue continued market share growth in the seven
communities in which our branches are located. Market share growth will be
achieved by Charter Bank's continued commitment to innovation. Whether it be
through new deposit product offerings, alternative delivery channels, additional
convenient locations or new technology, we will focus our efforts to provide the
best financial services available. The commitment to innovation coupled with
knowledgeable employees and superior customer service will keep Charter Bank a
leader in each of the market areas it serves.
Charter Financial's commitment to its new shareholders was evidenced by the 5%
repurchase of outstanding stock during June and July, 1996, and a 10% repurchase
of outstanding stock in September, 1996. Shares totaling 721,285 were
repurchased. We are pleased to have the financial strength to undertake the
stock repurchases.
We wish to extend our appreciation to our shareholders, customers, and staff for
their continued support.
Sincerely,
John A. Becker
President and Chief Executive Officer
<PAGE>
COMMON STOCK AND RELATED MATTERS
- --------------------------------------------------------------------------------
The common stock of Charter Financial, Inc. is traded in the over-the-counter
market and is listed for quotation in the NASDAQ National Market under the
symbol "CBSB." The stock was issued on December 28, 1995 at $10.00 per share. As
of December 1, 1996, there were 896 stockholders of record and 4,253,459
outstanding shares of common stock.
The following table sets forth the high and low closing bid prices as reported
by NASDAQ and dividends paid per share of common stock for the periods
indicated.
<TABLE>
<CAPTION>
Dividends
Quarter ended High Low paid
------------- ---- --- ----
<S> <C> <C> <C>
December 31, 1995 $ 10.8125 $ 10.8125 $ .15*
March 31, 1996 10.8125 12.2500 .06
June 30, 1996 12.0000 11.2500 .06
September 30, 1996 13.0000 10.8750 .06
</TABLE>
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, Charter Financial's results of operations and financial condition,
tax considerations, and general economic conditions. No assurance can be given
that dividends will be declared or, if declared, what the amount of dividends
will be, or whether such dividends, once declared, will continue.
* Represents dividends paid by Charter Bank, S.B., to its stockholders other
than its mutual holding company prior to the reorganization of Charter
Bancorp, M.H.C. to Charter Financial, Inc.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain historical information concerning the
financial position and results of operations of the Company at the dates
indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets .................. $388,431 $293,135 $261,297 $259,042 $229,410
Loans receivable, net ......... 275,487 206,074 178,058 157,342 134,788
Investments, net (1) .......... 77,999 60,174 58,798 68,957 67,067
Mortgage-backed securities, net 16,632 16,670 16,071 20,950 19,366
Deposits (2) .................. 248,723 197,103 189,947 198,183 200,495
Borrowed money ................ 76,354 57,080 35,566 27,095 7,110
Stockholders' equity (3) ...... 56,394 35,622 31,581 22,016 18,943
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income .................. $ 24,819 $ 20,009 $ 18,233 $ 18,391 $ 19,772
Interest expense ................. 12,426 10,309 8,387 8,730 11,274
-------- -------- -------- -------- --------
Net interest income ........... 12,393 9,700 9,846 9,661 8,498
Provision for losses on loans .... 170 360 140 1,004 653
-------- -------- -------- -------- --------
Net interest income after
provision for losses on loans 12,223 9,340 9,706 8,657 7,845
-------- -------- -------- -------- --------
Noninterest income:
Late charges and other loan fees 391 241 266 173 149
Gain (loss) on sale of
invesment securities, net ...... (29) (14) 121 8 131
Loss on sale of mortgage-backed.
securities, net ............. (9) -- -- -- --
Deposit account fees .......... 797 677 603 530 446
Other ......................... 691 506 454 458 426
-------- -------- -------- -------- --------
Total noninterest income .... 1,841 1,410 1,444 1,169 1,152
-------- -------- -------- -------- --------
Noninterest expense:
Compensation and employee ..... 3,661 3,025 2,778 2,106 1,997
benefits
Office buildings and equipment
and data processing ......... 1,083 835 825 836 809
Advertising ................... 237 148 196 152 138
Deposit insurance premiums .... 458 438 461 380 447
SAIF special assessment ....... 1,479 -- -- -- --
Other ......................... 1,641 1,306 1,199 880 889
Provision for losses and
expenses on real estate
acquired by foreclosure ..... 81 4 184 84 156
Amortization of cost in
excess of fair value of net
assets acquired ........... 211 136 142 142 362
-------- -------- -------- -------- --------
Total noninterest expense ... 8,851 5,892 5,785 4,580 4,798
-------- -------- -------- -------- --------
<PAGE>
<CAPTION>
Year ended September 30,
------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income before income tax
expense and cumulative
effect of change in
accounting principle....... 5,213 4,858 5,365 5,246 4,199
Income tax expense ............... 2,155 1,874 2,054 2,173 1,757
-------- -------- -------- -------- --------
Income before cumulative effect in
accounting principle ........ 3,058 2,984 3,311 3,073 2,442
Cumulative effect of change in
accounting principle ........ -- -- 786 -- --
-------- -------- -------- -------- --------
Net income ....................... $ 3,058 $ 2,984 $ 4,097 $ 3,073 $ 2,442
======== ======== ======== ======== ========
Earnings per share:
Income before cumulative
effect of change in
accounting principle....... $ 0.67 $ 0.69 0.78 N/A N/A
Cumulative effect of change in
accounting principle ........ -- -- 0.19 N/A N/A
-------- -------- -------- -------- --------
Net Income ....................... $ 0.67 $ 0.69 $ 0.97 $ N/A $ N/A
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION, Cont.
At or for the year ended
September 30,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other
Data:
Performance ratios:
Return on average assets(4) ......... 0.93% 1.09% 1.27%(5) 1.26% 1.08%
Return on average stockholders'
equity (4) ....................... 5.57 8.92 15.29 15.10 13.79
Stockholders' equity as a
percent of average assets ......... 17.18 12.97 12.14 9.02 8.35
Stockholders' equity to total
assets (end of period) ............ 14.52 12.15 12.09 8.50 8.26
Interest rate spread (6) ............ 3.27 3.25 3.48 3.86 3.53
Net interest margin (7) ............. 3.95 3.68 3.85 4.12 3.87
Average interest-earning assets as a
percent of average interest-bearing
liabilities (8) .................. 117.30 110.80 111.17 107.06 106.64
Asset quality ratios:
Nonperforming loans as a percent
of loans receivable, net(9) ...... 0.78 0.32 0.23 1.40 0.95
Nonperforming assets as a percent
of nonperforming total assets(10) 0.67 0.27 0.24 0.94 0.76
Allowance for loan losses as a
percent of nonperforming loans(9) 111.89 336.65 528.29 100.09 102.26
Number of full-service offices ......... 7 6 5 5 5
</TABLE>
(1) Includes Federal Home Loan Bank stock and
interest-bearing deposits.
(2) During the years ended September 30, 1994, 1993, and 1992, $1.8 million,
$7.6 million, and the $6.3 million, respectively, in certificates of
deposit were converted into reverse repurchase agreements and, therefore,
are not reflected in deposit totals.
(3) Reflects only retained earnings for years prior to 1994, the fiscal year
in which Charter Bank converted to stock form.
(4) Averages are computed on a simple average basis using
period-end balances.
(5) Does not include cumulative effect of change in accounting
principle of $786,053. Return
on average assets was 1.57% including such amount at
September 30, 1994.
(6) Represents the difference between the yield on average interest-earning
assets and the cost of average interest-bearing liabilities.
(7) Represents net interest income as a percent of
average interest-earning assets.
(8) Averages are computed based upon
month-end balances.
(9) Includes nonaccruing loans 90 days or
more delinquent.
(10) Includes nonaccruing loans 90 days or more delinquent and real estate
acquired through foreclosure.
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of |liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
utilizing month-end balances. Management does not believe that the use of
month-end balances instead of daily balances has caused any material differences
in the information presented.
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------------------------------------------
1996 1995
---------------------------------- ---------------------------------
Average Average Average Average
balance Interest yield/cost balance Interest yield/cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1) $ 230,765 $ 19,439 8.42% $ 188,897 $ 15,462 8.19%
Investments, net (2) 62,243 3,937 6.33 54,036 3,308 6.12
Mortgage-backed securities, net 16,353 1,173 7.17 17,510 1,087 6.21
Interest-bearing deposits 4,563 270 5.92 3,477 152 4.37
--------- -------- --------- --------
Total interest-earning assets $ 313,924 24,819 7.91 $ 263,920 20,009 7.58
========= -------- ======== --------
Interest-bearing liabilities:
Deposits $ 219,092 9,793 4.47 $ 189,309 7,567 4.00
Borrowed money 48,544 2,633 5.42 48,882 2,742 5.61
--------- -------- --------- --------
Total interest-bearing liabilities $ 267,636 12,426 4.64 $ 238,191 10,309 4.33
========= -------- ========= --------
Net interest income $ 12,393 $ 9,700
======== ========
Net interest rate spread (3) 3.27% 3.25%
==== ====
Net interest margin (4) 3.95% 3.68%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 117.30% 110.80%
====== ======
<PAGE>
<CAPTION>
Year ended September 30,
------------------------------
1994
----------------------------
Average Average
balance Interest yield/cost
-------- ------- ---------
Interest-earning assets:
Loans receivable, net (1) $ 168,391 $ 13,256 7.87 %
Investments, net (2) 64,977 3,754 5.78
Mortgage-backed securities, net 17,673 1,082 6.12
Interest-bearing deposits 4,731 141 2.98
--------- --------
Total interest-earning assets $ 255,772 18,233 7.13
========= --------
Interest-bearing liabilities:
Deposits $ 195,142 6,859 3.51
Borrowed money 34,940 1,528 4.37
--------- --------
Total interest-bearing liabilities $ 230,082 8,387 3.65
======== --------
Net interest income $ 9,846
========
Net interest rate spread (3) 3.48%
====
Net interest margin (4) 3.85%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities 111.17%
======
</TABLE>
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average (changes in average volume multiplied by prior rate); (ii)
changes in rates (change in rate multiplied by prior average volume); (iii)
changes in rate-volume (changes in rate multiplied by the change in average
volume); and (iv) the net change.
<TABLE>
<CAPTION>
Year ended
September 30,
-----------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------------------------------------ ---------------------------------------- --------
Increase (decrease) Increase (decrease)
due to due to
------------------------------------------ ---------------------------------------- --------
Rate/ Increase Rate/ Increase
Volume Rate volume (Decrease) Volume Rate volume (Decrease)
------ ---- ------ ---------- ------ ---- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, net (1) ..... $ 3,429 $ 434 $ 114 $ 3,977 $ 1,614 $ 526 $ 66 $ 2,206
Investments, net (2) .......... 502 113 14 629 (632) 223 (37) (446)
Mortgage-backed securities, net (72) 168 (10) 86 (10) 15 0 5
Interest-bearing deposits ..... 47 54 17 118 (37) 65 (17) 11
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets . 3,906 769 135 4,810 935 829 12 1,776
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Deposits ...................... 1,191 890 145 2,226 (205) 942 (29) 708
Borrowed money ................ (19) (93) 3 (109) 609 432 173 1,214
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ................ 1,172 797 148 2,117 404 1,374 144 1,922
------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income $ 2,734 $ (28) $ (13) $ 2,693 $ 531 $ (545) $ (132) $ (146)
======= ======= ======= ======= ======= ======= ======= =======
(1) Average balance includes nonaccrual loans.
(2) Includes Federal Home Loan Bank stock and investment securities.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended
September 30,
-------------------------------------------
1994 vs. 1993
-------------------------------------------
Increase (decrease)
due to
-------------------------------------------
Rate/ Increase
Volume Rate volume (Decrease)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable, net (1) ..... $ 2,061 $(1,321) $ (214) $ 526
Investments, net (2) .......... 329 (389) (33) (93)
Mortgage-backed securities, net (98) (247) 17 (328)
Interest-bearing deposits ..... (226) (81) 45 (262)
------- ------- ------- -------
Total interest-earning assets . 2,066 (2,038) (185) (157)
------- ------- ------- -------
Interest expense:
Deposits ...................... (190) (1,023) 24 (1,189)
Borrowed money ................ 557 159 130 846
------- ------- ------- -------
Total interest-bearing
liabilities ................ 367 (864) 154 (343)
------- ------- ------- -------
Change in net interest income $ 1,699 $(1,174) $ (339) $ 186
======= ======= ======= =======
(1) Average balance includes nonaccrual loans.
(2) Includes Federal Home Loan Bank stock and investment securities.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
Net income of Charter Financial, Inc. and its subsidiary ("the Company") is
primarily dependent on the interest income earned on its loans receivable,
mortgage-backed securities, and investments, and the interest expense on its
deposits and borrowings. The Company's net income is also affected by its
noninterest income, consisting primarily of late charges and other loan fees,
deposit account fees, brokerage commissions and fees, as well as its provision
for losses on loans, and noninterest expense, such as compensation and employee
benefits, deposit insurance premiums, occupancy and equipment costs, and income
taxes.
Additionally, earnings of the Company are affected significantly by general
economic and competitive conditions, particularly changes in market interest
rates, government policies, and actions of regulatory authorities.
On December 28, 1995, the Company completed its conversion from an
Illinois-charted mutual holding company to a Delaware stock corporation (the
Conversion). At the date of the Conversion, the Company completed the sale of
2,919,414 shares of common stock, $.10 par value, at a price of $10 per share to
Charter Bank, S.B.'s ("the Bank") depositors, ESOP, and minority stockholders in
a subscription offering and to certain members of the general public in a
community offering. Net proceeds from the sale of common stock were $27,051,859,
after deducting approximately $1.2 million of offering expenses and $969,030
related to the sale of 96,903 shares to the Bank's ESOP.
In conjunction with the subscription and community offering, an additional
2,054,832 shares of common stock were issued by the Company to convert 986,051
shares of the Bank's common stock held by minority stockholders into common
stock of the Company. Each share of the Bank's common stock in the above
transaction was converted into the right to receive 2.0839 shares of the
Company's common stock (the Exchange Ratio).
Business Strategy
The Company's current business strategy is to operate as a well-capitalized,
profitable, and independent community savings bank dedicated to financing home
ownership and consumer needs in its market area and to providing quality service
to its customers. The Company has implemented this strategy by: (I) closely
monitoring needs of customers and providing quality service; (ii) emphasizing
consumer banking by originating residential mortgage loans and consumer loans,
and by offering checking accounts and other financial services and products;
(iii) maintaining asset quality; (iv) maintaining capital in excess of
regulatory requirements and growing moderately in a manner consistent with the
Company's strategy of maintaining high capital levels; (v) increasing earnings;
and (vi) managing interest rate risk by better matching asset and liability
maturities and rates.
