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, 1997
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 4, 1997, there were issued and outstanding 4,150,123
shares of the Registrant's Common Stock.
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the last sale price on December 4,
1997, as reported by the Nasdaq National Market, was approximately $71.8
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the Registrant that such
person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the fiscal year ended
September 30, 1997 (Parts II and IV).
2. Portions of Proxy Statement for the 1998 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 asset of the Company is its
investment in Charter Bank, S.B., a wholly-owned subsidiary of the Company (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. At September 30, 1997, the Company had
total consolidated assets of $387.0 million, total consolidated deposits of
$276.0 million, and consolidated stockholders' equity of $58.4 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 seven full-service branches located in Carbondale (2), 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") of Chicago. The Bank invests in obligations of
the United States Government or agencies thereof, collateralized mortgage
obligations, mutual funds, municipal bonds and corporate debentures.
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>
Reorganization
On October 15, 1993, the Bank reorganized from an Illinois-chartered
mutual savings bank into an Illinois mutual holding company (the "MHC"). As part
of the reorganization, the Bank offered a minority equity interest in the Bank
to its depositors, with the MHC retaining majority ownership of the Bank. On
December 28, 1995, the MHC merged with and into the Company, then a
newly-organized Delaware corporation. In connection therewith, the Company sold
shares of its stock to the members of the MHC and to the minority stockholders
of the Bank (through the exchange of Company common stock for Bank common
stock), thereby becoming the sole stockholder of the Bank.
Forward-Looking Statements
When used in this Form 10-K and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, and in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including, among other things, changes in economic conditions in the Company's
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company's market area and competition,
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
The Company does not undertake--and specifically declines any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Recent Acquisitions
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,
which resulted in goodwill of approximately $2.9 million which is being
amortized over a 15-year period.
On January 15, 1997, the Bank completed its acquisition of Home Federal
Savings Bank, Carbondale, Illinois, for approximately $6.3 million. The
acquisition was accounted for as a purchase and the Bank recorded approximately
$2.6 million of goodwill. The goodwill will be amortized over a 15 year period.
<PAGE>
As part of the purchase, the Bank assumed $23.8 million in deposit liabilities.
The Bank acquired loans receivable of $21.4 million, mortgage-backed securities
of $1.8 million, investment securities of $3.1 million and buildings and
equipment with a book value of $219,000.
Planned Merger of the Company
On November 19, 1997, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with Magna Group, Inc. ("Magna"), pursuant to which the
Company will merge with and into a wholly-owned subsidiary of Magna ("Merger
Sub"), with Merger Sub as the surviving entity (the "Merger"). The Agreement
provides that each share of the Company's Common Stock will be exchanged for
0.5751 of a share of the common stock, par value $2.00 per share, of Magna and
associated Preferred Share Purchase Rights issued pursuant to the Rights
Agreement, dated as of November 11, 1988, between Magna and Magna Trust Company.
Consummation of the Merger is subject to various conditions, including
approval of the Merger by certain regulatory authorities and by the stockholders
of the Company. No assurance can be given as to when or whether the necessary
approvals will be obtained, or, even if obtained, when or whether the Merger
will be consummated.
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
seven 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.
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.
<PAGE>
Lending Activities
General. The Bank's loan portfolio consists primarily of conventional
mortgage loans secured by one- to four-family residences. At September 30, 1997,
the Bank's loans receivable, net, totaled $287.7 million, of which $200.6
million, or 68.60%, 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 (1.05%), commercial real estate loans (5.21%), commercial
business loans (2.69%) and consumer loans (22.45%). 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, 1997,
the Bank's residential loan originations (excluding equity lines of credit) were
$29.3 million. For the fiscal year ended September 30, 1997, the Bank's one- to
four-family residential mortgage loans increased by $7.3 million, or 3.8%, from
September 30, 1996. In order to expand its loan portfolio, in recent years 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,
1997, approximately $171.4 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, 1997, the Bank sold $917,000
of student loans and $1.7 million of one- to four residential loans and
purchased $907,000 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 $52.1 million
and represented 23.8% of the Bank's total real estate loans at the end of the
fiscal year. For the years ended September 30, 1996 and 1995, respectively, the
Bank purchased $37.4 million and $25.9 million of residential mortgage loans.
The Bank also invests in mortgage-backed securities with adjustable
interest rates. At September 30, 1997, the Bank's mortgage-backed securities
portfolio totaled $14.6 million, or 3.8%, of total assets. At that date, $5.3
million, or 36.6%, of the mortgage-backed securities had adjustable interest
rates. Mortgage-backed securities with remaining terms of five years or less
represent $641,000, or 4.4%, 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,
-----------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
1-4 family (1)................ $200,610 68.60% $193,301 68.78% $134,640 63.45%
Multi-family.................. 3,054 1.05 1,749 0.62 1,479 0.70
Commercial........................... 15,237 5.21 12,677 4.51 9,186 4.33
-------- ------- -------- ------ -------- ------
Total real estate loans....... 218,901 74.86 207,727 73.91 145,305 68.48
Commercial business loans............... 7,881 2.69 7,768 2.76 6,634 3.13
Consumer loans:
Automobile........................... 47,252 16.16 50,292 17.90 49,918 23.52
Mobile home loans.................... 293 0.10 170 0.06 145 0.07
Education loans...................... 550 0.19 1,373 0.49 2,755 1.30
Loans secured by deposit accounts.... 1,821 0.62 1,590 0.57 1,117 0.53
Other (2) 15,735 5.38 12,120 4.31 6,312 2.97
-------- ------- -------- ------ -------- ------
Total consumer loans.......... 65,651 22.45 65,545 23.33 60,247 28.39
-------- ------- -------- ------ -------- ------
Total loans receivable.. 292,433 100.00% 281,040 100.00% 212,186 100.00%
====== ====== ======
Less:
Loans in process..................... 1 36 37
Unearned discounts, net.............. 2,058 2,648 3,429
Deferred loan fees................... 274 205 105
Allowance for loan losses............ 2,258 2,419 2,232
Purchase accounting discounts........ 192 245 309
-------- -------- --------
Total loans receivable, net... $287,650 $275,487 $206,074
======== ======== ========
</TABLE>
- ----------------
(1) Includes home equity lines of credit of $2.0 million, $1.6 million and $1.8
million at September 30, 1997, 1996, and 1995, respectively.
(2) Includes personal loans and creditline checking.
<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, 1997,
the Bank had $200.6 million, or 68.60%, 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. 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.
However, in fiscal year 1996, the Bank experienced relatively low delinquency
rates on purchased loans. At September 30, 1997 and 1996, purchased loan
delinquencies totaled $408,000 and $238,000, respectively, and represented 0.8%
and 0.3% of purchased loans outstanding, respectively. The delinquency rate on
loans originated by the Bank at September 30, 1997 and 1996 was 0.5% and 0.9%,
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 and service loans
for the Federal National Mortgage Association ("FNMA"). During fiscal year 1997,
the Bank sold $1.7 million in loans to FNMA. 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, every
three years 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 $149.8 million,
or 74.7%, of the Bank's total one- to four-family residential real estate loans
at September 30, 1997. 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
<PAGE>
rates increase, 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
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, 1997, the Bank originated $9.1 million of fixed-rate
residential and multi-family mortgage loans and $25.5 million of ARM loans.
During fiscal years 1996 and 1995, the Bank originated $11.1 million and $1.7
million of fixed-rate residential and multi-family mortgage loans and $15.9
million and $13.4 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 do 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 (the
"Guidelines"). The Guidelines set forth, pursuant to the mandates of the Federal
Deposit Insurance Corporation Improvement Act of 1991, 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 LTV ratio of 100% for residential property and 90% for all
other real estate loans. The Bank's lending policies, however, generally limit
the maximum LTV 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 of 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 service 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 LTV
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.
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, 1997, $15.2 million, or 5.21%, of the Bank's loan
portfolio consisted of commercial real estate loans and $3.1 million, or 1.05%,
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 LTV ratio
for commercial real estate loans originated or purchased by the Bank is 80%. At
<PAGE>
September 30, 1997, approximately 93.1% 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 $1.0 million. At September 30, 1997, the
largest multi-family residential real estate loan had a principal balance of
$405,000 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 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 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 and one mobile home
dealership for the purpose of allowing dealerships to finance their inventory.
The Bank secures the automobile dealership loans by perfecting a security
interest in the dealership's used motor vehicles. At September 30, 1997, the
Bank had four automobile dealership floor plan loans, the largest of which had
an outstanding principal balance of $675,000 and one mobile home dealership
floor plan loan, which had an outstanding balance of $232,000. 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 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 $7.9 million, or 2.69%, of the Bank's total loans receivable at
September 30, 1997. At that date, the Bank's largest commercial business loan
other than the largest automobile dealership floor plan loan had a principal
balance of $669,000, and was secured primarily by equipment and fixtures.
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
<PAGE>
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, 1997, consumer loans totaled $65.7
million, or 22.45%, of the Bank's total loans receivable. The principal types of
consumer loans offered by the Bank are automobile loans, personal loans,
creditline checking and loans secured by deposit accounts. 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, 1997, consumer loans secured by automobiles totaled $47.3 million,
or 16.16%, 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, 1997, consumer loans 90 days or more
delinquent totaled $289,000, 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.
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 source. 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.
<PAGE>
Loan Maturity Schedule. The following table sets forth certain
information at September 30, 1997 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 Through Through Through Beyond
1 Year 3 Years 5 Years 10 20 Years 20 Years Total
------- ------- ------- ------- ------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
1-4 family .......... $ 3,661 $ 2,250 $ 6,191 $27,915 $72,997 $87,596 $200,610
Multi-family ........ -- 65 405 231 1,120 1,233 3,054
Commercial ................. 403 222 230 4,114 9,299 969 15,237
Commercial business loans ..... 3,473 1,009 931 1,399 1,069 -- 7,881
Consumer loans ................ 7,854 22,082 30,644 4,733 275 63 65,651
------- ------- ------- ------- ------- ------- --------
Total loans
receivable .......... $15,391 $25,628 $38,401 $38,392 $84,760 $89,861 $292,433
======= ======= ======= ======= ======= ======= ========
Mortgage-backed securities, net $ -- $ 641 $ -- $ 92 $ 5,325 $ 8,548 $ 14,606
======= ======= ======= ======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans and
mortgage-backed securities at September 30, 1997, which have predetermined
interest rates and have floating or adjustable interest rates which are due
after September 30, 1998.
<TABLE>
<CAPTION>
Floating or
Fixed Rate Adjustable Total
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
Residential:
1-4 family..................................... $ 47,241 $149,708 $196,949
Multi-family................................... 373 2,681 3,054
Commercial....................................... 2,010 12,824 14,834
Commercial business loans........................ 2,225 2,183 4,408
Consumer loans................................... 57,797 --- 57,797
-------- -------- --------
Total loans receivable....................... $109,646 $167,396 $277,042
======== ======== ========
Mortgage-backed securities, net.................. $9,262 $5,344 $14,606
======= ====== =======
</TABLE>
<PAGE>
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.
Residential real estate loans with principal balances of $125,000 or less may be
approved by either (i) one 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,
----------------------------------------
1997 1996 1995
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Loans receivable, net at beginning of year ............... $ 275,487 $ 206,074 $ 178,058
--------- --------- ---------
Originations:
Real Estate:
Residential(1) ........................... 34,577 26,987 15,070
Commercial ............................... 3,893 3,149 1,560
Commercial business loans(2) ................... 23,426 18,806 15,090
Consumer ....................................... 42,424 40,336 35,338
--------- --------- ---------
Total originations ....................... 104,320 89,278 67,058
Loans purchased .......................................... 907 37,363 28,213
Loans acquired from:
Community Savings Bank ......................... -- 45,442 --
Home Federal Savings Bank ...................... 21,388 -- --
Repayments ............................................... (112,698) (102,481) (67,037)
Loans sold ............................................... (2,631) (1,549) (1,723)
Increase (decrease) in other items, net .................. 877 1,360 1,505
--------- --------- ---------
Total loans receivable, net at end of year $ 287,650 $ 275,487 $ 206,074
========= ========= =========
</TABLE>
- ---------------
(1) Includes advances on equity lines of credit of $5.3 million, $5.2 million
and $3.1 million for September 30, 1997, 1996, and 1995, respectively.
(2) Includes advances on non-mortgage commercial lines of credit of $18.5
million, $15.6 million and $13.8 million for September 30, 1997, 1996 and
1995, respectively.
<PAGE>
Mortgage-Backed Securities
Set forth below is a table showing the Company's purchases, sales and
repayments of mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------
1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities, net at beginning of year ......... $ 16,632 $ 16,670 $ 16,071
Purchases .......................................... 1,998 3,096 2,543
Mortgage-backed securities acquired from:
Community Savings Bank ....................... -- 1,296 --
Home Federal Savings Bank .................... 1,834 -- --
Sales ........................................................ (1,759) (64) --
Repayments ................................................... (4,238) (4,225) (2,443)
Discount (premium) amortization .............................. (22) (38) (119)
Unrealized gain/(loss) on mortgage-backed securities available
for sale ................................................... 161 (103) 618
-------- -------- --------
Mortgage-backed securities, net at end of year ..... $ 14,606 $ 16,632 $ 16,670
======== ======== ========
</TABLE>
From time to time the Bank purchases real estate mortgage loans in
order to supplement loan originations. During the fiscal year ended September
30, 1997, the Bank purchased $907,000 in loans. At September 30, 1997, purchased
loans totalled $52.1 million and comprised 17.8% of total loans receivable. At
September 30, 1997, $9.0 million of purchased loans were secured by properties
located within the State of Illinois and $43.1 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, 1997,
the Bank had $274,000 of net deferred loan fees. The Bank offered loans with and
without fees during the fiscal year ended September 30, 1997. 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
$579,000, $391,000 and $241,000 for the years ended September 30, 1997, 1996,
and 1995, 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, 1997, 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 $1.8 million.
<PAGE>
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 $14.6 million
at September 30, 1997. Included in this amount are $641,000 of mortgage-backed
securities with remaining terms of five years or less. Total mortgage-backed
securities consisted of $9.3 million of fixed rate mortgage-backed securities
and $5.3 million of adjustable-rate mortgage-backed securities.
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,
-------------------------------------------------------------------
1997 1996 1995
------------------ ------------------- --------------------
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 ............................... $ 5,023 33.99% $ 5,693 34.23% $ 4,052 24.31%
Fixed .................................... 8,381 57.78 9,424 56.66 12,203 73.20
------- ------ ------- ------ ------- ------
Total mortgage-backed securities
available for sale ................. 13,404 91.77 15,117 90.89 16,255 97.51
------- ------ ------- ------ ------- ------
Held to maturity (at cost):
Adjustable ............................... 321 2.20 368 2.21 415 2.49
Fixed .................................... 881 6.03 1,147 6.90 --
----- ------- ------ ------- ------
Total mortgage-backed securities
held to maturity ................... 1,202 8.23 1,515 9.11 415 2.49
------- ------ ------- ------ ------- ------
Total mortgage-backed securities,
net .......................... $14,606 100.00% $16,632 100.00% $16,670 100.00%
======= ====== ======= ====== ======= ======
</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, 1997, the percentage of loans receivable delinquent 90 days or more to total
loans receivable, net, was 0.52%.
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 1997, non-performing loans as a percentage of total
loans receivable, net, decreased from 0.78% as of September 30, 1996 to 0.52% as
of September 30, 1997.
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, 1997, 1996 and 1995, the Bank owned
approximately $670,000, $428,000 and $140,000, 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
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
<PAGE>
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, 1997, the Bank's classified assets totaled $1.8
million, of which $1.4 million were classified substandard and $359,000 were
classified loss. Specific reserves have been made for the assets or portions
thereof which are classified as loss. At September 30, 1997, the Bank had no
assets classified as special mention.