On May 15, 1996, the Company completed its acquisition of Community Savings
Bank, Marion, Illinois ("Community Savings") in exchange for cash of $7.5
million. Community Savings' assets consisted primarily of loans receivable of
$45.4 million and investment securities of $6.3 million, while liabilities
consisted primarily of savings deposits of $49.7 million. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
operating results of Community Savings have been included in the Company's
results of operations since the date of the acquisition. The excess of the cost
over fair value of the net assets acquired was approximately $2.9 million.
<PAGE>
On May 12, 1995, the Company acquired the savings deposit liabilities of the
branch office of another financial institution totaling approximately $21.1
million. The acquisition was accounted for under the purchase method and
resulted in the recording of a core deposit intangible totaling approximately
$1.2 million.
Results of Operations
The earnings of the Company depend primarily on its level of net interest
income, which is the difference between interest earned on the Company's
interest-earning assets and the interest paid on interest-bearing liabilities.
Net interest income is a function of the Company's interest rate spread which is
the difference between the yield earned on interest-earning assets and the rate
paid on interest-bearing liabilities, as well as a function of the average
balance of interest-earning assets as compared to the average balance of
interest-bearing liabilities. The Company had net income of $3.1 million, $3.0
million, and $4.1 million for the fiscal years ended September 30, 1996, 1995,
and 1994, respectively.
Comparison of Operating Results for the Fiscal Years ended September 30, 1996
and 1995
Interest Income. Interest income totaled $24.8 million for the fiscal year ended
September 30, 1996 compared to $20.0 million for the fiscal year ended September
30, 1995, an increase of $4.8 million, or 24.0%. This increase resulted
primarily from an increase in the average yield on interest-earning assets to
7.91% in fiscal year 1996 from 7.58% in fiscal year 1995, which increase
reflected the general increase in market interest rates, which existed for most
of fiscal year 1996, as well as changes in the composition and amount of
interest-earning assets. Average interest-earning assets increased to $313.9
million for fiscal year 1996 compared to $263.9 million for fiscal year 1995.
The increase in average interest-earning assets resulted from the impact of
$27.1 million of net proceeds from the sale of common stock and the acquisition
of Community Savings.
Interest income earned on loans receivable increased $4.0 million, or 25.7%,
reflecting an increase in average loans outstanding of $41.9 million , or 22.2%,
to $230.8 million in fiscal year 1996, as well as an increase in the average
yield on loans receivable to 8.42% from 8.19%. The general increase in market
rates resulted in higher yields on new consumer loan originations, as well as
adjustable rate mortgages which repriced at higher levels. The increase in
average loans outstanding consisted substantially of $45.8 million in loans
acquired from Community Savings Bank, and the purchase of $37.4 million in ARM
loans.
Interest received from investments increased $629,000, or 19.0%, to $3.9 million
for the fiscal year ended September 30, 1996 compared to $3.3 million for the
fiscal year ended September 30, 1995. This increase reflects the increase of
$8.2 million, or 15.2%, in the average balance of investments to $62.2 million
in fiscal year 1996 from $54.0 million in fiscal year 1995 as well as an
increase in the average yield on investments to 6.33% from 6.12%. The increase
in the average balance of investment securities resulted from the $6.3 million
of investments acquired from Community Savings coupled with the increased
purchase activity of investment securities by the Company in 1996 compared to
1995.
<PAGE>
Interest received from mortgage-backed securities remained stable at $1.2
million and $1.1 million for the fiscal years ended September 30, 1996 and 1995,
respectively. The average yield on mortgage-backed securities increased to 7.17%
for fiscal year 1996 from 6.21% for fiscal year 1995 which increase was
partially offset by the decrease in the average balance on mortgage-backed
securities of $1.2 million, or 6.6%, to $16.4 million in fiscal year 1996 from
$17.5 million in fiscal year 1995.
Interest income from interest-bearing deposits increased $118,000, or 77.2%,
reflecting an increase in the average yield on interest-bearing deposits to
5.92% for fiscal year 1996 from 4.37% for fiscal year 1995 as well as an
increase in the average balance of $1.1 million, or 31.2%.
Interest Expense. Interest expense increased by $2.1 million, or 20.5%, to $12.4
million for the fiscal year ended September 30, 1996 from $10.3 million for the
fiscal year ended September 30, 1995. This increase resulted primarily from an
increase in the average cost on interest-bearing liabilities to 4.64% in fiscal
year 1996 from 4.33% in fiscal year 1995, as well as an increase in average
interest-bearing liabilities of $29.4 million, or 12.4%, to $267.6 million in
fiscal year 1996 compared to $238.2 million in fiscal year 1995.
Interest expense on deposits increased $2.2 million, or 29.4%, reflecting an
increase in the average cost of deposits to 4.47% from 4.00% as well as an
increase of $29.8 million, or 15.7%, in average deposits to $219.1 million from
$189.3 million. The increase in the average balance of deposits resulted from
the $49.7 million of deposits acquired from Community Savings in May 1996 and
the full years impact of the $21.1 million of deposits acquired in the May 1995
branch acquisition. The increase in the cost of deposits reflected the higher
cost of time deposits acquired from Community Savings.
Interest expense on borrowed money decreased $109,000, or 4.0%, reflecting a
decrease in average borrowed money of $338,000, or 0.7%, to $48.5 million in
fiscal year 1996 from $48.9 million in fiscal year 1995 and a decrease in the
cost of borrowed money to 5.42% from 5.61%. Borrowed money resulted from the
continued utilization of Federal Home Loan Bank line of credit advances to fund
the origination and purchase of mortgage loans and the acquisition of Community
Savings.
Net Interest Income. Net interest income totaled $12.4 million and $9.7 million
for the fiscal years ended September 30, 1996 and 1995, respectively. This
increase in net interest income primarily resulted from an increase to 117.30%
in the ratio of average interest-earning assets to average interest-bearing
liabilities in fiscal year 1996 compared to 110.80% in fiscal year 1995, as well
as an increase in the Company's interest margin to 3.95% in fiscal year 1996
from 3.68% in fiscal year 1995.
Provision for Losses on Loans. The allowance for loss is established through a
provision for losses on loans based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including, general economic conditions, loan
portfolio composition, prior loss experience, the review of delinquencies and
loan portfolio quality, the estimated fair value of the underlying collateral,
and other factors that warrant recognition in providing for an adequate loan
loss allowance.
<PAGE>
The provision for losses on loans for the fiscal year ended September 30, 1996
was $170,000 compared to $360,000 for the fiscal year ended September 30, 1995.
The higher provision in fiscal year 1995 was necessary to establish loan loss
reserves to cover the credit risk associated with one large commercial loan and
the collateralization of a commercial real estate project based on management's
current estimate of the value of the underlying collateral.
The Company's allowance for losses on loans was $2.4 million, or 0.86%, of loans
receivable at September 30, 1996 compared to $2.2 million, or 1.05%, of loans
receivable at September 30, 1995. The reduced allowance as a percentage of loans
receivable resulted primarily from an increased level of residential real estate
loans. This increase was attributable to the higher concentration of residential
real estate loans which comprised the Community Savings portfolio acquired by
the Company. Residential real estate loan charge-offs for the Company and
Community Savings have been minimal over the past five years. Overall, the
Company's level of net loans charged off as a percentage of average net loans
receivable outstanding was 0.11% and 0.14% for fiscal years 1996 and 1995,
respectively. Additionally, the Company's nonperforming loans as a percentage of
loans receivable, net, increased to 0.78% from 0.32% at September 30, 1996 and
1995, respectively. Based on current levels in the allowance for losses on loans
in relation to total loans receivable and delinquent loans, management's ability
to resolve problem loan situations, and the low level of charge-offs in recent
years, management believes the allowance is adequate at September 30, 1996.
The breakdown of general loan loss allowances and specific loan loss allowances
is only made for regulatory accounting purposes. General loan loss allowances
are added back to capital to the extent permitted in computing risk-based
capital. Both general and specific loan loss provisions are charged to expense.
Noninterest Income. The Company's principal sources of noninterest income
include late charges and other loan fees, deposit account fees, and commissions
and fees from brokerage activities. Noninterest income increased by $431,000, or
30.6%, for the fiscal year ended September 30, 1996 to $1.8 million. This
increase resulted primarily from increases in late charges and other loan fees,
deposit account fees, commissions and fees and other noninterest income, which
increases were partially offset by an increase in the loss on sale of investment
securities and losses on sales of mortgage-backed securities. Late charges and
other loan fees increased $150,000, or 62.3%, for the fiscal year ended
September 30, 1996 to $391,000 as compared to $241,000 for the fiscal year ended
September 30, 1995. Deposit account fees increased $120,000, or 17.7%, for the
fiscal year ended September 30, 1996 to $797,000 compared to $677,000 for the
fiscal year ended September 30, 1995.
Noninterest Expense. Noninterest expense increased $3.0 million, or 50.2%, for
the fiscal year ended September 30, 1996 to $8.9 million from $5.9 million for
the fiscal year ended September 30, 1995. The increase in noninterest expense
resulted primarily from the SAIF special assessment of $1.5 million.
Additionally, the increase in noninterest expense was the result of an increase
in compensation and employee benefits expense of $636,000, or 21.0%, to $3.7
million for fiscal year 1996 compared to $3.0 million for fiscal year 1995. The
primary reason for the increase in compensation and employee benefits expense is
due to additional compensation expense related the acquisition of the DuQuoin
branch in fiscal year 1995 and Community Savings in fiscal year 1996 as well as
the cost of certain stock benefit plans.
<PAGE>
Primarily as a result of the acquisition of the DuQuoin branch office in May
1995 and the acquisition of Community Savings in May 1996, office buildings and
equipment expense increased $186,000, or 38.9%, to $663,000 for fiscal year 1996
compared to $477,000 for fiscal year 1995, data processing increased $62,000, or
17.3%, to $420,000 for fiscal year 1996 compared to $358,000 for fiscal year
1995, and amortization of cost in excess of fair value of net assets acquired
increased $75,000, or 54.9%, to $211,000 for fiscal year 1996 from $136,000 for
fiscal year 1995.
Other noninterest expense increased $335,000, or 25.6%, to $1.6 million for the
fiscal year ended September 30, 1996 compared to $1.3 million for the fiscal
year ended September 30, 1995. This increase resulted primarily from additional
losses on the disposition of repossessed collateral. The provision for losses
and expenses on real estate acquired by foreclosure increased $78,000 to $81,000
for the fiscal year ended September 30, 1996 compared to $4,000 for the fiscal
year ended September 30, 1995, due to increased losses on the sale of real
estate acquired by foreclosure.
Income Taxes. The provision for income taxes totaled $2.2 million and $1.9
million for the fiscal years ended September 30, 1996 and 1995, respectively.
The Company's effective income tax rates were 41.3% and 38.6% for the fiscal
years ended September 30, 1996 and 1995, respectively. The increase in the
effective tax rate is primarily the result of increases in nondeductible
expenses.
Net Income. Net income totaled $3.1 million for the fiscal year ended September
30 1996 compared to $3.0 million for the fiscal year ended September 30, 1995.
The increase in net income reflects the increase of $2.7 million, or 27.8%, in
net interest income, the increase of $431,000, or 30.6%, in noninterest income,
and the decrease in provision for losses on loans of $190,000, or 52.8%, which
increases were partially offset by an increase in noninterest expense of $3.0
million, or 50.2%, and the increase in income taxes of $281,000, or 15.0%.
Comparison of Operating Results for the Fiscal Years ended September 30, 1995
and 1994
Interest Income. Interest income totaled $20.0 million for the fiscal year ended
September 30, 1995 compared to $18.2 million for the fiscal year ended September
30, 1994, an increase of $1.8 million, or 9.7%. This increase resulted primarily
from an increase in the average yield on interest-earning assets to 7.58% in
fiscal year 1995 from 7.13% in fiscal year 1994, which increase reflected the
general increase in market interest rates, which existed for most of fiscal year
1995, as well as changes in the composition and amount of interest-earning
assets.
Interest income earned on loans receivable increased $2.2 million, or 16.6%,
reflecting an increase in average loans outstanding of $20.5 million to $188.9
million in fiscal year 1995, as well as an increase in the average yield on
loans receivable to 8.19% from 7.87%. The general increase in market interest
rates that began in fiscal year 1994 and continued for most of fiscal year 1995
resulted in higher yields on new loan originations and loans purchased as well
as on adjustable rate mortgage (ARM) loans which repriced during the year. The
increase in average loans outstanding consisted substantially of the purchase of
ARM loans as well as increased automobile loan originations, as the Company
continued to expand its market for these loans.
<PAGE>
Interest received from investments decreased $446,000, or 11.9%, to $3.3 million
for the fiscal year ended September 30, 1995 compared to $3.8 million for the
fiscal year ended September 30, 1994. This decrease reflects the decrease of
$10.9 million, or 16.8%, in the average balance of investments to $54.0 million
in fiscal year 1995 from $65.0 million in fiscal year 1994, which decrease was
partially offset by an increase in the average yield on investments to 6.12%
from 5.78%. The decrease in the average balance of investment securities is the
result of funds from maturities and principal repayments on securities being
utilized to fund the purchase of loans as well as other loan originations such
as automobile loans. The average yield on investments increased due to maturity
and principal repayment of lower yielding securities as well as interest rates
on adjustable securities increasing due to the general increase in market
interest rates which existed for most of fiscal 1995.
Interest received from mortgage-backed securities remained stable at $1.1
million for fiscal years ended September 30, 1995 and 1994. The average balance
on mortgage-backed securities decreased $163,000, or 0.9%, to $17.5 million in
fiscal year 1995 from $17.7 million in fiscal year 1994, although the average
yield increased to 6.21% from 6.12%.
Interest income from interest-bearing deposits increased $11,000, or 8.0%,
reflecting an increase in the average yield on interest-bearing deposits to
4.37% for fiscal year 1995 from 2.98% for fiscal year 1994, which increase was
partially offset by a decrease in the average balance of $1.3 million, or 26.5%.
Interest Expense. Interest expense increased by $1.9 million, or 22.9%, to $10.3
million for the fiscal year ended September 30, 1995 from $8.4 million for the
fiscal year ended September 30, 1994. This increase resulted primarily from an
increase in the average cost on interest-bearing liabilities to 4.33% in fiscal
year 1995 from 3.65% in fiscal year 1994, as well as an increase in average
interest-bearing liabilities of $8.1 million to $238.2 million in fiscal year
1995 compared to $230.1 million in fiscal year 1994.