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,
--------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ---- ---- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Residential real estate ....... $ 827 $1,069 $544 $290 $2,023
Commercial real estate ........ 381 850 -- 16 32
Consumer ...................... 289 243 119 97 150
Commercial business ........... -- -- -- -- --
------ ------ ---- ---- ------
Total nonperforming loans .. 1,497 2,162 663 403 2,205
Total real estate acquired through
foreclosure (1) ............ 670 428 140 210 241
------ ------ ---- ---- ------
Total nonperforming assets . $ 2,167 $2,590 $803 $613 $2,446
====== ====== ==== ==== ======
Total nonperforming loans
to loans receivable, net ...... 0.52% 0.78% 0.32% 0.23% 1.40%
====== ====== ==== ==== ======
Total nonperforming loans
to total assets ............... 0.39% 0.56% 0.23% 0.15% 0.85%
====== ====== ==== ==== ======
Total nonperforming assets
to total assets .............. 0.56% 0.67% 0.27% 0.24% 0.94%
====== ====== ==== ==== ======
</TABLE>
(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.
<PAGE>
At September 30, 1997, the Bank's largest nonperforming loan had a
principal balance of $381,000 and was secured by commercial real estate. At
September 30, 1997, the Bank's largest property constituting real estate owned
by the Bank had a book value of $110,000. During the year ended September 30,
1997, the Bank would have recorded $49,000 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, 1997, the Bank
did not record any interest income attributable to such non-accrual loans.
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, 1997, 1996 and 1995, the Bank
provided $321,000, $170,000 and $360,000, respectively, to the allowance for
loan losses. The Bank's allowance for loan losses totaled $2.3 million, $2.4
million and $2.2 million at September 30, 1997, 1996 and 1995, respectively. The
provisions for loan losses in recent years reflect 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 1997 was necessary to maintain loan loss
reserves adequate to absorb potential losses based on management's current
estimate of the value of underlying collateral. 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. 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.
<PAGE>
Analysis of the Allowance For Loan Losses. The following table sets
forth 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.
<TABLE>
<CAPTION>
At September 30
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding ................. $292,433 $281,040 $212,186 $184,829 $163,365
======== ======== ======== ======== ========
Average loans receivable, net ........... 285,700 230,765 188,897 168,391 144,923
outstanding
Allowance balance (at beginning of year) $ 2,419 $ 2,232 $ 2,129 $ 2,207 $ 1,315
Provision for loan losses ............... 321 170 360 140 1,003
Reserves acquired from:
Community Savings Bank .............. -- 265 -- -- --
Home Federal Savings Bank ........... 190 -- -- -- --
Charge-offs:
Residential real estate ............. 87 13 57 116 30
Commercial real estate .............. 42 -- -- -- --
Consumer ............................ 555 409 293 160 139
Commercial business ................. 145 -- -- -- --
-------- -------- -------- -------- --------
Total charge-offs ................. 829 422 350 276 169
-------- -------- -------- -------- --------
Recoveries:
Residential real estate ............. 9 -- 1 6 21
Consumer ............................ 148 174 92 52 37
- ----------------------------------------- -------- -------- -------- -------- --------
Total recoveries .................. 157 174 93 58 58
-------- -------- -------- -------- --------
Allowance balance (at end of year) ...... $ 2,258 $ 2,419 $ 2,232 $ 2,129 $ 2,207
======== ======== ======== ======== ========
Allowance for loan losses as a percent
of totalloans outstanding at end of year 0.77% 0.86% 1.05% 1.15% 1.35%
======== ======== ======== ======== ========
Net loans charged off as a percent of
average loans receivable, net .......... 0.24% 0.11% 0.14% 0.13% 0.08%
======== ======== ======== ======== ========
Ratio of allowance for loan losses to
total nonperforming loans at end of year 150.79% 111.89% 336.65% 528.29% 100.09%
======== ======== ======== ======== ========
</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,
---------------------------------------------------------------------------
1997 1996 1995
% 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 ............. $ 528 69.65 $ 557 69.40% $ 723 64.15%
Commercial real estate .............. 390 5.21 544 4.51 152 4.33
Consumer ............................ 1,160 22.45 1,148 23.33 1,120 28.39
Commercial business ................. 180 2.69 170 2.76 187 3.13
Credit enhancement .................. -- -- 50 --
------ ------ ------ ------ ------ ------
Total allowance for loan losses . $2,258 100.00% $2,419 100.00% $2,232 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Investment Activities
The Bank's investment portfolio consists primarily of obligations of
the United States Government and agencies thereof, collateralized mortgage
obligations, mutual funds, municipal bonds, corporate debentures and FHLB stock.
The Bank's portfolio of investment securities totaled $59.2 million at September
30, 1997. The Bank's holdings of FHLB stock totaled $2.6 million at September
30, 1997. The Bank's total investment in interest-bearing deposits was $5.0
million at September 30, 1997. Total investment securities at September 30, 1997
were $58.9 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 fiscal year ended 1997
was 5.36%, which was adequate to meet its normal business activities.
<PAGE>
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, 1997, the market value of
the Bank's investment securities was approximately $59.3 million. At September
30, 1997 the market value of the FHLB stock and interest-bearing deposits was
approximately equal to the book value of such investments.
<TABLE>
<CAPTION>
At September 30,
-------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Investment securities:
Available for sale (at market value):
U.S. Government and agencies .......................... $37,831 $43,794 $23,281
Corporate debentures .................................. 2,100 2,116 --
Collateralized mortgage obligations ................... 5,581 6,157 --
Municipal bonds ....................................... 1,266 -- --
Equity securities-mutual funds ........................ 6,644 6,546 6,167
------- ------- -------
Total investment securities available for sale 53,422 58,613 29,448
------- ------- -------
Held to maturity (at cost):
U.S. Government and agencies .......................... -- 1,000 5,000
Corporate debentures .................................. 1,002 3,275 7,632
Collateralized mortgage obligations ................... 1,936 2,335 8,948
Municipal bonds ....................................... 2,854 2,250 1,756
Equity securities - mutual funds ...................... -- -- --
------- ------- -------
Total investment securities held to maturity . 5,792 8,860 23,336
------- ------- -------
Total investment securities ......... 59,214 67,473 52,784
Interest-bearing deposits ...................................... 4,954 7,476 5,250
FHLB stock, at cost ............................................ 2,600 3,050 2,140
------- ------- -------
Total investments .................. $66,768 $77,999 $60,174
======= ======= =======
</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, 1997.
Equity securities consisting of $6.6 million invested in mutual funds have been
excluded since such instruments have no stated maturity.
<TABLE>
<CAPTION>
At September 30, 1997
-----------------------------------------------------------------------------------------
More Than
One Year or Less One to Five Years Five to Ten Years Ten Years
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Available for sale:
U.S. Government and agencies ...... $3,405 6.70% $21,510 6.32% $8,717 7.26% $ 4,199 7.76%
Corporate debentures .............. -- -- 2,100 6.12 -- -- -- --
Collateral mortgage obligations ... -- -- -- -- 454 5.35 5,127 5.71
Municipal bonds ................... -- -- -- -- -- -- 1,266 5.24
Held to maturity:
U.S. Government and agencies ...... -- -- -- -- -- -- -- --
Corporate debentures .............. 1,002 6.00 -- -- -- -- -- --
Collateralized mortgage obligations -- -- -- -- -- -- 1,936 5.86
Municipal bonds ................... 324 5.04 1,151 4.81 150 6.10 1,229 5.62
------ ---- ------- ---- ------ ---- ------- ----
Total investment securities ..... $4,731 6.45% $24,761 6.23% $9,321 7.15% $13,757 6.28%
====== ==== ======= ==== ====== ==== ======= ====
</TABLE>
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
<PAGE>
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.
The following table sets forth the net change in deposits of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
At September 30,
1997 1996 1995
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Deposits .............................. $ 859,231 $ 658,951 $ 672,364
Deposits acquired, net of premium ..... 23,820 49,724 19,795
Withdrawals ........................... (864,404) (663,674) (690,467)
--------- --------- ---------
Net increase before interest credited 18,647 45,001 1,692
Interest credited ..................... 8,610 6,619 5,464
--------- --------- ---------
Net increase in deposits ............ $ 27,257 $ 51,620 $ 7,156
========= ========= =========
</TABLE>
<PAGE>
Deposit Portfolio. Deposits in the Bank as of September 30, 1997 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 $ 13,382 4.85%
2.69 None Interest-bearing checking 100 28,876 10.46
3.84 None Money market demand 100 18,159 6.58
2.78 None Savings accounts 100 24,457 8.86
4.76 None Savings accounts 5,000 17,120 6.21
-------- -------
101,994 36.96
-------- -------
Certificates of Deposit
4.43 3 months Fixed term, fixed rate 500 100 0.04
4.33 91 days Fixed term, fixed rate 500 1,111 0.40
5.16 6 months Fixed term, fixed rate 500 19,693 7.14
5.77 9 months Fixed term, fixed rate 500 13,994 5.07
5.35 1 year Fixed term, fixed rate 500 25,395 9.20
5.59 15 months Fixed term, fixed rate 500 4,063 1.47
5.47 11/2years Fixed term, fixed rate 500 8,312 3.01
6.01 21 months Fixed term, fixed rate 500 18,717 6.78
5.52 2 years Fixed term, fixed rate 500 7,429 2.69
5.00 2 years Fixed term, adj. rate (1) 1,000 120 0.04
5.74 21/2years Fixed term, fixed rate 500 20,965 7.60
5.80 21/2years Fixed term, fixed rate (2) 2,500 12,058 4.37
5.62 25 months Fixed term, fixed rate (3) 5,000 2,501 0.91
5.78 3 years Fixed term, fixed rate 500 6,628 2.40
5.53 4 years Fixed term, fixed rate 500 5,190 1.88
6.22 5 to 10 years Fixed term, fixed rate (3) --- 4,010 1.45
5.79 Various IRA/QRP 50-100 17,085 6.19
6.02 Various Negotiated Jumbo 100,000 6,615 2.40
-------- ------
173,986 63.04
-------- -------
Total $275,980 100.00%
======== ======
</TABLE>
(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.
<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 at Increase Balance % Increase Balance %
9/30/97 % Deposits (Decrease) at 9/30/96 Deposits (Decrease) (Decrease) Deposits
------- ---------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits: $ 13,382 4.85% $ 3,586 $ 9,796 3.94% $ 2,158 $ 7,638 3.87%
Noninterest-bearing
checking
Interest-bearing .. 28,876 10.46 2,863 26,013 10.46 (377) 26,390 13.39
checking
Money market demand 18,159 6.58 710 17,449 7.01 226 17,223 8.74
Savings accounts .. 41,577 15.07 5,882 35,695 14.35 9,006 26,689 13.54
-------- ------ ------- -------- ------ -------- -------- ------
Total demand
deposits ............ 101,994 36.96 13,041 88,953 35.76 11,013 77,940 39.54
-------- ------ ------- -------- ------ -------- -------- ------
Certificates of
deposit which
mature in the
period ending: (1)
Within 1 year ..... 112,180 40.65 2,377 109,803 44.15 36,685 73,118 37.10
Within 3 years .... 60,305 21.85 16,488 43,817 17.62 (537) 44,354 22.50
Over 3 years ...... 1,501 0.54 (4,649) 6,150 2.47 4,459 1,691 0.86
-------- ------ ------- -------- ------ -------- -------- ------
Total certificates of
deposits ............ 173,986 63.04 14,216 159,770 64.24 40,607 119,163 60.46
-------- ------ ------- -------- ------ -------- -------- ------
Total deposits $275,980 100.00% $ 27,257 $248,723 100.00% $ 51,620 $197,103 100.00%
======== ====== ======== ======== ====== ======== ======== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance
Increase at %
(Decrease) 9/30/94 Deposits
---------- ------- --------
<S> <C> <C> <C>
Demand Deposits: $ (488) $ 8,126 4.28%
Noninterest-bearing
checking
Interest-bearing .. 925 25,465 13.41
checking
Money market demand (3,641) 20,864 10.98
Savings accounts .. (1,611) 28,300 14.90
-------- -------- ------
Total demand
deposits ............ (4,815) 82,755 43.57
-------- -------- ------
Certificates of
deposit which
mature in the
period ending: (1)
Within 1 year ..... 2,231 70,887 37.32
Within 3 years .... 9,988 34,366 18.09
Over 3 years ...... (248) 1,939 1.02
-------- -------- ------
Total certificates of
deposits ............ 11,971 107,192 56.43
-------- -------- ------
Total deposits $ 7,156 $189,947 100.00%
======== ======== ======
</TABLE>
(1) During the year ended September 30, 1994, $1.8 million of certificates of
deposit were converted into reverse repurchase agreements and therefore are not
reflected in the 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,
------------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Less than 3.00% ............. $ 14 $ 26 $ 24
3.00 - 4.99% ................ 3,111 14,827 42,104
5.00 - 6.99% ................ 169,123 141,335 73,668
7.00 - 8.99% ................ 1,325 3,086 2,704
9.00 - 10.99% ............... 413 496 663
-------- -------- --------
$173,986 $159,770 $119,163
======== ======== ========
</TABLE>
Certificate of Deposit Maturity Schedule. The following table sets
forth the balances and maturities of certificates of deposit in the Bank at
September 30,1997.
<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% . $ -- $ -- $ 14 $ -- $ 14
3.00 - 4.99% ... 2,550 519 -- 42 3,111
5.00 - 6.99% ... 108,649 46,148 12,904 1,422 169,123
7.00 - 8.99% ... 568 -- 720 37 1,325
9.00 - 10.99% .. 413 -- -- -- 413
-------- ------- ------- -------- --------
$112,180 $46,667 $13,638 $ 1,501 $173,986
</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, 1997.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposit
--------------- -----------------------
(In Thousands)
<S> <C>
Three months or less....................... $ 2,516
Three through six months................... 5,858
Six through twelve months.................. 3,782
Over twelve months......................... 5,380
---------
Total.................................. $ 17,536
=========
</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, 1997, the Bank had $37.0
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, 1997, the
Bank had reverse repurchase agreements totalling $13.3 million.
The following table sets forth certain information regarding borrowings
by the Bank at the end of and during the periods indicated.
<TABLE>
<CAPTION>
For the years ended September 30,
--------------------------------------------------------
1997 1996 1995
------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Weighted average rate paid on: (1)
Reverse repurchase agreements............. 5.40% 5.48% 5.64%
FHLB advances............................. 5.89 5.33 5.51
ESOP borrowings........................... 8.00 8.35 8.60
Reverse repurchase agreements:
Maximum balance........................... $13,345 $14,782 $15,406
Average balance........................... 13,320 13,510 14,242
FHLB advances:
Maximum balance........................... 56,491 60,996 42,800
Average balance........................... 44,455 34,303 33,607
ESOP borrowings:
Maximum balance........................... 576 844 1,152
Average balance........................... 112 751 1,033
</TABLE>
(1) Calculated using the daily weighted average interest rates.
<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, 1997, the Bank had a $939,000 equity investment in
Sparta First. For the year ended September 30, 1997 Sparta First had net income
of $135,000.
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 Savings Association
Insurance Fund ("SAIF") of the FDIC. The Bank is subject to extensive regulation
by the Illinois Commissioner of Banks and Real Estate (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 with various regulatory requirements. The Bank is also subject to
certain reserve requirements established by the Board of Governors of the
<PAGE>
Federal Reserve System (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 Company and the Bank. The
Company, as a savings and loan holding company, is also 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 CAMELS 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,
1997, the Bank's ratio of core capital to total adjusted assets was 12.10%,
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, 1997, the Bank's risk-based capital to total
assets ratio was 22.16% 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, 1997.
<TABLE>
<CAPTION>
At September 30, 1997
-------------------------
Percent of
Amount Assets
------- -----
(Dollars in Thousands)
<S> <C> <C>
Tier 1 (core) Capital Leverage Ratio:
Actual level .................................. $46,800 12.10%
Required level ................................ 11,606 3.00
------- -----
Excess ........................................ $35,194 9.10%
======= =====
Tier 1 Risk-based Capital Ratio:
Actual level .................................. $46,800 21.30%
Required level ................................ 8,791 4.00
------- -----
Excess ........................................ $38,011 17.30%
======= =====
Tier 2 Risk-based Capital Ratio:
Actual level .................................. $48,699 22.16%
Required level ................................ 17,579 8.00
------- -----
Excess ........................................ $31,120 14.16%
======= =====
</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.
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.