Interest expense on deposits increased $708,000, or 10.3%, reflecting an
increase in the average cost of deposits to 4.00% from 3.51% which was partially
offset by a decrease of $5.8 million, or 3.0%, in average deposits to $189.3
million from $195.1 million. The increase in the cost of average deposits is
consistent with the increase in general market interest rates that existed for
most of fiscal year 1995 and reflects the higher cost of deposits which were
acquired in the DuQuoin branch acquisition. Average deposits continue to
decrease as depositors shift funds to alternative investments to seek higher
yields elsewhere.
Interest expense on average borrowed money increased $1.2 million, or 79.5%,
reflecting an increase in average borrowed money of $13.9 million, or 39.9%, to
$48.9 million in fiscal year 1995 from $34.9 million in fiscal year 1994 and an
increase in the cost of average borrowed money to 5.61% from 4.37%. Average
borrowed money increased predominately from the utilization of Federal Home Loan
Company line of credit advances to fund the purchase of mortgage loans, the
origination of automobile loans, and the withdrawal of deposits.
Net Interest Income. Net interest income totaled $9.7 million and $9.8 million
for the fiscal years ended September 30, 1995 and 1994, respectively. This
decline in net interest income primarily resulted from a decrease to 110.80% in
the ratio of average interest-earning assets to average interest-bearing
liabilities in fiscal year 1995 compared to 111.17% in fiscal year 1994, as well
as a decrease in the Company's interest rate spread to 3.25% in fiscal year 1995
from 3.48% in fiscal year 1994.
<PAGE>
Provision for Losses on Loans. The allowance for loss is established through a
provision for losses on loans based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including, general economic conditions, loan
portfolio composition, prior loss experience, the review of delinquencies and
loan portfolio quality, the estimated fair value of the underlying collateral,
and other factors that warrant recognition in providing for an adequate loan
loss allowance.
The provision for losses on loans for the fiscal year ended September 30, 1995
was $360,000 compared to $140,000 for the fiscal year ended September 30, 1994.
The increased provision in fiscal year 1995 was necessary to establish loan loss
reserves to cover the credit risk associated with one commercial loan and the
collateralization of a commercial real estate project based on management's
current estimate of the value of the underlying collateral. The decreased
provisions in fiscal year 1994 reflected, among other factors, the termination
of the selective strike of area coal miners by the United Mine Workers of
America which began in May 1993 and reached settlement in December 1993, the
continued low level of delinquencies relative to other savings institutions, and
management's effort to closely monitor the level of delinquencies.
The Company's allowance for losses on loans was $2.2 million, or 1.05%, of loans
receivable at September 30, 1995 compared to $2.1 million, or 1.15%, of loans
receivable at September 30, 1994. The Company's level of net loans charged off
as a percentage of average net loans receivable outstanding was 0.14% and 0.13%
for fiscal years 1995 and 1994, respectively. Additionally, the Company's
nonperforming loans as a percentage of loans receivable increased to 0.32% from
0.23% at September 30, 1995 and 1994, respectively. Based on current levels in
the allowance for losses on loans in relation to total loans receivable and
delinquent loans, management's effort to resolve problem loan situations, and
the low level of charge-offs in recent years, management believes the allowance
is adequate at September 30, 1995.
The breakdown of general loan loss allowances and specific loan loss allowances
is only made for regulatory accounting purposes. General loan loss allowances
are added back to capital to the extent permitted in computing risk-based
capital. Both general and specific loan loss provisions are charged to expense.
Noninterest Income. The Company's principal sources of noninterest income
include late charges and other loan fees, deposit account fees, and commissions
and fees from brokerage activities. Noninterest income decreased slightly by
$34,000, or 2.3%, for the fiscal year ended September 30, 1995 to $1.4 million.
This decrease resulted primarily from a decrease in the gain on sale of
investment securities and a decrease in late charges and other loan fees, which
decreases were partially offset by an increase in deposit account fees and other
noninterest income. The $135,000 decrease in the gain on sale of investment
securities resulted from the decline in sales activity from $21.2 million in
fiscal year 1994 to $40,000 in fiscal year 1995. The significant level of sales
activity in fiscal year 1994 was designed to reposition the investment
securities portfolio in anticipation of adopting Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, at September 30, 1994. Late charges and other loan fees
decreased $25,000, or 9.3%, for the fiscal year ended September 30, 1995 to
$241,000 as compared to $266,000 in the fiscal year ended September 30, 1994.
Deposit account fees increased $74,000, or 12.3%, for the fiscal year ended
September 30, 1995 to $677,000 compared to $603,000 for the fiscal year ended
September 30, 1994.
<PAGE>
Noninterest Expense. Noninterest expense increased $107,000 for the fiscal year
ended September 30, 1995 to $5.9 million from $5.8 million for the fiscal year
ended September 30, 1994. One reason for the increase in noninterest expense was
that compensation and employee benefits expense increased $247,000 to $3.0
million for fiscal year 1995 compared to $2.8 million for fiscal year 1994. The
primary reason for the increase in compensation and employee benefits expense is
due to additional compensation expense related to the conversion to an in-house
data processing system as well as the cost of certain stock benefit plans. Other
noninterest expense increased $107,000, or 8.9%, to $1.3 million for the fiscal
year ended September 30, 1995 compared to $1.2 million for the fiscal year ended
September 30, 1994 primarily due to higher professional fees as a result of
being a public company. The provision for losses and expenses on real estate
acquired by foreclosure decreased $181,000, or 98.1%, to $4,000 for the fiscal
year ended September 30, 1995 compared to $184,000 for the fiscal year ended
September 30, 1994, due to decreased losses on the sale of real estate acquired
by foreclosure. Deposit insurance premiums decreased $23,000, or 5.1%, to
$438,000 for the fiscal year ended September 30, 1995 compared to $461,000 for
the fiscal year ended September 30, 1994.
Income Taxes and Cumulative Effect of Change in Accounting Principle. The
provision for income taxes totaled $1.9 million and $2.1 million for the fiscal
years ended September 30, 1995 and 1994, respectively. The Company's effective
income tax rates were 38.6% and 38.3% for the fiscal years ended September 30,
1995 and 1994, respectively.
In 1994, the Company adopted Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes (SFAS No. 109), which resulted in an increase
in income for the cumulative effect of a change of accounting principle of
$786,000. The net deferred tax asset that was recognized as a result of the
adoption of SFAS No. 109 represents future tax benefits derived from temporary
differences between the carrying value and tax basis of assets and liabilities
and bad debt deductions which had not been recognized and are, in substance, tax
loss carryforwards.
Net Income. Net income totaled $3.0 million for the fiscal year ended September
30 1995 compared to $4.1 million for the fiscal year ended September 30, 1994.
The net income for the fiscal year ended September 30, 1994, includes the effect
of the adoption of SFAS No. 109 as discussed above. The decrease in net income
also reflects the decrease of $147,000, or 1.5%, in net interest income, the
decrease of $34,000, or 2.3%, in noninterest income, the increase in provision
for losses on loans of $220,000, or 157.1%, and the increase of $107,000, or
1.9%, in noninterest expense, which was partially offset by a decrease in income
taxes of $180,000, or 8.8%.
Asset and Liability Management - Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
<PAGE>
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to positively affect net interest income. This has not
been the case for the Company. However, no assurance can be given that this
trend will continue.
The Company's policy in recent years has been to reduce it's exposure to
interest rate risk generally by better matching the maturities of its interest
rate sensitive assets and liabilities and by originating or purchasing ARM loans
and other variable rate or short-term loans, as well as by purchasing short-term
investments. The Company seeks to lengthen the maturities of its deposits by
promoting longer-term certificates. The Company has also entered into reverse
repurchase agreements with terms of up to 330 days. The Company does not solicit
negotiated high-rate jumbo certificates of deposit or brokered funds.
The Board of Directors functions as the Asset Liability Management Committee
which is responsible for reviewing the Company's asset and liability policies.
The Committee meets quarterly to discuss interest rate risks and trends, as well
as liquidity and capital ratios and requirements.
Liquidity and Capital Resources
At September 30, 1996, the Company was required to maintain minimum levels of
liquid assets by FDIC regulations. The Company's liquidity policy, which varies
from time to time depending upon economic conditions and deposit flows, is based
upon a percentage of deposits and short-term borrowings and is currently 5.0%.
The Company historically has maintained a level of liquid assets in excess of
requirements, and the Company's liquidity ratio averaged 9.41% during the month
of September 1996 and 9.76% during the fiscal year ended September 30, 1996. The
Company adjusts its liquidity levels in order to meet funding needs for deposit
outflows, payment of real estate taxes on mortgage loan escrow accounts,
repayment of borrowings, when applicable, and loan commitments. The Company also
adjusts liquidity as appropriate to meet its asset/liability objectives.
The Company's primary sources of funds are deposits, borrowed money, repayment
and prepayment of loans and mortgage-backed securities, borrowings, maturities
of investments, and funds provided from operations. While loan and
mortgage-backed securities scheduled repayments are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions, and competition. The Company
manages the pricing of its deposits to maintain a steady deposit balance. In
addition, the Company invests excess funds in overnight deposits, other
short-term interest-earning investments, and other assets which provide
liquidity to fund lending demand. Assets qualifying for liquidity at September
30, 1996, 1995, and 1994 amounted to $29.6 million, $26.3 million, and $26.4
million, respectively.
A major portion of the Company's liquidity consists of cash and cash equivalents
which are a product of its operating, investing, and financing activities. The
primary sources of cash are derived from operations and financing activities.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB to proved an additional
source of funds. At September 30, 1996, the Company had $61.0 million in
borrowings from the FHLB.
<PAGE>
At September 30, 1996, the Company had outstanding mortgage loan commitments of
$1.7 million. Certificates of deposit scheduled to mature in one year or less at
September 30, 1996 totaled $109.8 million. Management believes, based on past
experience, that a significant portion of such deposits will remain with the
Company.
At September 30, 1996, the Company exceeded all of its regulatory capital
requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike most industrial companies, nearly all the assets
and liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Impact of New Accounting Pronouncements
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued Statement
of Financial Accounting Standards 122, Accounting for Mortgage Servicing Rights,
an amendment of FASB Statement No. 65 (SFAS 122). SFAS 122 amends Statement of
Financial Accounting Standards No. 65, Accounting for Certain Mortgage
Companying Activities, to require that a mortgage Companying enterprise
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. A mortgage Companying enterprise
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair values, if it is practicable to estimate
those fair values. If it is not practicable to estimate the fair values of the
mortgage servicing rights and the mortgage loans (without the mortgage servicing
rights), the entire cost of purchasing or originating the loans should be
allocated to the mortgage loans, and no cost should be allocated to mortgage
servicing rights. SFAS 122 also requires that a mortgage Companying enterprise
assess its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. SFAS 122 must be applied prospectively for fiscal
years beginning after December 15, 1995, with earlier adoption encouraged, to
transactions in which a mortgage Companying enterprise sells or securitizes
mortgage loans with servicing rights retained and to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including those purchased
before the adoption of SFAS 122. Retroactive capitalization of mortgage
servicing rights retained in transactions in which a mortgage Companying
enterprise originates mortgage loans and sells or securitizes those loans before
the adoption of SFAS 122 is prohibited. The Company plans to adopt the
provisions of SFAS 122 effective October 1, 1996. Management does not believe
the adoption of SFAS 122 will have a material effect on the Company's financial
position.
<PAGE>
Accounting for Impairment of Long-Lived Assets. In March 1995, the FASB issued
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 121 is effective for fiscal years beginning
after December 15, 1995. Earlier application is permitted. SFAS 121 will
require, among other things, that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company plans to adopt the provisions of SFAS 121
effective October 1, 1996. Management does not believe that the adoption of SFAS
121 will have a material impact on the Company's financial position.
Disclosures of Certain Significant Risks and Uncertainties. In December 1994,
the AICPA issued SOP 94-6, "Disclosure of Certain Significant Risks and
Uncertainties." SOP 94-6 is effective for fiscal years ending after December 15,
1995. Earlier application is permitted. SOP 94-6 will require, among other
things, that entities include in their financial statements disclosures about
the nature of their operations and the use of estimates in the preparation of
financial statements. In addition, SOP 94-6 requires disclosures about current
vulnerability due to certain concentrations. Management believes that the
adoption of SOP 94-6 in fiscal 1996 did not have a material impact on the
Company's financial position.
During October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which establishes financial accounting and reporting standards
for stock-based employee compensation plans and also applies to transactions in
which an entity issues its equity instruments to acquire goods or services from
nonemployees. SFAS No. 123 defines a fair value-based method of accounting for
an employee stock option or similar equity instruments and encourages all
entities to adopt that method of accounting. However, it also allows an entity
to continue to measure compensation cost for those plans using the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Pro forma
disclosures required for entities that elect to continue to measure compensation
cost using APB 25 must include the effect of all awards granted in fiscal years
that begin after December 15, 1994. The Company plans to continue to measure
compensation cost using APB 25; therefore, the adoption of SFAS No. 123 will not
have any impact on the Company's financial condition or results of operations.
During June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. The Statement also
requires that a liability can be derecognized if an only if either (a) the
debtor pays the creditor and is relieved of its obligation for the liability or
(b) the debtor is legally released from the liability either judicially or by
the creditor.
This statement is effective for transactions occurring after December 31, 1996,
and is to be applied prospectively. Earlier or retroactive application is not
permitted. Management does not believe the statement will have a material impact
on the financial position of the Company.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Charter Financial, Inc.