Under Illinois law, savings banks are required to maintain a minimum
total 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 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
<PAGE>
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, 1997, the Bank's core capital ratio was 12.10% 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, 1997, 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 by any savings bank
having total capital of less than 6% of total assets before any dividends
exceeding 50% of the savings bank's profits for any calendar year may be
declared. A stock dividend may be declared out of retained earnings at any time.
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.
<PAGE>
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 may 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. 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, 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.
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 United States 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
<PAGE>
order to pose a serious risk to the SAIF or the Bank Insurance Fund (the "BIF").
The FDIC also has the authority to initiate enforcement actions against
institutions, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
On September 30, 1996, federal legislation was enacted that required
the SAIF to be recapitalized with a one-time assessment on virtually all
SAIF-insured institutions, including the Savings Bank, equal to 65.7 basis
points on SAIF-insured deposits maintained by those institutions as of March 31,
1995. The SAIF special assessment applicable to the Bank, which was accrued in
fiscal year 1996 and paid to the FDIC in November 1996, was approximately $1.5
million.
As a result of the SAIF recapitalization, the FDIC reduced the
insurance premiums for SAIF-insured deposits to a range of 0 to 27 basis points
per $100 of domestic deposits, effective January 1, 1997. The Bank qualifies for
the minimum SAIF assessment. All SAIF-insured institutions are required to pay
an assessment for the repayment of interest on obligations issued by a federally
chartered corporation to provide financing ("FICO") for resolving the thrift
crisis in the 1980s, in an amount equal to 6.48 basis points for each $100 in
domestic deposits. As a result of the recent legislation discussed above,
BIF-insured institutions are also required to pay an assessment for the
repayment of interest on the FICO bonds, in an amount equal to 1.52 basis points
for each $100 in domestic deposits. The assessment on SAIF-insured institutions
is expected to be reduced to 2.43 basis points for each $100 in domestic
deposits no later than January 1, 2000, by which point BIF-insured institutions
will participate fully in the FICO bond interest repayment. These assessments,
which may be revised based upon the level of BIF and SAIF deposits, will
continue until the bonds mature in 2017.
Federal Holding Company Regulation. The Company is a non-diversified
savings and loan holding company within the meaning of the Home Owners' Loan
Act, as amended. As such, the Company is registered with the OTS and is subject
<PAGE>
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 Qualified Thrift
Lender ("QTL"). See "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.
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.
<PAGE>
Qualified Thrift Lender Test. The QTL test requires an institution to
have at least 65% of its portfolio assets (as defined by regulation) in
qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the institution may maintain 60%
of its assets in those assets specified in Section 7701(a)(19) of the Internal
Revenue Code of 1986, as amended (the "Code"). Under either standard, the
required assets primarily consist of residential housing related loans and
investments. If the Bank fails to meet the QTL test, the Company will lose its
status as unitary savings and loan holding company and its business activities
will be limited to those permissible for a bank holding company. At September
30, 1997, the Savings Bank met the QTL test and has always met such test since
its effectiveness.
Federal and State Taxation
Federal Taxation. Prior to the enactment of recent legislation
(discussed below), savings institutions such as the Bank that met certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Code, had been permitted to establish reserves for bad debts
and to make annual additions thereto which could, within specified formula
limits, be taken as a deduction in computing taxable income for federal income
tax purposes. The amount of the bad debt reserve deduction for "non-qualifying
loans" was computed under the experience method. The amount of the bad debt
reserve deduction for "qualifying real property loans" (generally loans secured
by improved real estate) could be computed under either the experience method or
the percentage of taxable income method (based on an annual election).
In August 1996, legislation was enacted that repeals the reserve method
of accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes. As a result, small thrifts such as the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the experience method for post-1987 tax years. The legislation
also requires thrifts to account for bad debts for federal income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of which
will be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Bank does not believe that the legislation will have a
material impact on the Bank.
In addition to the regular income tax, corporations, including savings
institutions such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings institutions such as
the Bank, were also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
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.
<PAGE>
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.
Personnel
As of September 30, 1997, the Bank and its subsidiary had a total of 93
full-time and 22 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.
Executive Officers Who Are Not Directors
The following is a description of the executive officer of the Company
who is not also a director of the Company.
Karen P. Jacobus. Ms. Jacobus, age 38, has served as Controller of the
Bank since 1984. In 1994, Ms. Jacobus was also appointed Vice President of the
Bank. Ms. Jacobus was appointed Assistant Controller in 1982 and served in such
capacity until her promotion to Controller in 1984. Ms. Jacobus joined the Bank
in 1977.
<PAGE>
ITEM 2. Properties
The Bank conducts its business through its main office located in
Sparta, Illinois and seven branch offices. The following table sets forth
certain information concerning the main office and each branch office of the
Bank at September 30, 1997. At September 30, 1997, the Bank's premises and
equipment had an aggregate net book value of approximately $5.9 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.
Year Book Value at
Location Occupied September 30, 1997
- -------- -------- ------------------
Main Office.......................... 1958 $ 660,747
114 West Broadway
Sparta, Illinois 62286
Branch Office........................ 1988 $ 37,982
358 South Main
Anna, Illinois 62906
Branch Office........................ 1983 $ 590,347
500 West Main
Carbondale, Illinois 62901
Branch Office........................ 1995 $ 413,552
Southtown Shopping Center
DuQuoin, Illinois 62832
Branch Office........................ 1978 $ 428,759
1101 Walnut
Murphysboro, Illinois 62966
Branch Office........................ 1991 $ 313,281
424 West Broadway
Steeleville, Illinois 62288
Branch Office........................ 1996 $1,535,822
1706 West DeYoung Street
Marion, Illinois 62959
Branch Office........................ 1997(1) $ 143,597
635 East Walnut
Carbondale, Illinois 62901
- ------------------
(1) Acquired in January 1997
<PAGE>
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.
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 1997
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 1997 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 1997 Annual Report to Stockholders
is incorporated herein by reference. No other sections of such Annual Report are
incorporated herein by this reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item contained in the 1997 Annual
Report to Stockholders is incorporated herein by 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 1997 Annual Report to Stockholders are
incorporated herein by reference.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Directors. Information concerning the Directors of the Registrant is
incorporated herein by reference from the Registrant's definitive Proxy
Statement dated December 10, 1997 (the "Proxy Statement").
Executive Officers. Information concerning the Executive Officers of
the Registrant who are not also Directors of the Registrant is contained in Part
I of this Form 10-K under the caption "Executive Officers Who Are Not
Directors."
Section 16(a) Beneficial Ownership Reporting Compliance. Information
concerning compliance with the reporting requirements of Section 16(a) of the
Exchange Act is incorporated herein by reference from the Section captioned
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
ITEM 11. Executive Compensation
Information concerning the Executive Compensation of the Registrant is
incorporated herein by reference from the 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" in the Proxy Statement.
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" in the Proxy Statement.
<PAGE>
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 1997 Annual
Report is incorporated by reference as Exhibit 13 to this Annual Report on Form
10-K.
Page in
Annual
Annual Report Sections Report
---------------------- ------
Independent Auditors Report......................................... 18
Consolidated Balance Sheets as of September 30, 1997 and 1996....... 19
Consolidated Statements of Income for the years ended
September 30, 1997, 1996 and 1995................................... 20
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1997, 1996 and 1995............................. 21
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995................................... 23
Notes to Consolidated Financial Statements.......................... 24
(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.
(a)(3) Exhibits
Reference to Prior
Filing or Exhibit
Regulation S-K Number Attached
Exhibit Number Document Hereto
-------------- -------- ------
2 Plan of acquisition, (1)
reorganization, arrangement,
liquidation or succession
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
4 Instruments defining the (1)
rights of security holders,
including debentures
<PAGE>
9 Voting trust agreement None
10.1 Employment Agreement between (1)
the Bank and John A. Becker,
President and Chief Executive
Officer
10.2 Employment Agreement between 10.2
the Bank and Michael R. Howell,
Executive Vice President and
Treasurer
10.3 Employment Agreement between 10.3
the Bank and Linda M. Johnson,
Senior Vice President and Secretary
10.4 Net Worth Maintenance Agreement (1)
10.5 Employee Severance Compensation (1)
Plan
10.6 1993 Incentive Stock Option Plan (1)
10.7 1993 Stock Option Plan for (1)
Outside Directors
10.8 Management Recognition and (1)
Retention Plan and Trust
10.9 Recognition and Retention Plan (1)
and Trust for Outside Directors
10.10 Supplemental Executive Retirement (1)
Plan
10.11 1997 Stock Option Plan (2)
10.12 1997 Recognition and Retention Plan (2)
11 Statement re: computation Not
of per share earnings Required
12 Statement re: computation Not
of ratios Required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying None
accountants
18 Letter re: change in accounting None
principles
21 Subsidiaries of Registrant 21
<PAGE>
22 Published report regarding None
matters submitted to vote of
security holders
23 Consent of Experts 23
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional Exhibits None
(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.
(2) Filed as an appendix to the Registrant's Definitive Proxy Statement on
Schedule 14A filed with the SEC on December 10, 1996. Such previously
filed document is hereby incorporated by reference in accordance with
Item 601 of Regulation S-K.
(b) Reports on Form 8-K
The Registrant did not file any Current Reports on Form 8-K during the
quarter ended September 30, 1997.
<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 29, 1997 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, President, Chief Executive Michael R. Howell, Executive Vice President,
Officer and Chairman of the Board Treasurer and Director
(Principal Executive Officer) (Principal Financial Officer)
Date:December 29, 1997 Date: December 29, 1997
By: /S/ Karen P. Jacobus By: /S/ James Clutts
-------------------- ----------------
Karen P. Jacobus, Vice President and Controller James Clutts, Director
(Principal Accounting Officer)
Date:December 29, 1997 Date: December 29, 1997
By: /S/ Carl S. Schlageter By: /S/ Linda M. Johnson
---------------------- --------------------
Carl S. Schlageter, Director Linda M. Johnson, Senior Vice President and Director
Date:December 29, 1997 Date: December 29, 1997
By: /S/ William A. Norton By: /S/ John Petkas, Jr.
--------------------- --------------------
William A. Norton, Director John Petkas, Jr., Director
Date:December 29, 1997 Date: December 29, 1997
<PAGE>
<CAPTION>
<S> <C>
By: /S/ Klondis T. Pirtle By: /S/ Dennis F. Doelitzch
--------------------- -----------------------
Klondis T. Pirtle, Director Dennis F. Doelitzch, Director
Date:December 29, 1997 Date: December 29, 1997
By: /S/ Ralph Eugene Watson By: /S/ Truman D. Cashman
----------------------- ---------------------
Ralph Eugene Watson, Director Truman D. Cashman, Director
Date:December 29, 1997 Date: December 29, 1997
</TABLE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT OF MICHAEL R. HOWELL
<PAGE>
CHARTER BANK, S.B.
EMPLOYMENT AGREEMENT
This Agreement is made effective as of April 17, 1997 by and between
Charter Bank, S.B. (the "Bank"), an Illinois-chartered savings bank with its
principal administrative office at 114 West Broadway, Sparta, Illinois, and
Michael R. Howell (the "Executive"). Any reference to "Holding Company" herein
shall mean Charter Financial, Inc. 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 and of Charter
Financial, Inc. During said period, Executive may, in his discretion, agree to
serve, if elected, as an officer and director of any subsidiary or affiliate of
the Bank, with appropriate adjustments to the compensation specified in Section
3(a). Failure to reelect Executive as Executive Vice President and Treasurer
without the consent of the Executive during the term of this Agreement shall
constitute a breach of this Agreement.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. 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 twenty (20) days prior to any
such anniversary date, that his employment shall cease at the end of twenty-four
(24) months following such anniversary date. Prior to each notice period for
non-renewal, the Board of Directors of the Bank ("Board") will conduct a formal
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.
(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, companies or 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.
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 $100,327.68 per
year ("Base Salary"). Such Base Salary shall be payable on the 15th and last day
of each 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 15, 1997. Such review shall be conducted by a Committee designated
by the Board, and the Board may increase Executive's Base Salary. 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 substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the forgoing provisions of this
Subsection (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-andaccident plan, medical coverage or any other employee benefit plan or
arrangement made available by the Bank m 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. 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 paragraph (a) of
this Section 3, 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, including annual bonuses, and such amounts as the Board may from time
to time determine.
(d) Compensation and reimbursement to be paid pursuant to paragraphs
(a), (b) and (c) of this Section 3 shall be paid by the Bank and the Holding
Company, respectively on a pro rata basis based upon the amount of service the
Executive devotes to the Bank and Holding Company, respectively.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Sections 7 and 15.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive' s term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and included any one or more of the following: (i) the
termination by the Bank or the Holding Company of Executive's full-time
employment hereunder for any reason other than a Change in Control, as defined
in Section 5(a) hereof, or 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 Vice President and
Treasurer, (B) material change in Executive's function duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section I, above (and any such material change shall be
deemed a continuing breach of this Agreement), (C) a relocation of Executive's
principal place of employment by more than 30 miles from its location at the
effective date of this Agreement, or a material reduction in the benefits and
perquisites to the Executive from those being provided as of the effective date
of this Agreement, (D) liquidation or dissolution of the Bank or Holding
Company, or (E) breach of this Agreement by the Bank. Upon the occurrence of any
event described in clauses (A), (B), (C), (D) or (E), above, Executive shall
have the right to elect to terminate his employment under this Agreement by
resignation upon sixty (60) days prior written notice given within a reasonable
period of time not to exceed four calendar months after the event giving rise to
said right to elect. Notwithstanding the preceding sentence, in the event of a
continuing breach the Executive, after giving due notice within the proscribed
time frame of an occurrence specified above, shall not waive any of his rights
solely by virtue of the fact that Executive and the Bank are engaged in good
faith discussions to resolve any occurrence of an event described in clauses
(A), (B), (C), (D) and (E) above.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 9, 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 the Agreement or
three (3) times the average of the three preceding years' Base Salary, including
bonuses and any other cash compensation paid to the Executive during such years,
and the amount of any benefits received pursuant to any employee benefit plans,
on behalf of the Executive, 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, and provided further, that in no
event shall total severance compensation from ail sources exceed three times the
Executive's Base Salary for the immediately preceding year. At the election of
the Executive, which election is to be made within thirty (30) days of an Event
of Termination, such payments shall be made in a lump sum or paid monthly during
the remaining term of the agreement following the Executive's termination. In
the event that no election is made, payment to the Executive will be made on a
monthly basis during the remaining term of the agreement. Such payments shall
not be reduced in the event the Executive obtains other employment following
termination of employment. The Executive shall not be required to mitigate such
payments by seeking other employment.
(c) Notwithstanding the provisions of Sections 4(a) and (b), and in the
event that there has not been a change in control as defined in Section 5(a),
upon the Voluntary Termination by the Executive upon giving sixty days notice to
the Bank (which shall not be deemed to constitute an "Event of Termination" as
defined herein), 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, a severance payment in an amount equal to the Executive's preceding
year's Base Saiary, including bonuses and any other cash compensation paid to
the Executive during such year, and the amount of any benefits received pursuant
to any employee benefit plans, on behaif of the Executive, 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
sapital 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 the Executive, which election is to be made within thirty (30) days
of an Event of Termination, any payments shall be made in a lump sum or paid
monthly during the remaining term of the agreement following the Executive' s
termination. In the event that no election is made, any payment to the Executive
will be made on a monthly basis during the remaining term of the agreement. Such
payments shall not be reduced in the event the Executive obtains other
employment following termination of employment.
(d) Upon the occurrence of an Event of Termination, the Bank will cause
to be continued life, madical, dental and disability coverage substantially
identical to the coverage maintained by the Bank of Executive prior to his
termination, provided that such benefits shall not be provided in the event they
should constitute an unsafe or unsound banking practice relating to executive
compensation and employment contracts pursuant to applicable regulations as is
now or hereafter in effect.
Such coverage shall cease upon the expiration of the remaining term of this
Agreement.
(e) In the event that the Executive is receiving monthly payments
pursuant to Section 4(b) or (c) hereof, on an annual basis, thereafter, between
the dates of January 1 and January 31 of each year, Executive shall elect
whether the balance of the amount payable under the Agreement at that time shall
be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable
for the year for which such election is made.