Sparta, Illinois:
We have audited the accompanying consolidated balance sheets of Charter
Financial, Inc. and subsidiary (the Company) as of September 30, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Charter Financial,
Inc. and subsidiary as of September 30, 1996 and 1995, and the results of their
operations and cash flows for each of the years in the three-year period ended
September 30, 1996, in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
St. Louis, Missouri
November 20, 1996
<PAGE>
<TABLE>
<CAPTION>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1996 and 1995
Assets 1996 1995
---- ----
<S> <C> <C>
Cash ........................................................................... $ 1,492,740 $ 1,097,732
Interest-bearing deposits ...................................................... 7,475,682 5,250,071
Investment securities:
Available for sale, at market value (amortized
cost of $58,924,095 and $29,067,062 at
September 30, 1996 and 1995, respectively) ................................ 58,613,400 29,448,015
Held to maturity, at cost (market value of
$8,819,034 and $23,019,301 at September 30,
1996 and 1995, respectively) .............................................. 8,860,125 23,336,289
Mortgage-backed securities:
Available for sale, at market value (amortized
cost of $15,059,424 and $16,094,896 at
September 30, 1996 and 1995, respectively) ................................ 15,116,592 16,255,110
Held to maturity, at cost (market value of
$1,553,881 and $458,708 at September 30,
1996 and 1995, respectively) .............................................. 1,515,622 414,681
Loans receivable, net .......................................................... 275,486,929 206,073,777
Accrued interest receivable .................................................... 3,098,131 2,112,947
Real estate acquired by foreclosure, net ....................................... 428,279 140,239
Stock in Federal Home Loan Bank, at cost ....................................... 3,049,900 2,140,000
Office properties and equipment, at cost less
accumulated depreciation .................................................... 5,990,392 3,737,740
Prepaid expenses and other assets .............................................. 1,995,423 1,070,713
Deferred tax asset ............................................................. 955,304 266,122
Core deposit intangible ........................................................ 1,031,729 1,173,823
Cost in excess of fair value of net assets acquired ............................ 3,320,843 617,696
------------- -------------
$ 388,431,091 $ 293,134,955
============= =============
<PAGE>
<CAPTION>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1996 and 1995
Liabilities and Stockholders' Equity 1996 1995
---- ----
<S> <C> <C>
Deposits ....................................................................... $ 248,722,627 $ 197,103,081
Accrued interest on deposits 576,341 ........................................... 513,182
Borrowed money ................................................................. 76,353,783 57,079,749
Advance payments by borrowers for taxes and insurance .......................... 1,084,720 848,082
Income taxes payable ........................................................... 188,097 73,933
Accrued expenses and other liabilities ......................................... 5,111,072 1,894,948
------------- -------------
Total liabilities ................................. 332,036,640 257,512,975
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.10 par value, 8,000,000 shares authorized, 4,253,459 shares
issued and outstanding at September 30, 1996; $1 par value, 20,000,000
shares authorized, 2,171,125 shares issued and
outstanding at September 30, 1995 ......................................... 425,346 2,171,125
Additional paid-in capital .................................................. 28,762,464 7,399,095
Retained earnings, substantially restricted ................................. 28,885,198 26,763,369
Unrealized gain (loss) on securities available
for sale, net of applicable taxes ......................................... (206,204) 301,058
Unamortized restricted stock awards ......................................... -- (148,667)
Unearned ESOP shares ........................................................ (1,472,353) (864,000)
------------- -------------
Total stockholders' equity ........................ 56,394,451 35,621,980
------------- -------------
$ 388,431,091 $ 293,134,955
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years ended September 30, 1996, 1995, and 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable .............................. $ 19,439,001 $ 15,461,525 $ 13,255,773
Investment securities ......................... 3,936,589 3,307,960 3,754,393
Mortgage-backed securities .................... 1,173,197 1,086,559 1,081,973
Other ......................................... 270,160 152,449 141,198
------------ ------------ ------------
Total interest income ................. 24,818,947 20,008,493 18,233,337
------------ ------------ ------------
Interest expense:
Deposits ...................................... 9,792,900 7,566,735 6,859,148
Borrowed money ................................ 2,632,822 2,741,838 1,527,716
------------ ------------ ------------
Total interest expense ................ 12,425,722 10,308,573 8,386,864
------------ ------------ ------------
Net interest income ................... 12,393,225 9,699,920 9,846,473
Provision for losses on loans .................... 170,000 360,000 140,000
------------ ------------ ------------
Net interest income after
provision for losses on loans ...... 12,223,225 9,339,920 9,706,473
------------ ------------ ------------
Noninterest income:
Late charges and other loan fees .............. 391,113 241,049 265,678
Gain (loss) on sale of investment
securities, net ............................. (28,806) (13,719) 121,392
Loss on sale of mortgage-backed securities, net (8,916) -- --
Deposit account fees .......................... 797,034 677,134 602,837
Commissions and fees .......................... 274,747 179,851 134,079
Other ......................................... 416,239 326,157 320,003
------------ ------------ ------------
Total noninterest income .............. 1,841,411 1,410,472 1,443,989
------------ ------------ ------------
Noninterest expense:
Compensation and employee benefits ............ 3,660,994 3,025,291 2,778,036
Office buildings and equipment ................ 662,845 477,326 477,763
Data processing ............................... 419,906 357,828 347,677
Advertising ................................... 237,479 147,918 195,629
Deposit insurance premiums .................... 457,818 437,794 461,218
SAIF special assessment ....................... 1,479,021 -- --
Other ......................................... 1,641,149 1,306,395 1,199,143
Provision for losses and expenses on
real estate acquired by foreclosure ......... 81,197 3,531 184,202
Amortization of cost in excess of fair
value of net assets acquired ................ 211,271 136,409 141,507
------------ ------------ ------------
Total noninterest expense ............. 8,851,680 5,892,492 5,785,175
------------ ------------ ------------
Income before income tax expense
and cumulative effect of change
in accounting principle ............ 5,212,956 4,857,900 5,365,287
------------ ------------ ------------
<PAGE>
<CAPTION>
Consolidated Statements of Income
Years ended September 30, 1996, 1995, and 1994
(continued)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax expense:
Current 2,622,877 ............................. 1,888,164 1,698,936
Deferred ...................................... (467,566) (14,141) 355,128
------------ ------------ ------------
Total income tax expense .............. 2,155,311 1,874,023 2,054,064
------------ ------------ ------------
Income before cumulative effect of
change in accounting principle ..... 3,057,645 2,983,877 3,311,223
Cumulative effect of change in
accounting principle .......................... -- -- 786,053
------------ ------------ ------------
Net income ............................ $ 3,057,645 $ 2,983,877 $ 4,097,276
============ ============ ============
Earnings per share:
Income before cumulative effect of
change in accounting principle .............. $ .67 $ .69 $ .78
Cumulative effect of change in
accounting principle ........................ -- -- .19
------------ ------------ ------------
Net income ............................ $ .67 $ .69 $ .97
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1996, 1995, and 1994
Unrealized
gain (loss)
on securities
available
Retained for sale,
Additional earnings, net of
Common stock paid-in substantially applicable
Shares Amount capital restricted taxes
------ ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1993 ................. -- $ -- $ -- $ 22,016,100 $ --
Net income .................................. -- -- -- 4,097,276 --
Capital contribution to
Charter Bank, M.H.C ..................... -- -- -- (100,000) --
Net proceeds from sale of
common stock ............................. 2,102,000 2,102,000 6,441,329 -- --
Exercise of stock options ................... 20,160 20,160 181,440 -- --
Issuance of restricted
stock awards ............................. 48,000 48,000 432,000 -- --
Amortization of restricted
stock awards ............................. -- -- -- -- --
Amortization of
ESOP awards .............................. -- -- 76,596 -- --
Dividend declared on nonmutual
holding company-owned
common stock at $2.00 per share .......... -- -- -- (1,664,312) --
Unrealized gain (loss) on
securities available for
sale, net of applicable taxes ........... -- -- -- -- (620,508)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1994 ................. 2,170,160 2,170,160 7,131,365 24,349,064 (620,508)
Net income .................................. -- -- -- 2,983,877 --
Amortization of restricted
stock awards ............................. -- -- -- -- --
Amortization of
ESOP awards .............................. -- -- 259,045 -- --
Exercise of stock options ................... 965 965 8,685 -- --
Dividend declared on nonmutual
holding company-owned
common stock at $.60 per share ........... -- -- -- (569,572) --
Change in unrealized gain (loss) on
securities available for
sale, net of applicable taxes ............ -- -- -- -- 921,566
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1995 ................. 2,171,125 $ 2,171,125 $ 7,399,095 $ 26,763,369 $ 301,058
<PAGE>
<CAPTION>
Consolidated Statements of Stockholders' Equity (continued)
Unamortized Total
restricted Unearned stock-
stock ESOP holders'
awards shares equity
------ ------ ------
<S> <C> <C> <C>
Balance, September 30, 1993 ....... $ -- $ -- $ 22,016,100
Net income ........................ -- -- 4,097,276
Capital contribution to
Charter Bank, M.H.C ........... -- -- (100,000)
Net proceeds from sale of
common stock ................... -- (1,440,000) 7,103,329
Exercise of stock options ......... -- -- 201,600
Issuance of restricted
stock awards ................... (480,000) -- --
Amortization of restricted
stock awards ................... 182,667 -- 182,667
Amortization of
ESOP awards .................... -- 288,000 364,596
Dividend declared on nonmutual
holding company-owned
common stock at $2.00 per share -- -- (1,664,312)
Unrealized gain (loss) on
securities available for
sale, net of applicable taxes . -- -- (620,508)
------------ ------------ ------------
Balance, September 30, 1994 ....... (297,333) (1,152,000) 31,580,748
Net income ........................ -- -- 2,983,877
Amortization of restricted
stock awards ................... 148,666 -- 148,666
Amortization of
ESOP awards .................... -- 288,000 547,045
Exercise of stock options ......... -- -- 9,650
Dividend declared on nonmutual
holding company-owned
common stock at $.60 per share . -- -- (569,572)
Change in unrealized gain (loss) on
securities available for
sale, net of applicable taxes .. -- -- 921,566
------------ ------------ ------------
Balance, September 30, 1995 ....... $ (148,667) $ (864,000) $ 35,621,980
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity (continued)
Unrealized
gain (loss)
on securities
available
Retained for sale,
Additional earnings, net of
Common stock paid-in substantially applicable
Shares Amount capital restricted taxes
------ ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995 ................ 2,171,125 $ 2,171,125 $ 7,399,095 $ 26,763,369 $ 301,058
Net income ................................. -- -- -- 3,057,645 --
Net proceeds from sale of
common stock of Charter
Financial, Inc. ........................ 2,919,414 291,941 27,728,948 -- --
Cancellation of Charter
Bank, S.B. common
stock owned by Charter
Bancorp, M.H.C .......................... (1,190,000) (1,190,000) 1,190,000 -- --
Cancellation of Charter
Bank, S.B. common
stock owned by
minority stockholders ................... (986,051) (986,051) 986,051 -- --
Issurance of common stock
of Charter Financial,
Inc. to minority
stockholders of
Charter Bank, S.B ....................... 2,054,832 205,483 (205,483) -- --
Capital contribution
from Charter Bancorp, M.H.C ............. -- -- 100,000 -- --
Cash paid to minority
stockholders for
fractional shares ....................... (230) (23) (2,303) -- --
Purchase of treasury
stock and retirement
of shares ............................... (721,285) (72,129) (8,911,580) -- --
Exercise of stock options .................. 6,488 5,834 55,262 -- --
Tax benefit of non-
incentive stock
options exercised ....................... -- -- 27,400 -- --
Cancellation of
restricted stock awards ................. (834) (834) (7,506) -- --
Amortization of restricted
stock awards ............................ -- -- -- -- --
Amortization of ESOP awards ................ -- -- 402,580 -- --
<PAGE>
<CAPTION>
Consolidated Statements of Stockholders' Equity (continued)
Unamortized Total
restricted Unearned stock-
stock ESOP holders'
awards shares equity
------ ------ ------
<S> <C> <C> <C>
Balance, September 30, 1995 .... $ (148,667) $ (864,000) $ 35,621,980
Net income ..................... -- -- 3,057,645
Net proceeds from sale of
common stock of Charter
Financial, Inc. ............ -- (969,030) 27,051,859
Cancellation of Charter
Bank, S.B. common
stock owned by Charter
Bancorp, M.H.C .............. -- -- --
Cancellation of Charter
Bank, S.B. common
stock owned by
minority stockholders ....... -- -- --
Issurance of common stock
of Charter Financial,
Inc. to minority
stockholders of
Charter Bank, S.B ........... -- -- --
Capital contribution
from Charter Bancorp, M.H.C . -- -- 100,000
Cash paid to minority
stockholders for
fractional shares ........... -- -- (2,326)
Purchase of treasury
stock and retirement
of shares ................... -- -- (8,983,709)
Exercise of stock options ...... -- -- 61,096
Tax benefit of non-
incentive stock
options exercised ........... -- -- 27,400
Cancellation of
restricted stock awards ..... 8,340 -- --
Amortization of restricted
stock awards ................ 140,327 -- 140,327
Amortization of ESOP awards .... -- 360,677 763,257
<PAGE>
<CAPTION>
Consolidated Statements of Stockholders' Equity (continued)
Unrealized
gain (loss)
on securities
available
Retained for sale,
Additional earnings, net of
Common stock paid-in substantially applicable
Shares Amount capital restricted taxes
------ ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Dividend declared on nonmutual
holding company-owned
common stock at $.15 per share ............. -- -- -- (132,780) --
Dividends declared on common stock of
Charter Financial,Inc. at
$.18 per share ............................. -- -- -- (803,036) --
Cumulative effect of transfer of
securities toavailable for sale,
net of tax ................................. -- -- -- -- (59,952)
Change in unrealized gain (loss) on
securities available for sale, net of
applicable taxes ........................... -- -- -- -- (447,310)
---------- ------------ ------------ ------------ ------------
Balance, September 30, 1996 ................... 4,253,459 $ 425,346 $ 28,762,464 $ 28,885,198 $ (206,204)
========== ============ ============ ============ ============
Consolidated Statements of Stockholders' Equity (continued)
Unamortized Total
restricted Unearned stock-
stock ESOP holders'
awards shares equity
------ ------ ------
<S> <C> <C> <C>
Dividend declared on nonmutual
holding company-owned
common stock at $.15 per share ...... -- -- (132,780)
Dividends declared on common stock of
Charter Financial,Inc. at
$.18 per share ...................... -- -- (803,036)
Cumulative effect of transfer of
securities toavailable for sale,
net of tax .......................... -- -- (59,952)
Change in unrealized gain (loss) on
securities available for sale, net of
applicable taxes .................... -- -- (447,310)
------ ------------ ------------
Balance, September 30, 1996 ............ $ -- $ (1,472,353) $ 56,394,451
====== ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
CHARTER BANK AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1992 and 1991
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 3,057,645 $ 2,983,877 $ 4,097,276
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle ........ -- -- (786,053)
Depreciation and amortization:
Office properties and equipment .......................... 507,285 351,612 244,958
Discounts related to purchase accounting ................. (63,272) (28,334) (183,213)
Cost in excess of fair value of net assets acquired ...... 211,271 136,409 141,507
Fees, discounts, and premiums ............................ (1,894,383) (1,717,121) (1,200,626)
Stock plans .............................................. 903,584 695,711 547,263
Decrease (increase) in accrued interest receivable ......... (664,241) (498,481) 387,106
Increase (decrease) in accrued interest on deposits ........ (230,264) 47,005 (26,133)
Provision for losses on loans .............................. 170,000 360,000 140,000
Stock dividend from FHLB ................................... -- (27,000) --
Decrease (increase) in income taxes, net ................... (348,536) 257,939 32,101
(Gain) loss on sale of investment securities, net .......... 28,806 13,719 (121,392)