5. CHANGE IN CONTROL
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control. A "Change in Control" shall mean a
reorganization, merger, merger conversion, consolidation or sale of ail or
substantially all of the assets of the Bank or the Company or a similar
transaction m which the Bank or Company is not the resulting entity; (ii)
individuals who constitute the board of directors of the Bank or the board of
directors of the Company as of the date hereof (the "Incumbent Board"), cease
for any reason to constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-fourths of the directors composing the
Incumbent Board or whose nomination for election by the Bank's or Company's
stockholders or members was approved by the same nominating Committee serving
under an Incumbent Board shall be for purposes of this section considered as
though he were a member of the Incumbent Board; or (iii) an acquisition of
"control" of the Bank or the Company as defined by 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"), as
determined by the board of directors of the Bank or the Company, or (iv) an
acquisition of the Bank's stock requiring submission of notice under the Change
in Bank Control Act; provided, however, that a change in control shall not be
deemed to have occurred under clauses (i), (iii), or (iv) of this section if the
transaction(s) constituting a change in control is approved by a majority of the
board of directors of the Bank or the Company, as the case may be.
(b) If any of the events described in Section 5(a) hereof constituting
a Change in Control have occurred, Executive shall be entitled to the benefits
provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 upon
his subsequent termination of employment at any time during the term of this
Agreement (regardless of whether such termination results from his resignation
or his dismissal), unless such termination is because of his death, termination
for Cause or termination for Disability. Upon the Change in Control, Executive
shall have the right to elect to terminate his employment with the Bank at any
time, for any reason, during the term of this Agreement.
(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, a severance pay or liquidated damages, or both, a sum equal
to the greater of the payments due for the remaining term of the 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,
and the amount of any contributions made to any employee benefit plans, on
behalf of the Executive, maintained by the Bank during such years. At the
election of the Executive, which election is to be made within thirty (30) days
of the Date of Termination following a Change in Control, such payment may be
made in a lump sum or paid in equal monthly installments during the thirty-six
(,6) months following the Executive's termination. In the event that no election
is made, payment to the 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.
Such coverage and payments shall cease upon the expiration of
thirty-six (36) months.
(e) Upon the occurrence of a Change m Control, Executive will be
entitled to any benefits granted to him pursuant to any stock option plan of the
Bank or Holding Company.
(f) Upon the occurrence of a Change in Control the Executive will be
entitled to any benefits awarded to him under any of the Bank's Recognition and
Retention Plans arising from a Change in Control.
(g) In the event that the Executive is receiving monthly payments
pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the
dates of January I and January 31 of each year, Executive shall elect whether
the balance of the amount payable under the Agreement at that time shall be paid
in a lump sum or on a pro rata basis. Such election shall be irrevocable for the
year for which such election is made.
(h) 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.
(i) 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.
(j) Any payments made to Executive pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
ss. 1818(k) and any applicable regulations promulgated thereunder.
(k) The 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, such payments shall be deferred until
such times as the Bank is in capital compliance and provided further, that in no
event shall total severance compensation from all sources exceed three times the
Executive's Base Salary for the immediately preceding year.
6. TERMINATION UPON RETIREMENT
Termination by the Bank of the 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 plans to which Executive is a party.
7. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, incompetence, 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 or
similar offenses) or final cease-and-desist order, or material breach of any
material provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against standards generally prevailing in the
savings institutions industry. 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 threefourths of the members of the Board at a
meeting of the Board called and held for that purpose (after reasonable notice
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. The 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 Holding Company or any subsidiary or affiliate thereof, shall become
null and void effective upon Executive's receipt of Notice of Termination for
Cause pursuant to Section 8 hereof, and shall not be exercisable by Executive at
any time subsequent to such Termination for Cause.
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
provided 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 is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
date of termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal having expired and no appeal having been perfected) 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.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue
Executive as a participant in all compensation, benefit and insurance plans in
which he was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive~s compliance with paragraph (b) of this Section 9 during
the term of this Agreement and for one (I) full year after the expiration or
termination thereof
(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 pursuant
to Section 4(c) hereof, Executive agrees not to compete with the Bank and/or the
Holding Company for a period of one (I) year following such termination in any
city, town or county in which the Bank and/or the Holding Company 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 othertwise serve with, directly or indirectly, any
entity whose business materially competes with the depository, lending or other
business activities of the Bank and/or the Holding Company. The parties hereto,
recognizing that irreparable injury will result to the Bank and/or the Holding
Company, its business and properly in the event of Executive's breach of this
Subsection 10(a) agree that in the event of any such breach by Executive, the
Bank and/or the Holding Company 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 in the event of the termination of his employment pursuant to
Sections 4(c) hereof, 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/or the Holding Company, 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
and/or the Holding Company from pursuing any other remedies available to the
Bank and/or the Holding Company 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.
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. In the
event of a breach or threatened breach by the Executive of the Provisions 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 m this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Holding Company, however,
guarantees payment and provision of all amounts and benefits due hereunder to
Executive and, if such amounts and benefits due from the Bank are not timely
paid or provided by the Bank, such amounts and benefits shall be paid or
provided by the Holding Company.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLAN
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 the 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 by 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 may terminate the Executive's employment at any time, but
any termination by the Bank, 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 as defined in Section ~
hereinabove.
(b) If the 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)(12U.S.C. ss.ss. 1818 (e)(3)) or 8(g)(12 U.S.C. ss.
1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, 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 shall (i) pay the 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 the 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)(12U.S.C. ss.ss. 1818(e)) or 8(g) (12 U. S.C. ss. 1818 (g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, 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)(l)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, 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 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, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1982; 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.
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 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 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.
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, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under federal law or 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, judgements, 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. 1828 (k) or applicable 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 Holding 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 and the Holding Company have caused this
Agreement to be executed and their seals to be affixed hereunto by their duly
authorized officers, and the Executive has signed this Agreement, on the 17th
day of April, 1997.
ATTEST: CHARTER BANK, S.B.
By:
[SEAL]
ATTEST: CHARTER FINANCIAL, INC.
By:
[SEAL]
WITNESS EXECUTIVE
By
EXHIBIT 10.3
EMPLOYMENT AGREEMENT OF LINDA M. JOHNSON
<PAGE>
CHARTER BANK, S.B.
EMPLOYMENT AGREEMENT
This Agreement is made effective as of April 17, 1997 by and between
Charter Bank, S B. (the "Bank"), an Illinois-chartered savings bank, with its
principal administrative office at 114 West Broadway, Sparta, Illinois, and
Linda M. Johnson (the "Executive"). Any reference to "Holding Company" herein
shall mean Charter Financial, Inc. 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 her employment hereunder, Executive agrees to
serve as Senior Vice President and Secretary of the Bank and of Charter
Financial, Inc. During said period, Executive may, in her discretion, agree to
serve, if elected, as an officer and director of any subsidiary or affiliate of
the Bank, with appropriate adjustments to the compensation specified in Section
3(a). Failure to reelect Executive as Senior Vice President and Secretary
without the consent of the Executive during the term of this Agreement shall
constitute a breach of this Agreement.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. 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 twenty (20) days prior to any
such anniversary date, that her employment shall cease at the end of twenty-four
(24) months following such anniversary date. Prior to each notice period for
non-renewal, the Board of Directors of the Bank ("Board") will conduct a formal
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.
(b) During the period of her employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all her business time,
attention, skill, and efforts to the faithful performance of her 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, companies or 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.
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 $97,400.40 per
year ("Base Salary"). Such Base Salary shall be payable on the 15th and last day
of each 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 15, 1997. Such review shall be conducted by a Committee designated
by the Board, and the Board may increase Executive's Base Salary. 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 substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the forgoing provisions of this
Subsection (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-andaccident plan, 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. 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 paragraph (a) of
this Section 3, the Bank shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred by Executive performing her
obligations under this Agreement and may provide such additional compensation in
such form, including annual bonuses, and such amounts as the Board may from time
to time determine.