Loss on sale of mortgage-backed securities, net ............ 8,916 -- --
Net change in other assets and other liabilities ........... 2,169,206 125,068 202,507
------------- ------------- -------------
Net cash provided by operating activities 3,856,017 2,700,404 3,475,301
------------- ------------- -------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable ............................................. 102,481,371 67,036,963 65,948,576
Mortgage-backed securities ................................... 4,224,776 2,442,953 7,564,219
Investment securities ........................................ 2,447,789 2,158,335 3,067,981
Proceeds from sale of:
Loans receivable ............................................. 1,549,116 1,722,721 --
Mortgage-backed securities ................................... 64,471 -- --
Investment securities ........................................ 3,876,723 39,500 21,190,722
FHLB stock ................................................... 656,000 955,000 --
Maturity of investment securities .............................. 17,130,000 7,635,000 19,199,667
Purchase of:
Loans receivable ............................................. (37,362,675) (28,213,309) (2,389,386)
Mortgage-backed securities ................................... (3,095,523) (2,542,936) (3,310,300)
Investment securities ........................................ (32,556,167) (11,988,779) (36,607,060)
FHLB stock ................................................... (1,176,900) (1,505,900) --
Cash invested in loans receivable .............................. (89,278,254) (67,058,169) (83,363,187)
Cash paid for acquisition, net of cash received ................ (6,936,679) -- --
Proceeds from sales of real estate acquired by
foreclosure, net ............................................. 345,722 335,148 951,959
Purchase of office properties and equipment .................... (780,856) (1,507,572) (330,836)
------------- ------------- -------------
Net cash used in investing activities ... (38,411,086) (30,491,045) (8,077,645)
------------- ------------- -------------
<PAGE>
<CAPTION>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
CHARTER BANK AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1992 and 1991
(continued)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposits ................................ 1,895,605 (13,873,930) (8,236,484)
Deposits acquired, net of premium .............................. -- 19,794,592 --
Repayments of FHLB advances .................................... (2,119,864) (2,010,000) (2,000,000)
Increase (decrease) in securities sold under agreements
to repurchase, net ........................................... 1,365,957 (1,987,822) 1,318,258
Increase in other borrowings, net .............................. 18,800,000 25,800,000 8,000,000
Proceeds from ESOP indebtedness ................................ -- -- 1,440,000
Repayments of ESOP indebtedness ................................ (288,000) (288,000) (288,000)
Increase (decrease) in advance payments by borrowers
for taxes and insurance ...................................... 115,265 39,149 (47,730)
Proceeds from sale of common stock, net ........................ 27,051,859 -- 7,103,329
Cash paid to minority stockholders ............................. (2,326) -- --
Exercise of stock options ...................................... 61,096 9,650 201,600
Dividends paid ................................................. (820,195) (1,773,219) (326,456)
Stock subscriptions ............................................ -- -- (9,127,517)
Purchase of treasury stock and retirement of shares ............ (8,983,709) -- --
Capital contribution (to) from Charter Bancorp, M.H.C .......... 100,000 -- (100,000)
------------- ------------- -------------
Net cash provided by (used in)
financing activities ................. 37,175,688 25,710,420 (2,063,000)
------------- ------------- -------------
Net increase (decrease) in cash
and cash equivalents ................. 2,620,619 (2,080,221) (6,665,344)
Cash and cash equivalents, beginning of year ...................... 6,347,803 8,428,024 15,093,368
------------- ------------- -------------
Cash and cash equivalents, end of year ............................ $ 8,968,422 $ 6,347,803 $ 8,428,024
============= ============= =============
Supplemental disclosure of cash flow information:
Interest paid .................................................. $ 12,260,869 $ 10,352,617 $ 8,412,997
Taxes paid ..................................................... 2,508,882 1,590,000 2,068,909
Loans transferred to real estate acquired by foreclosure ....... 720,040 258,078 1,142,530
Interest credited to deposits .................................. 6,619,453 5,464,128 5,356,000
Securities transferred to available for sale ................... 5,971,820 -- --
============= ============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
September 30, 1996 and 1995
(1) Summary of Significant Accounting Policies
Following are the significant accounting policies which Charter
Financial, Inc. and its subsidiary (the Company) follow in preparing and
presenting their consolidated financial statements:
Reorganization to a Mutual Holding Company
On October 15, 1993, Charter Bank (the Bank) reorganized from an
Illinois-chartered mutual savings bank into a mutual holding company.
The mutual holding company was an Illinois corporation, chartered and
regulated by the Board of Governors of the Federal Reserve System and
the Office of the Illinois Commissioner of Savings and Residential
Finance, and was named Charter Bancorp, M.H.C. (the MHC). As part of the
reorganization, the Bank transferred substantially all of its assets and
all of its liabilities to a new Illinois-chartered savings bank and
retained its same name.
The reorganization was accounted for as a change in corporate form with
the historic basis of the Bank's assets, liabilities, and retained
earnings unchanged as a result.
Concurrent with the reorganization, the Bank offered a minority interest
of its common stock to its depositors and to its Employee Stock
Ownership Plan (ESOP). A total of 912,000 shares of newly issued common
stock, $1.00 par value, were sold at $10.00 per share. An additional
48,000 authorized shares of common stock were sold to the Bank's
Recognition and Retention Plan at $10.00 per share. The cost of issuing
the 960,000 shares totaled $577,000, which was deducted from the sales
proceeds.
The Bank was required to be a majority-owned subsidiary of the MHC at
all times as long as the MHC remained in existence. The existing rights
of the Bank's depositors upon liquidation were transferred to the MHC,
and records were maintained to ensure such rights received statutory
priority in the event of a future mutual to stock conversion.
Reorganization to a Stock Corporation
On December 28, 1995, the MHC completed its conversion from an Illinois-
chartered mutual holding company to a Delaware stock corporation (the
Conversion). At the date of the Conversion, the Company completed the
sale of 2,919,414 shares of common stock, $.10 par value, at a price of
$10.00 per share to the Bank's depositors, ESOP, and minority
stockholders in a subscription offering and to certain members of the
general public in a community offering. Net proceeds from the sale of
common stock were $27,051,859, after deducting approximately $1.2
million of offering expenses and $969,030 related to the sale of 96,903
shares to the Bank's ESOP.
<PAGE>
In conjunction with the subscription and community offering, an
additional 2,054,832 shares of common stock were issued by the Company
to convert 986,051 shares of the Bank's common stock held by minority
stockholders into common stock of the Company. Each share of the Bank's
common stock in the above transaction was converted into the right to
receive 2.0839 shares of the Company's common stock (the Exchange
Ratio).
Prior to the Conversion, the Company had not issued any stock, had no
assets or liabilities, and had not engaged in any business activities
other than of an organizational nature. Accordingly, operating
activities prior to December 28, 1995 reflect the operations of the Bank
only.
Business
The Company provides a full range of banking services to individual and
corporate customers through its home office in Sparta, Illinois, and six
branch offices in neighboring cities in Southern Illinois. The Company
is subject to competition from other financial institutions, is subject
to the regulations of certain federal and state agencies, and undergoes
periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet and
revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for
loan losses. In connection with the determination of the allowance for
loan losses, management obtains independent appraisals for significant
properties.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize such losses,
future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Company's allowance for losses. Such agencies may require the Company to
recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
<PAGE>
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
About Fair Value of Financial Instruments, requires that the estimated
fair value of the Company's financial instruments be disclosed. Fair
value estimates of financial instruments are made at a specific point in
time, based on relevant market information and information about the
financial instruments. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings or a significant portion of a particular financial instrument.
Because no market exists for a significant portion of the Company's
financial instruments, some fair value estimates are subjective in
nature and involve uncertainties and matters of significant judgment.
Changes in assumptions could significantly affect these estimates. Fair
value estimates are presented for existing on-balance-sheet and
off-balance-sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. In addition,
the tax ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates and
have not been considered in any of the estimates (see note 17).
Principles of Consolidation
The consolidated financial statements include the accounts of Charter
Financial, Inc. and its wholly-owned subsidiary, Charter Bank, S.B.
Sparta First Service Corporation, a subsidiary of the Bank, is engaged
primarily in the sale of multiple lines of insurance products to its
customers. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all interest-bearing deposits (consisting primarily of
interest-bearing demand and time deposits) to be cash equivalents.
Investment Securities and Mortgage-Backed Securities
The Company classifies its debt securities in one of the following
categories: available for sale or held to maturity. Held-to-maturity
securities are those securities in which the Company has the ability and
intent to hold until maturity. All other securities not included in held
to maturity are classified as available for sale.
Available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. Unrealized gains
and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and reported as a separate
component of stockholders' equity until realized.
A decline in the market value of any security below cost that is deemed
other than temporary results in a charge to earnings and the
establishment of a new cost basis for the security.
<PAGE>
Premiums and discounts are amortized or accreted over the lives of the
respective securities as an adjustment to yield using the interest
method. Dividend and interest income are recognized when earned.
Realized gains and losses are included in earnings and are derived using
the specific-identification method for determining the cost of
securities sold.
On November 15, 1995, the Financial Accounting Standards Board (FASB)
issued a special report, A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities (the
Special Report). Due to uncertainties surrounding the regulatory capital
treatment for unrealized gains and losses on available-for-sale
securities at the time SFAS 115 was required to be implemented, the
Special Report was issued to allow all entities a one-time opportunity
to reconsider their ability and intent to hold securities to maturity
and transfer securities from held to maturity without "tainting" the
remainder held-to-maturity securities. Those securities transferred
would be accounted for prospectively under SFAS No. 115. These transfers
were only allowed during the period from the date of issuance of the
Special Report through December 31, 1995.
As a result of the Special Report, management reconsidered the
classification of held-to-maturity securities and transferred $5,971,820
of investment securities to available for sale on December 15, 1995. As
a result of the transfers: a market valuation account was established
for the available-for-sale securities of $96,697 to decrease the
recorded balance of such securities to their fair value; a deferred tax
asset of $36,745 was recorded to reflect the tax effect of the market
valuation account; and the net decrease resulting from the market
valuation adjustment of $59,952 was recorded as a separate component of
stockholders' equity.
Loans Receivable
Loans receivable are carried at cost, net of discounts and deferred loan
fees. Interest is credited to income as earned; however, interest
receivable is accrued only if deemed collectible. Discounts on loans
purchased and certain consumer loans are amortized into income using the
interest method over the estimated lives of the loans.
Loans receivable acquired in a business combination accounted for by the
purchase method are recorded at fair value. The net discounts related to
the fair value adjustment are amortized using the interest method over
the lives of the loans acquired, adjusted for expected prepayments.
Loan origination fees and the related incremental direct costs of
originating loans are amortized over the contractual lives of the
related loans using the interest method.
The allowance for loan losses is maintained at an amount considered
adequate to provide for credit losses. The provision for loan losses is
based on a periodic analysis of the loan portfolio by management. In
this regard, management considers numerous factors, including, but not
necessarily limited to, general economic conditions, loan portfolio
composition, prior loss experience, and independent appraisals of the
underlying collateral. In addition to the allowance for identified
problem loans, the Company also maintains a general allowance for
unidentified credit losses.
<PAGE>
Effective October 1, 1995, the Company adopted SFAS No. 114, Accounting
by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by
Creditors for Impairment of a Loan Income Recognition and Disclosures,
which amends SFAS No. 114. SFAS No. 114, as amended by SFAS No. 118,
defines the recognition criteria for loan impairment and the measurement
methods for certain impaired loans and loans for which terms have been
modified in troubled-debt restructurings (a restructured loan).
Specifically, a loan is considered impaired when it is probable a
creditor will be unable to collect all amounts due - both principal and
interest - according to the contractual terms of the loan agreement.
When measuring impairment, the expected future cash flows of an impaired
loan are required to be discounted at the loan's effective interest
rate. Alternatively, impairment can be measured by reference to an
observable market price, if one exists, or the fair value of the
collateral for a collateral-dependent loan. Regardless of the historical
measurement method used, SFAS No. 114 requires a creditor to measure
impairment based on the fair value of the collateral when the creditor
determines foreclosure is probable. Additionally, impairment of a
restructured loan is measured by discounting the total expected future
cash flows at the loan's effective rate of interest as stated in the
original loan agreement.
The Company applies the recognition criteria of SFAS No. 114 to
multi-family residential loans, commercial real estate loans,
agriculture loans, and restructured loans. Smaller balance, homogeneous
loans, including one-to-four family residential loans and consumer
loans, are collectively evaluated for impairment. SFAS No. 118 amends
SFAS No. 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans. The Company has elected to continue
to use its existing nonaccrual methods for recognizing interest on
impaired loans. The adoption of SFAS No. 114 and SFAS No. 118 resulted
in no prospective adjustment to the allowance for loan losses and did
not affect the Company's policies regarding charge-offs or recoveries.
Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure is initially recorded on an
individual property basis at estimated fair value on the date of
foreclosure, thus establishing a new cost basis. Subsequent to
foreclosure, real estate is periodically evaluated by management and a
valuation allowance is established if the estimated fair value, less
cost to sell, of the property declines. Subsequent increases in fair
value are recorded through a reversal of the valuation allowance, but
not below zero. Costs incurred in maintaining the properties are charged
to expense.
Profit on sales of real estate owned is recognized when title has
passed, minimum down payment requirements have been met, the terms of
any notes received by the Company are such to satisfy continuing payment
requirements, and the Company is relieved of any requirement for
continued involvement in the real estate. Otherwise, recognition of
profit is deferred until such criteria are met.
<PAGE>
Stock in Federal Home Loan Bank
The Company, as a member of the reconstituted Federal Home Loan Bank
System administered by the Federal Housing Finance Board, is required to
maintain an investment in capital stock of the Federal Home Loan Bank of
Chicago (FHLB) in an amount equal to the greater of 1% of the aggregate
outstanding balance of the loans secured by dwelling units at the
beginning of each year, or 5% of advances from the FHLB to the Company.
The stock is recorded at cost, which represents redemption value.
Office Properties and Equipment
Depreciation of office properties and equipment is charged to expense
using the straight-line method over the estimated useful lives of the
related assets. Estimated lives are 3 to 50 years for office buildings
and improvements; 2 to 15 years for furniture, fixtures and equipment;
and 3 years for automobiles.
Cost in Excess of Fair Value of Net Assets Acquired
Cost in excess of fair value of net assets acquired (goodwill) arose
from the acquisitions of Community Savings Bank, Marion, Illinois in
1996 (see note 2) and Carbondale Savings and Loan Association in 1983,
both of which were accounted for by the purchase method of accounting.
Goodwill is being amortized on a straight-line basis over 15 years.
Core Deposit Intangible
A core deposit intangible in the original amount of $1,235,604 resulted
from the May 1995 acquisition of the deposit liabilities of another
financial institution (see note 2). This intangible asset is being
amortized on an accelerated basis over 10 years. The remaining
unamortized intangible totaled $1,031,729 at September 30, 1996. During
June 1995, the Company fully amortized its previous core deposit
intangible resulting from a prior acquisition of deposit liabilities.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under repurchase agreements
(reverse repurchase agreements). Reverse repurchase agreements are
treated as financings, and the obligation to repurchase securities sold
is reflected as a liability in the consolidated balance sheets.
Income Taxes
The Company files a consolidated federal income tax return. Temporary
differences exist between income and expense recognition for financial
reporting and income tax purposes. Deferred income taxes have been
provided for these temporary differences.
Effective October 1, 1993, the Company adopted SFAS No. 109, Accounting
for Income Taxes. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
<PAGE>
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company reported the
cumulative effect of the change in the method of accounting for income
taxes totaling $786,053 in the consolidated statement of income for the
year ended September 30, 1994.
Earnings Per Share
Earnings per share are based upon the weighted average number of common
shares and common stock equivalents, if dilutive, outstanding during the
period. The only common stock equivalents are stock options. The
weighted average number of common stock equivalents is calculated using
the treasury stock method. Only ESOP shares committed to be released are
considered outstanding for purposes of computing earnings per share.
Earnings per share have been calculated based on the weighted average
number of common shares and common stock equivalents outstanding of
4,550,068, 4,314,838, and 4,218,034 for the years ended September 30,
1996, 1995, and 1994, respectively. As a result of the Conversion, the
weighted average number of common shares outstanding for 1995 and 1994
were restated based on the Exchange Ratio.
Reclassification
Certain reclassifications of 1995 and 1994 information have been made to
conform to the 1996 presentation.
(2) Business Combinations
On May 15, 1996, the Company completed its acquisition of Community
Savings Bank, Marion, Illinois (Community Savings) in exchange for cash
of $7.5 million. Community Savings' assets consisted primarily of loans
receivable of $45.4 million and investment securities of $6.3 million,
while liabilities consisted primarily of savings deposits of $49.7
million. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the operating results of Community Savings
have been included in the Company's results of operations since the date
of the acquisition. The excess of the cost over fair value of the net
assets acquired was approximately $2.9 million.
On May 12, 1995, the Bank acquired the savings deposit liabilities of
the branch office of another financial institution totaling
approximately $21.1 million. The acquisition was accounted for under the
purchase method of accounting and resulted in the recording of a core
deposit intangible totaling approximately $1.2 million.
<PAGE>
(3) Investment Securities
The amortized cost and market value of investment securities classified
as available for sale at September 30, 1996 and 1995 follow:
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Debt securities:
U.S. government and agencies ....... $ 43,726,735 $ 263,581 $ (196,290) $ 43,794,026
Corporate debentures ............... 2,149,003 -- (32,923) 2,116,080
Collateralized mortgage
obligations ...................... 6,373,165 5,958 (222,024) 6,157,099
Equity securities - mutual funds ...... 6,675,192 -- (128,997) 6,546,195
------------ ------------ ------------ ------------
$ 58,924,095 $ 269,539 $ (580,234) $ 58,613,400
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Debt securities - U.S. government
and agencies $ 22,809,812 $ 521,495 $ (49,846) $ 23,281,461
Equity securities - mutual funds 6,257,250 - (90,696) 6,166,554
------------ ------------ ------------ ------------
$ 29,067,062 $ 521,495 $(140,542) $ 29,448,015
============ ============ ============ ============
</TABLE>
<PAGE>
Gross realized gains, gross realized losses, and gross proceeds from
sales of debt securities follow:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Gross realized gains ........... $ 1,425 $ -- $ 323,060
Gross realized losses .......... (30,231) (13,719) (201,668)
------------ ------------ ------------
Net realized gain (loss) . $ (28,806) $ (13,719) $ 121,392
============ ============ ============
Gross proceeds ................. $ 3,876,723 $ 39,500 $ 21,190,722
============ ============ ============
</TABLE>
The amortized cost and market value of debt securities classified as
available for sale at September 30, 1996, by contractual maturity,
follow:
<TABLE>
<CAPTION>
Amortized Market
cost value
----------- -----------
<S> <C> <C>
Within one year .......................... $ 8,246,912 $ 8,257,242
Between one and five years ............... 24,249,476 24,275,189
Between five and ten years ............... 6,032,803 5,994,751
After ten years .......................... 13,719,712 13,540,023
----------- -----------
$52,248,903 $52,067,205
=========== ===========
</TABLE>
The amortized cost and market values of investment securities classified
as held to maturity at September 30, 1996 and 1995 follows:
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Debt securities:
Securities of U.S. government
and agencies $ 1,000,000 $ 8,010 $ - $ 1,008,010
Corporate debentures 3,275,594 2,029 (4,053) 3,273,570
Collateralized mortgage
obligations 2,334,731 - (56,505) 2,278,226
Municipal bonds 2,249,800 10,193 (765) 2,259,228
--------- ------ ------ ---------
$ 8,860,125 $ 20,232 $(61,323) $ 8,819,034
========= ====== ====== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1995
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Debt securities:
Securities of U.S. government
and agencies $ 5,000,000 $ 4,600 $ (22,200) $ 4,982,400
Corporate debentures 7,632,573 - (69,501) 7,563,072
Collateralized mortgage
obligations 8,947,913 32,392 (262,477) 8,717,828
Municipal bonds 1,755,803 6,852 (6,654) 1,756,001
---------- ------ ------- ----------
$ 23,336,289 $ 43,844 $(360,832) $ 23,019,301
========== ====== ======= ==========
</TABLE>
Collateralized mortgage obligations with a carrying value at September
30, 1996 of approximately $8.3 million were collateralized by
mortgage-backed securities issued by the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation. A
collateralized mortgage obligation with a carrying value at September
30, 1996 of approximately $177,000 was collateralized by nonagency
mortgage-backed securities.
The amortized cost and market value of debt securities classified as
held to maturity at September 30, 1996, by contractual maturity,
follows:
<TABLE>
<CAPTION>
Amortized Market
cost value
---------- ----------
<S> <C> <C>
Within one year .......................... $2,761,608 $2,763,901
Between one and five years ............... 2,463,644 2,467,990
Between five and ten years ............... 1,195,000 1,203,010
After ten years .......................... 2,439,873 2,384,133
$8,860,125 $8,819,034
========== ==========
</TABLE>
<PAGE>
4) Mortgage-Backed Securities
The amortized cost and market value of mortgage-backed securities
classified as available for sale at September 30, 1996 and 1995 follow:
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
GNMA ......... $ 715,742 $ 73,898 $ -- $ 789,640
FHLMC ........ 9,980,068 172,936 (184,954) 9,968,050
FNMA ......... 4,363,614 54,798 (59,510) 4,358,902
------------ ------------ ------------ ------------
$ 15,059,424 $ 301,632 $ (244,464) $ 15,116,592
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
GNMA ......... $ 831,425 $ 91,621 $ -- $ 923,046
FHLMC ........ 13,244,118 221,981 (217,843) 13,248,256
FNMA ......... 2,019,353 64,455 -- 2,083,808
------------ ------------ ------------ ------------
$ 16,094,896 $ 378,057 $ (217,843) $ 16,255,110
============ ============ ============ ============
</TABLE>
The amortized cost and market value of mortgage-backed securities
classified as available for sale at September 30, 1996, by contractual
maturity, follow:
<TABLE>
<CAPTION>
Amortized Market
cost value
----------- -----------
<S> <C> <C>
Within one year .......................... $ 2,059,479 $ 2,061,297
Between one and five years ............... 838,790 824,332
After ten years .......................... 12,161,155 12,230,963
----------- -----------
$15,059,424 $15,116,592
=========== ===========
</TABLE>
<PAGE>
Gross realized losses and gross proceeds from sales of mortgage-backed
securities during the year ended September 30, 1996 totaled $8,916 and
$64,471, respectively. There were no sales of mortgage-backed securities
during the years ended September 30, 1995 or 1994.
The amortized cost and market value of mortgage-backed securities
classified as held to maturity at September 30, 1996 and 1995 follow:
<TABLE>
<CAPTION>
September 30, 1996
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
GNMA .................... $ 612,116 $ 10,526 $ -- $ 622,642
FHLMC ................... 363,470 3,439 -- 366,909
FNMA .................... 171,941 4,992 -- 176,933
Private
pass-throughs ......... 368,095 19,302 -- 387,397
---------- ---------- ---------- ----------
$1,515,622 $ 38,259 $ -- $1,553,881
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Private
pass-throughs $ 414,681 $ 44,027 $ - $ 458,708
========= ======== ======== =========
</TABLE>
The amortized cost and market value of mortgage-backed securities
classified as held to maturity at September 30, 1995, by contractual maturity,
follow:
<TABLE>
<CAPTION>
Amortized Market
cost value
----------- -----------
<S> <C> <C>
After ten years $ 1,515,622 $ 1,553,881
=========== ===========
</TABLE>
<PAGE>
(5) Loans Receivable
A comparative summary of loans receivable follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loans secured by real estate:
Residential:
1-4 family .................................. $193,301,481 $134,639,565
Multifamily ................................. 1,748,587 1,478,790
------------ ------------
Total residential .................... 195,050,068 136,118,355
Land held for development ..................... 1,055,501 2,380,691
Commercial .................................... 11,621,874 6,805,559
------------ ------------
Total loans secured by real estate ... 207,727,443 145,304,605
------------ ------------
Commercial business loans ........................ 7,767,959 6,633,987
Consumer loans:
Automobile loans .............................. 50,292,567 49,917,806
Mobile home loans ............................. 169,808 145,278
Education loans ............................... 1,373,526 2,754,359
Loans secured by deposits ..................... 1,589,568 1,117,259
Other ......................................... 12,119,599 6,311,968
------------ ------------
Total consumer loans ................. 65,545,068 60,246,670
------------ ------------
281,040,470 212,185,262
------------ ------------
Less:
Loans in process .............................. 35,787 36,538
Unearned discount, net ........................ 2,648,056 3,429,088
Deferred loan fees ............................ 205,280 104,953
Allowance for losses .......................... 2,418,800 2,232,016
Purchase accounting discounts ................. 245,618 308,890
------------ ------------
5,553,541 6,111,485
------------ ------------
$275,486,929 $206,073,777
============ ============
</TABLE>
<PAGE>
The weighted average interest rate on loans was 8.48% and 8.60% at
September 30, 1996 and 1995, respectively.
A summary of activity in the allowance for losses for the years ended
September 30, 1996, 1995, and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year ........ $ 2,232,016 $ 2,129,296 $ 2,206,488
Provision charged to expense ...... 170,000 360,000 140,000
Acquisition of Community
Savings Bank ................... 265,000 -- --
Charge-offs ....................... (421,652) (349,839) (275,385)
Recoveries ........................ 173,436 92,559 58,193
----------- ----------- -----------
Balance, end of year .............. $ 2,418,800 $ 2,232,016 $ 2,129,296
=========== =========== ===========
</TABLE>
A summary of loans receivable contractually in arrears three months or
more is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Residential real estate loans .............. $1,068,570 $ 543,952
Commercial real estate loans ............... 849,529 --
Consumer loans ............................. 243,426 118,954
---------- ----------
$2,161,525 $ 662,906
========== ==========
Percent of loans receivable ................ .78% .32%
========== ==========
Number of loans ............................ 66 36
========== ==========
</TABLE>
A summary of loans on which interest is not being accrued and impaired
loans at September 30, 1996 follows:
<TABLE>
<CAPTION>
September 30,
1996
--------
<S> <C>
Nonaccrual loans ............................................... $765,662
Impaired loans continuing to accrue interest ................... --
--------
Total impaired loans ............... $765,662
========
</TABLE>
<PAGE>
The allowance for losses on impaired loans was $375,000 at September 30,
1996. The average balance of impaired loans during the year ended
September 30, 1996 was $524,403.
A summary of interest income on nonaccrual and other impaired loans for
the year ended September 30, 1996 follows:
<TABLE>
<CAPTION>
September 30,
1996
--------
<S> <C>
Income recognized - nonaccrual loans .......................... $ --
=======
Interest income if interest had accrued -
nonaccrual loans ........................................... $53,681
=======
</TABLE>
(6) Real Estate Acquired by Foreclosure
A comparative summary of real estate acquired by foreclosure is as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Foreclosed real estate ................... $385,074 $ 92,068
Deficiency judgments ..................... 43,205 48,171
-------- --------
$428,279 $140,239
======== ========
</TABLE>
(7) Office Properties and Equipment
A comparative summary of office properties and equipment follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land ......................................... $ 855,373 $ 524,818
Office buildings and improvements ............ 5,321,618 3,417,024
Furniture, fixtures and equipment ............ 3,636,287 2,792,233
Automobiles .................................. 102,833 91,672
---------- ----------
9,916,111 6,825,747
Less accumulated depreciation ................ 3,925,719 3,088,007
---------- ----------
$5,990,392 $3,737,740
========== ==========
</TABLE>
<PAGE>
Depreciation expense for the years ended September 30, 1996, 1995, and
1994 amounted to $507,285, $351,612, and $244,958, respectively.
(8) Deposits
A comparative summary of deposits follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- ------------------------
Percent Percent
Stated to to
rate Amount total Amount total
---- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Demand deposits:
Checking ......................... 0-2.50% $ 35,809,064 14.4% $ 34,027,636 17.3%
Money market demand .............. 2.50-3.75 17,448,651 7.0 17,222,778 8.7
Passbook ......................... 0-2.75 35,694,715 14.4 26,689,122 13.5
------------ ---- ------------- ----
88,952,430 35.8 77,939,536 39.5
------------ ---- ------------- ----
Certificates of deposit:
Less than 3.00 26,463 -- 23,757 --
3.00-4.99 14,826,775 6.0 42,103,677 21.4
5.00-6.99 141,335,188 56.8 73,668,658 37.4
7.00-8.99 3,086,126 1.2 2,703,808 1.4
9.00-11.00 495,645 .2 663,645 .3
============ ---- ------------- ----
159,770,197 64.2 119,163,545 60.5
------------ ---- -------------- -----
$248,722,627 100.0% $ 197,103,081 100.0%
============ ===== ============= =====
</TABLE>
The weighted average interest rate on deposits was 4.63% and 4.31% at
September 30, 1996 and 1995, respectively.
A summary of the maturities of certificates of deposit at September 30,
1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
Amount Percent Amount Percent
------------ ----- ------------ -----
<S> <C> <C> <C> <C>
Within one year ...... $109,803,423 68.7% $ 73,118,490 61.4%
Second year .......... 32,827,662 20.5 31,892,841 26.8
Third year ........... 10,989,454 6.9 12,460,894 10.4
Fourth year .......... 5,400,553 3.4 1,045,262 .9
Thereafter ........... 749,105 .5 646,058 .5
------------ ----- ------------ -----
$159,770,197 100.0% $119,163,545 100.0%
============ ===== ============ =====
</TABLE>
<PAGE>
Interest expense on deposits, by type, for the years ended September 30,
1996, 1995, and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Checking and money market ...... $1,334,117 $1,199,954 $1,307,501
Savings accounts ............... 953,487 898,191 752,121
Certificates of deposit ........ 7,363,202 5,370,258 4,750,790
Amortization of core
deposit intangible .......... 142,094 98,332 48,736
---------- ---------- ----------
$9,792,900 $7,566,735 $6,859,148
========== ========== ==========
</TABLE>
Certificates of deposit of $100,000 or more totaled $11,837,210 and
$5,904,214 at September 30, 1996 and 1995, respectively. Investment
securities and mortgage-backed securities with a carrying value of
approximately $12,207,000 and $18,767,000 at September 30, 1996 and
1995, respectively, were pledged to secure certain of these certificates
of deposit. Investment securities and mortgage-backed securities with a
carrying value of approximately $3,296,000 and $3,610,000 at September
30, 1996 and 1995, respectively, were pledged to secure a commercial
checking account.
(9) Borrowed Money
A summary of borrowed money at September 30, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
------------------------- --------------------------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
------------ ----- ------------ -----
<S> <C> <C> <C> <C>
Reverse repurchase agreements $ 14,781,706 5.35% $ 13,415,749 5.75%
Line of credit advances from FHLB 53,600,000 6.22 33,800,000 6.66
Fixed-term advances from FHLB due in:
1996 - - 2,000,000 4.52
1998 7,000,000 5.11 7,000,000 5.11
2001 396,077 8.36 - -
ESOP 576,000 8.00 864,000 8.50
------------ ------------
$ 76,353,783 5.97% $ 57,079,749 6.21%
============ ==== ============ ====
</TABLE>
<PAGE>
Reverse repurchase agreements (the agreements) are treated as
financings, and the obligations to repurchase the securities sold are
reflected as a liability. These agreements mature within one year. All
of the agreements were to repurchase identical securities. The
investment securities underlying the agreements were delivered to a
designated safekeeping agent. These investment securities had an
amortized cost and market value of $16,878,000 and $16,851,000,
respectively, at September 30, 1996. At September 30, 1995, the
investment securities had an amortized cost and market value of
$16,147,000 and $16,348,000, respectively.
The agreements averaged approximately $13,510,000 and $14,242,000 during
1996 and 1995, respectively. The maximum amounts outstanding at any
month-end during 1996 and 1995 were approximately $14,782,000 and
$15,406,000, respectively. Interest expense on reverse repurchase
agreements was approximately $741,000, $803,000, and $531,000 for the
years ended September 30, 1996, 1995, and 1994, respectively.
Line of credit advances bear interest at 1% above the FHLB daily
investment deposit rate. These borrowings are short-term and are
secured. The maximum amount outstanding at any month-end was
approximately $53,600,000 and $33,800,000 during 1996 and 1995,
respectively. Interest expense on line of credit advances was
approximately $1,180,000, $973,000, and $291,000 for the years ended
September 30, 1996, 1995, and 1994, respectively.
Interest expense on fixed-term advances from the FHLB was approximately
$649,000, $878,000, and $625,000 for the years ended September 30, 1996,
1995, and 1994, respectively.
At September 30, 1996 and 1995, total borrowings from the FHLB of
Chicago were $60,996,077 and $42,800,000, respectively. Advances from
the FHLB of Chicago are secured by a blanket lien of qualifying first
mortgage loans equivalent to 165% of outstanding borrowings. As of
September 30, 1996, the Company's available credit from the FHLB cannot
exceed the lesser of 35% of total assets ($136.0 million), or 60% of
one-to-four-family residential mortgages not more than 90 days
delinquent ($116.0 million).
In 1994, the ESOP borrowed $1,440,000 to finance the acquisition of the
stock to be held in trust for future allocation to eligible
participants. The debt of the ESOP is collateralized by the ESOP shares
and is reflected as a liability in the consolidated balance sheet. The
loan is due on September 30, 1998. Principal payments totaling $288,000
in both 1996 and 1995 and interest payments of approximately $63,000 and
$89,000 were made during 1996 and 1995, respectively.
(10) Income Taxes
If certain conditions are met, the Company, in determining taxable
income, is allowed a special bad debt deduction based on specified
experience formulas or on a percentage of taxable income before such
deduction. The Company used the percentage of taxable income method in
1996, 1995, and 1994, since this method resulted in the maximum bad debt
deduction. The bad debt deduction under the percentage method is limited
to 8% of taxable income.
<PAGE>
The composition of income tax expense for the years ended September 30,
1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal ............. $ 2,336,702 $ 1,689,259 $ 1,462,353
State ............... 286,175 198,905 236,583
Deferred ............... (467,566) (14,141) 355,128
----------- ----------- -----------
$ 2,155,311 $ 1,874,023 $ 2,054,064
=========== =========== ===========
</TABLE>
The reasons for the difference between expected federal income tax
expense computed at the federal statutory rate of 34% and the actual
amount are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- ------------------------
Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" income tax
expense ..................... $ 1,772,405 34.0% $ 1,651,686 34.0% $ 1,824,198 34.0%
Items affecting federal income
tax rate:
Amortization of ESOP awards 161,587 3.1 72,114 1.5 42,004 .8
Tax-exempt interest ....... (38,824) (.8) (45,269) (.9) (45,240) (.9)
Amortization of cost in
excess of fair value of
net assets acquired ..... 71,832 1.4 46,379 .9 48,112 .9
State income taxes, net of
federal benefit ......... 147,347 2.8 163,020 3.4 180,933 3.4
Other ..................... 40,964 .8 (13,907) (.3) 4,057 .1
----------- ---- ----------- ---- ----------- ----
$ 2,155,311 41.3% $ 1,874,023 38.6% $ 2,054,064 38.3%
=========== ==== ============ ==== =========== ====
</TABLE>
<PAGE>
The components of deferred tax assets and deferred tax liabilities at
September 30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
General loan loss allowance ....................... $ 726,528 $ 824,088
SAIF special assessment ........................... 572,973 --
Available-for-sale securities market valuation .... 47,321 --
Discounts and premiums related to purchase
method of accounting ............................ 57,005 78,402
Core deposit intangible ........................... 33,773 10,637
Other, net ........................................ 64,437 67,051
---------- ----------
Total deferred tax assets ........... 1,502,037 980,178
---------- ----------
Deferred tax liabilities:
Available-for-sale securities market valuation .... -- 240,108
Loans, due to bad debts taken in excess of base
year reserve .................................... 217,535 219,957
Restricted stock awards ........................... -- 44,422
Tax depreciation in excess of that recorded
for book purposes ............................... 227,969 128,534
FHLB stock dividends .............................. 39,929 69,500
Other, net ........................................ 61,300 11,535
---------- ----------
Total deferred tax liabilities ...... 546,733 714,056
---------- ----------
Net deferred tax asset .............. $ 955,304 $ 266,122
========== ==========
</TABLE>
The special bad debt deduction accorded thrift institutions is covered
under Section 593 of the Internal Revenue Code. On August 20, 1996, the
Small Business Job Protection Act of 1996 (the Act) was signed into law.
This Act included the repeal of Section 593 effective for tax years
beginning after December 31, 1995. The repeal of the thrift reserve
method generally requires thrift institutions to recapture into income
the portion of bad debt reserves that exceed the base year reserve. The
recapture will generally be taken into income ratably over six tax
years. However, if the Company meets a residential loan requirement for
the tax years beginning in 1996 and 1997, recapture of the reserve can
be deferred until the tax year beginning in 1998. At September 30, 1996,
the Company had bad debts deducted for tax purposes in excess of the
base year reserve of approximately $562,000. The Company has recognized
a deferred income tax liability for this amount.
Certain events covered by IRC Section 593(e), which was not repealed,
will trigger a recapture of the base year reserve. The base year reserve
of thrift institutions would be recaptured if a thrift ceases to qualify
as a bank for federal income tax purposes. The base year reserves of
thrift institutions also remain subject to income tax penalty provisions
which, in general, require recapture upon certain stock redemptions of,
and excess distributions to, stockholders. At September 30, 1996,
retained earnings included approximately $7.8 million of base year
reserves, for which no deferred federal income tax liability has been
recognized.
<PAGE>
(11) Regulatory Matters
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To be considered "well capitalized," an
institution must generally have a leverage (core) ratio of at least 5%,
a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based
capital ratio of at least 10%. At September 30, 1996, the Company's
capital levels result in a determination of "well capitalized" under the
regulatory framework for prompt corrective action.
A summary of the Company's compliance with its capital requirements as
of September 30, 1996 follows:
<TABLE>
<CAPTION>
Regulatory Capital
-------------------------------------------------------------------------------
Tier 1 Leverage Tier 1 Risk-based Total Risk-based
--------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital $ 52,119 13.57% $ 52,119 24.19% $ 53,994 25.06%
Capital requirement 11,522 3.00 8,619 4.00 17,237 8.00
------ ----- ------ ----- ------ -----
Excess $ 40,597 10.57% $ 43,500 20.19% $ 36,757 17.06%
====== ===== ====== ===== ====== =====
</TABLE>
<PAGE>
(12) Pension Plan
Substantially all employees are included in a trusteed defined benefit
pension plan. The benefits contemplated by the plan are funded through
payments to the Financial Institutions Retirement Fund, which operates
as an industry-wide plan and does not report relative plan assets and
actuarial liabilities of the individual participating associations. The
cost of funding is charged to current operations. There is no unfunded
liability for past service. Expense for the years ended September 30,
1996, 1995, and 1994 was $113,558, $102,304, and $75,703, respectively.
During 1994, the Bank adopted a supplemental executive retirement plan
for certain key executive officers and directors selected by the Board
of Directors. Benefits to be paid under the plan are accrued over the
remaining period to retirement of the covered executives. Expense for
the years ended September 30, 1996 and 1995 was approximately $12,000
and $14,000, respectively.
(13) Employee Stock Ownership Plan, Stock Option
Plan, and Recognition and Retention Plan
During 1994, the Company established a tax-qualified ESOP. The plan
covers substantially all employees who have attained the age of 21 and
completed one year of service. In connection with the mutual holding
company conversion, the ESOP purchased 144,000 shares of the Bank's
common stock at a subscription price of $10.00 per share using funds
loaned by the Bank. As a result of the Conversion, these ESOP shares
were converted into 300,082 shares based on the Exchange Ratio. In
connection with the Conversion, the ESOP purchased an additional 93,903
shares of common stock at a subscription price of $10.00 per share using
funds loaned by the Company. All shares are held in a suspense account
for allocation among the participants as the loans are repaid with level
principal payments over 5 and 10 years, respectively. Shares released
from the suspense account are allocated among the participants based
upon their pro rata annual compensation. The purchases of the shares by
the ESOP were recorded by the Company as unearned ESOP shares in a
contra equity account. As ESOP shares are committed to be released to
compensate employees, the contra equity account is reduced and the
Company recognizes compensation expense equal to the fair market value
of the shares committed to be released. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt or
compensation expense. Compensation expense related to the ESOP was
approximately $763,000, $547,000, and $365,000 for the years ended
September 30, 1996, 1995, and 1994, respectively.
<PAGE>
The ESOP shares as of September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Allocated shares ................................. 180,408 120,033
Committed to be released shares .................. 7,268 --
Unreleased shares ................................ 209,669 180,049
---------- ----------
Total ESOP shares ......... 396,985 300,082
========== ==========
Fair value of unreleased shares .................. $2,620,850 $1,879,200
========== ==========
</TABLE>
In connection with the mutual holding company conversion, the Board of
Directors adopted the Charter Bank, S.B. 1993 Incentive Stock Option
Plan which provided for the granting of options for a maximum of 144,000
shares of common stock at $10.00 per share to directors, key officers,
and employees. As a result of the Conversion, the stock options and the
price per share were converted based on the Exchange Ratio. Activity
within the plan is summarized as follows:
<TABLE>
<CAPTION>
Number of
shares Price
------ -----
<S> <C> <C>
Balance at September 30, 1994 ................. 122,165 $ 10.00
Granted ....................................... -- --
Exercised ..................................... (965) 10.00
Cancelled ..................................... (840) 10.00
--------
Balance at September 30, 1995 ................. 120,360 10.00
Exercised ..................................... (5,760) 10.00
Conversion into common stock
of Charter Financial, Inc. ................. 124,205 4.80
Granted ....................................... -- --
Exercised ..................................... (728) 4.80
Cancelled ..................................... (730) 4.80
--------
Balance at September 30, 1996 ................. 237,347 4.80
======== =========
</TABLE>
<PAGE>
Also, in connection with the mutual holding company conversion, the
Company established the Charter Bank, S.B. 1993 Recognition and
Retention Plan which acquired 48,000 shares (2.2% of total shares
issued) of $1.00 par value stock at a subscription price of $10.00 per
share. The plan provided that such common stock could be issued to
directors and employees in key management positions to encourage such
key directors and employees to remain with the Company. Interest in the
plan for each participant generally vested in three equal installments
beginning September 30, 1994. As of September 30, 1996, participants had
become fully vested and the shares of stock were released to the
appropriate participants. Prior to September 30, 1996, the remaining
portion of the plan which was not vested was presented in the
consolidated balance sheets as a contra equity account at historical
cost. Compensation expense related to vesting in the plan totaled
approximately $140,000, $149,000, and $183,000 during the years ended
September 30, 1996, 1995, and 1994, respectively.
(14) Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and financial guarantees.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and financial guarantees written is represented by the
contractual amount of these instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
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 certain of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty.
At September 30, 1996, the Company had outstanding commitments to
originate residential loans of approximately $1,699,000, of which
$1,097,000 were at fixed rates and $602,000 were at adjustable rates. In
addition, the Company had commitments to fund outstanding credit lines
of approximately $7,002,000 at September 30, 1996. Commitments to extend
credit may involve elements of interest rate risk in excess of the
amount recognized in the consolidated balance sheets. Interest rate risk
on commitments to extend credit results from the possibility that
interest rates may have moved unfavorably from the position of the
Company since the time the commitment was made.
<PAGE>
(15) Commitments and Contingencies
As discussed more fully in note 14, the Company has outstanding
commitments to originate loans in the ordinary course of business.
The Company is involved in various litigation arising in the ordinary
course of business. In the opinion of management, at the present time,
disposition of the suits and claims will not have a material effect on
the financial position of the Company.
(16) Liquidation Account
At the time of Conversion, the Bank established a liquidation account
for the benefit of eligible savings account holders who continue to
maintain their savings accounts with the Bank after conversion. In the
event of a complete liquidation of the Bank (and only in such event),
eligible savings account holders who continue to maintain their accounts
with the Bank shall be entitled to receive a distribution from the
liquidation account after payment to all creditors but before any
liquidation distribution with respect to common stock. The initial
liquidation account was established at ap- proximately $22 million. This
account will be proportionately reduced for any subsequent reduction in
the eligible holders' deposit accounts. The creation and maintenance of
the liquidation account will not restrict the use or application of any
of the capital accounts of the Company, except that the Company may not
declare or pay a cash dividend on, or repurchase any of, its capital
stock, if the effect of such dividend or repurchase would be to cause
the Company's net worth to be reduced below the aggregate amount then
required for the liquidation account, or the amount required by federal
or state law.
<PAGE>
(17) Fair Values of Financial Instruments
The estimated fair values of the Company's interest-earning assets and
interest-bearing liabilities at September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
value fair value
------------ ------------
<S> <C> <C>
Interest-earning assets:
Cash and cash equivalents ................. $ 8,968,422 $ 8,968,422
Investment securities ..................... 67,473,525 67,432,434
Mortgage-backed securities ................ 16,632,214 16,670,473
Loans receivable .......................... 275,486,929 277,478,000
Stock in Federal Home Loan Bank ........... 3,049,900 3,049,900
------------ ------------
$371,610,990 $373,599,229
============ ============
Interest-bearing liabilities:
Deposits:
Checking, money market demand,
and passbooks ......................... $ 88,952,430 $ 88,952,430
Certificates of deposit ................. 159,770,197 160,203,852
Borrowed money:
Reverse repurchase agreements .......... 14,781,706 14,781,706
Line-of-credit advances from FHLB ...... 53,600,000 53,600,000
Fixed-term advances from FHLB .......... 7,396,077 7,396,000
ESOP ................................... 576,000 576,000
------------ ------------
$325,076,410 $325,509,988
============ ============
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument listed above:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and interest-bearing deposits.
The carrying value is considered a reasonable estimate of fair value of
these financial instruments due to their short-term nature.
Investment Securities
Fair values are based on quoted market prices or dealer quotes.
Mortgage-Backed Securities
Fair values are based on quoted market prices or dealer quotes.
<PAGE>
Loans Receivable
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, such as residential real
estate, commercial real estate, commercial business, and consumer loans.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the Company's
historical experience, with repayments for each loan classification
modified, as required, by an estimate of the effect of current economic
and lending conditions.
Fair value for significant nonperforming loans is based on recent
external appraisals. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market
information and specific borrower information.
Stock in Federal Home Loan Bank
Stock in Federal Home Loan Bank is valued at cost, which represents
redemption value and approximates fair value.
Deposits
The fair value of deposits with no stated maturity, such as checking,
money market demand, and passbook, is equal to the amount payable on
demand at September 30, 1996.
The fair value of certificates of deposit, all of which have stated
maturities, is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
Borrowed Money
The fair value of borrowed money is based on the discounted value of
contractual cash flows. The discount rate is estimated using rates
currently available to the Company for similar terms to maturity.
(18) Recent Regulatory Developments
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (DIFA)
was signed into law. DIFA authorizes the FDIC to impose a one-time
special assessment on SAIF-assessable deposits of depository
institutions. This special assessment, which is based on SAIF-assessable
deposits at March 31, 1995, is intended to recapitalize the SAIF. The
one-time special assessment for the Company totaled approximately $1.5
million and was accrued on September 30, 1996. The actual reduction of
net income was approximately $917,000, after considering the tax
deductibility of the special assessment.
<PAGE>
(19) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the year ended September 30, 1996
is as follows:
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------------------
December 31, March 31, June 30, September 30,
1995 1996 1996 1996
------------ --------- -------- -------------
(thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Total interest income ................................... $5,690 $5,692 $6,199 $7,238
Total interest expense .................................. 2,970 2,648 3,028 3,780
------ ------ ------ ------
Net interest income .......................... 2,720 3,044 3,171 3,458
Provision for losses on loans ........................... 30 30 50 60
------ ------ ------ ------
Net interest income
after provision
for losses
on loans .................................. 2,690 3,014 3,121 3,398
Noninterest income ...................................... 364 439 547 492
Noninterest expense ..................................... 1,700 1,720 1,891 3,541(1)
------ ------ ------ ------
Income before income
tax expense ............................... 1,354 1,733 1,777 349
Income tax expense ...................................... 561 718 700 176
------ ------ ------ ------
Net income ................................... $ 793 $1,015 $1,077 $ 173
====== ====== ====== ======
Earnings per share ...................................... $ .18 $ .21 $ .22 $ .06
====== ====== ====== ======
(1) Includes SAIF special assessment of $1.5 million.
</TABLE>
<PAGE>
Selected quarterly financial data for the year ended September 30, 1995
is as follows:
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------------------
December 31, March 31, June 30, September 30,
1994 1995 1995 1995
------------ --------- -------- -------------
(thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Total interest income ...................................... $4,551 $4,941 $5,002 $5,514
Total interest expense ..................................... 2,217 2,453 2,657 2,981
------ ------ ------ ------
Net interest income ............................... 2,334 2,488 2,345 2,533
Provision for losses on loans .............................. 30 30 -- 300
------ ------ ------ ------
Net interest income after
provision for losses
on loans ....................................... 2,304 2,458 2,345 2,233
Noninterest income ......................................... 382 379 274 375
Noninterest expense ........................................ 1,470 1,439 1,511 1,472
------ ------ ------ ------
Income before income tax
expense ........................................ 1,216 1,398 1,108 1,136
Income tax expense ......................................... 504 545 389 436
------ ------ ------ ------
Net income ........................................ $ 712 $ 853 $ 719 $ 700
====== ====== ====== ======
Earnings per share ......................................... $ .17 $ .19 $ .17 $ .16
====== ====== ====== ======
</TABLE>
(20) Purchase Agreement
On August 13, 1996, the Company and Home Federal Savings Bank,
Carbondale, Illinois (Home Federal) announced the execution of a
definitive agreement under the terms of which the Company intends to
acquire Home Federal at a purchase price of $21.00 per share. The
acquisition price will approximate $6.3 million. The acquisition has
been approved by regulatory authorities and is subject to approval by
stockholders of the Company and Home Federal. The transaction is
expected to close during the first calendar quarter of 1997.
<PAGE>
(21) Parent Company Financial Information
The following are a condensed balance sheet as of September 30, 1996 and
a condensed statement of income and cash flows for the period from
December 28, 1995 to September 30, 1996 for Charter Financial, Inc.
(parent company only):
<TABLE>
<CAPTION>
Condensed Balance Sheet
1996
-------
(in thousands)
<S> <C>
Assets:
Cash ...................................................... $ 268
Repurchase agreements ..................................... 4,401
Investment in subsidiary .................................. 53,404
Other assets .............................................. 275
-------
$58,348
Liabilities and stockholders' equity:
Other liabilities ......................................... 1,954
Stockholders' equity ...................................... 56,394
$58,348
<CAPTION>
Condensed Statement of Income
1996
-------
(in thousands)
<S> <C>
Interest income .............................................. $ 401
Interest expense ............................................. 55
-------
346
Operating expenses ........................................... 43
-------
Income before income taxes and
equity in undistributed
earnings of subsidiary ..................... 303
Income tax expense ........................................... 116
Income before equity in
undistributed earnings
of subsidiary .............................. 187
Equity in undistributed earnings of subsidiary ............... 2,871(1)
-------
Net income .................................... $ 3,058
=======
(1) Includes undistributed earnings of subsidiary for the year ended
September 30, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
1996
-------
(in thousands)
<S> <C>
Operating activities:
Net income .................................................. $ 3,058
Equity in undistributed earnings of
subsidiary ................................................ (2,871)
Other, net .................................................. 2,032
Net cash provided by operating
activities ...................................... 2,219
Investing activities:
Capital contributions to subsidiary ......................... (15,166)
Increase in repurchase agreements ........................... (4,401)
Net cash used in investing activities ........... (19,567)
Financing activities:
Proceeds from issuance of stock ............................. 27,052
Exercise of stock options ................................... 3
Cash paid to minority stockholders .......................... (2)
Dividends paid .............................................. (553)
Retirement of stock ......................................... (8,984)
Capital contribution from Charter
Bancorp, M.H.C ............................................ 100
Net cash provided by financing
activities ...................................... 17,616
Net change in cash and cash
equivalents ..................................... 268
Cash and cash equivalents at beginning of year ................. --
--------
Cash and cash equivalents at end of year ....................... $ 268
========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STOCKHOLDER INFORMATION
BOARD OF DIRECTORS OFFICERS
- ------------------ --------
<S> <C>
John A. Becker, Chairman John A. Becker
Truman D. Cashman Chairman of the Board and President
William A. Norton
Klondis T. Pirtle Michael R. Howell
Carl S. Schlageter, M.D. Executive Vice President and Treasurer
Linda M. Johnson
Michael R. Howell Linda M. Johnson
John Petkas, Jr. Senior Vice President and Secretary
James H. Clutts
Dennis F. Doelitzsch Karen P. Jacobus
Ralph Eugene Watson Vice President and Controller
MURPHYSBORO ADVISORY BOARD Ronald L. Diel
Vice President
James E. McCoskey
Ronald W. Seymour
CORPORATE HEADQUARTERS Vice President
114 West Broadway Klay D. Tiemann
Sparta, IL 62286 Vice President
(618) 443-2166
Jerry K. Thomas
ANNUAL MEETING Vice President
Thursday, January 16, 1997 William H. Gardner
1:30 P.M. Vice President
Charter Financial, Inc.
Corporate Headquarters Cynthia M. Calhoun
114 West Broadway Assistant Vice President
Sparta, IL 62286
J. Doug Baker
STOCK LISTING Assistant Vice President
NASDAQ Bruce N. Uchtman
Symbol: CBSB Assistant Vice President
SPECIAL COUNSEL Larry D. Keller
Assistant Vice President
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue N.W. Sandra J. Kowzan
Suite 400 Assistant Vice President
Washington, DC 20015
Bonnie L. Meacham
INDEPENDENT AUDITORS Assistant Vice President and Assistant
Secretary
KPMG Peat Marwick LLP
1010 Market Street Rosalyn K. Thies
St. Louis, MO 63101 Assistant Vice President and Assistant
Secretary
TRANSFER AGENT
Registrar and Transfer Company Deborah J. Baird
10 Commerce Drive Assistant Vice President and Assistant
Cranford, NJ 07016 Secretary
(800) 368-5948
<PAGE>
<CAPTION>
STOCKHOLDER INFORMATION
BOARD OF DIRECTORS OFFICERS
- ------------------ --------
<S> <C>
Elizabeth H. Gearhart
Assistant Secretary
Marsha A. Pieron
Assistant Secretary
Theresa M. Richter
Assistant Secretary
Mary E. Yeckley
Assistant Secretary
Judith L. Batchelor
Assistant Secretary
Kay L. Morrison
Assistant Secretary
Franny R. Presutti
Assistant Secretary
</TABLE>
GENERAL INQUIRIES AND REPORTS
A copy of the Company's 1996 Annual Report to the Securities and Exchange
Commission, Form 10-K, may be obtained without charge by written request of
shareholders to: Linda M. Johnson, Senior Vice President, Charter Financial,
Inc., 114 West Broadway Sparta, IL 62286
FDIC Disclaimer
This Annual Report has not been reviewed, or confirmed for accuracy or
relevance, by the FDIC.
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<PAGE>
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE COMPANY
Parent Subsidiary State of Incorporation
------ ---------- ----------------------
<S> <C> <C>
Charter Financial, Inc. Charter Bank, S.B. Illinois
Charter Bank, S.B. Sparta First Service Corporation Illinois
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,493
<INT-BEARING-DEPOSITS> 7,476
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 73,730
<INVESTMENTS-CARRYING> 10,376
<INVESTMENTS-MARKET> 10,373
<LOANS> 275,487
<ALLOWANCE> 2,419
<TOTAL-ASSETS> 388,431
<DEPOSITS> 248,723
<SHORT-TERM> 76,354
<LIABILITIES-OTHER> 2,100
<LONG-TERM> 0
425
0
<COMMON> 0
<OTHER-SE> 57,648
<TOTAL-LIABILITIES-AND-EQUITY> 388,431
<INTEREST-LOAN> 19,439
<INTEREST-INVEST> 5,049
<INTEREST-OTHER> 270
<INTEREST-TOTAL> 24,819
<INTEREST-DEPOSIT> 9,793
<INTEREST-EXPENSE> 12,426
<INTEREST-INCOME-NET> 12,223
<LOAN-LOSSES> 170
<SECURITIES-GAINS> (29)
<EXPENSE-OTHER> 8,852
<INCOME-PRETAX> 5,213
<INCOME-PRE-EXTRAORDINARY> 5,213
<EXTRAORDINARY> 2,623
<CHANGES> 0
<NET-INCOME> 3,058
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
<YIELD-ACTUAL> 7.91
<LOANS-NON> 766
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,162
<ALLOWANCE-OPEN> 2,232
<CHARGE-OFFS> 422
<RECOVERIES> 173
<ALLOWANCE-CLOSE> 2,419
<ALLOWANCE-DOMESTIC> 2,419
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