(d) Compensation and reimbursement to be paid pursuant to paragraphs
(a), (b) and (c) of this Section 3 shall be paid by the Bank and the Holding
Company, respectively on a pro rata basis based upon the amount of service the
Executive devotes to the Bank and Holding Company, respectively.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Sections 7 and 15.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and included any one or more of the following: (i) the
termination by the Bank or the Holding Company of Executive's full-time
employment hereunder for any reason other than a Change in Control, as defined
in Section 5(a) hereof, or 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 Senior Vice President and Secretary,
(B) material change in Executive's function, duties, or responsibilities, which
change would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above (and any such material change shall be deemed a continuing
breach of this Agreement), (C) a relocation of Executive's principal place of
employment by more than 30 miles from its location at the effective date of this
Agreement, or a material reduction m the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
(D) liquidation or dissolution of the Bank or Holding Company, or (E) breach of
this Agreement by the Bank. Upon the occurrence of any event described in
clauses (A), (B), (C), (D) or (E), above, Executive shall have the right to
elect to terminate her employment under this Agreement by resignation upon sixty
(60) days prior written notice given within a reasonable period of time not to
exceed four calendar months after the event giving rise to said right to elect.
Notwithstanding the preceding sentence, in the event of a continuing breach the
Executive, after giving due notice within the proscribed time frame of an
occurrence specified above, shall not waive any of her rights solely by virtue
of the fact that Executive and the Bank are engaged in good faith discussions to
resolve any occurrence of an event described in clauses (A), (B), (C), (D) and
(E) above.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 9, the Bank shall pay Executive, or, in the
event of her subsequent death, her beneficiary or beneficiaries, or her 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 the Agreement or
three (3) times the average of the three preceding years' Base Salary,.including
bonuses and any other cash compensation paid to the Executive during such years,
and the amount of any benefits received pursuant to any employee benefit plans,
on behalf of the Executive, maintained by the Bank during such years; ~i~,
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, and provided further, that m no
event shall total severance compensation from all sources exceed three times the
Executive's Base Salary for the immediately preceding year. At the election of
the Executive, which election is to be made within thirty (30) days of an Event
of Termination, such payments shall be made in a lump sum or paid monthly during
the remaining term of the agreement following the Executive's termination. In
the event that no election is made, payment to the Executive will be made on a
monthly basis during the remaining term of the agreement. Such payments shall
not be reduced in the event the Executive obtains other employment following
termination of employment. The Executive shall not be required to mitigate such
payments by seeking other employment.
(c) Notwithstanding the provisions of Sections 4(a) and (b), and in the
event that there has not been a change in control as defined in Section 5(a),
upon the Voluntary Termination by the Executive upon giving sixty days notice to
the Bank (which shall not be deemed to constitute an "Event of Termination" as
defined herein), the Bank, shall pay Executive, or in the event of her
subsequent death, her beneficiary or beneficiaries, or her estate, as the case
may be, a severance payment in an amount equal to the Executive's preceding
year's Base Salary, including bonuses and any other cash compensation paid to
the Executive during such year, and the amount of any benefits received pursuant
to any employee benefit plans, on behalf of the Executive, 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 the Executive, which election is to be made within thirty (30) days
of an Event of Termination, any payments shall be made in a lump sum or paid
monthly during the remaining term of the agreement following the Executive's
termination. In the event that no election is made, any payment to the Executive
will be made on a monthly basis during the remaining term of the agreement. Such
payments shall not be reduced in the event the Executive obtains other
employment following termination of employment.
(d) 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 of Executive prior to her
termination, provided that such benefits shall not be provided in the event they
should constitute an unsafe or unsound banking practice relating to executive
compensation and employment contracts pursuant to applicable regulations as is
now or hereafter in effect. Such coverage shall cease upon the expiration of the
remaining term of this Agreement.
(e) In the event that the Executive is receiving monthly payments
pursuant to Section 4(b) or (c) hereof, on an annual basis, thereafter, between
the dates of January I and January 31 of each year, Executive shall elect
whether the balance of the amount payable under the Agreement at that time shall
be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable
for the year for which such election is made.
5. CHANGE IN CONTROL
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control. A "Change in Control" shall mean a
reorganization, merger, merger conversion, consolidation or sale of all or
substantially all of the assets of the Bank or the Company or a similar
transaction in which the Bank or Company is not the resulting entity; (u)
individuals who constitute the board of directors of the Bank or the board of
directors of the Company as of the date hereof (the "Incumbent Board"), cease
for any reason to constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-fourths of the directors composing the
Incumbent Board or whose nomination for election by the Bank's or Company's
stockholders or members was approved by the same nominating Committee serving
under an Incumbent Board shall be for purposes of this section considered as
though he were a member of the Incumbent Board; or (iii) an acquisition of
"control" of the Bank or the Company as defined by 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"), as
determined by the board of directors of the Bank or the Company; or (iv) an
acquisition of the Bank's stock requiring submission of notice under the Change
in Bank Control Act; provided, however, that a change in control shall not be
deemed to have occurred under clauses (i), (iii), or (iv) of this section if the
transaction(s) constituting a change in control is approved by a majority of the
board of directors of the Bank or the Company, as the case may be.
(b) If any of the events described in Section 5(a) hereof constituting
a Change in Control have occurred, Executive shall be entitled to the benefits
provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 upon
her subsequent termination of employment at any time during the term of this
Agreement (regardless of whether such termination results from her resignation
or her dismissal), unless such termination is because of her death, termination
for Cause or termination for Disability. Upon the Change in Control, Executive
shall have the right to elect to terminate her employment with the Bank at any
time, for any reason, during the term of this Agreement.
(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 her subsequent death, her beneficiary or beneficiaries, or her estate,
as the case may be, a severance pay or liquidated damages, or both, a sum equal
to the greater of the payments due for the remaining term of the 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,
and the amount of any contributions made to any employee benefit plans, on
behalf of the Executive, maintained by the Bank during such years. At the
election of the Executive, which election is to be made within thirty (30) days
of the Date of Termination following 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 the 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 her severance.
Such coverage and payments shall cease upon the expiration of
thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, Executive will be
entitled to any benefits granted to her pursuant to any stock option plan of the
Bank or Holding Company.
(f) Upon the occurrence of a Change in Control the Executive will be
entitled to any benefits awarded to her under any of the Bank's Recognition and
Retention Plans arising from a Change in Control.
(g) In the event that the Executive is receiving monthly payments
pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the
dates of January I and January 31 of each year, Executive shall elect whether
the balance of the amount payable under the Agreement at that time shall be paid
in a lump sum or on a pro rata basis. Such election shall be irrevocable for the
year for which such election is made.
(h) 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.
(i) 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 her duties hereunder by reason of temporary
disability.
(j) Any payments made to Executive pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
ss. 1818(k) and any applicable regulations promulgated thereunder.
(k) The 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, such payments shall be deferred until
such times as the Bank is in capital compliance and provided further, that in no
event shall total severance compensation from all sources exceed three times the
Executive's Base Salary for the immediately preceding year.
6. TERMINATION UPON RETIREMENT
Termination by the Bank of the 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 her. Upon termination of Executive upon Retirement, Executive
shall be entitled to all benefits under any retirement plan of the Bank and
other plans to which Executive is a party.
7. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, incompetence, 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 or
similar offenses) or final cease-and-desist order, or material breach of any
material provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to her a copy of a resolution duly adopted by the
affirmative vote of not less than threefourths of the members of the Board at a
meeting of the Board called and held for that purpose (after reasonable notice
to Executive and an opportunity for her, 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. The 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 Holding Company or any subsidiary or affiliate thereof, shall become
null and void effective upon Executive's receipt of Notice of Termination for
Cause pursuant to Section 8 hereof, and shall not be exercisable by Executive at
any time subsequent to such Termination for Cause.
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
provided 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 her duties
on a full-time basis during such thirty (3 0) day period), and (B) if her
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 is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
date of termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is fainally determined,
either by mutual written agreement of the parties, by a binding arbitration
award, or by a final judgment, order or decree of a court of competent
jurisdiction (the time for appeal having expired and no appeal having been
perfected) 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. Notwithstanding the pendency of any such dispute, the Bank will
continue to pay Executive her full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue Executive as a participant in all compensation, benefit and insurance
plans in which he was participating when the notice of dispute was given, until
the dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 9 during
the term of this Agreement and for one (1) full year after the expiration or
termination thereof
(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 pursuant
to Section 4(c) hereof, Executive agrees not to compete with the Bank and/or the
Holding Company for a period of one (1) year following such termination in any
city, town or county in which the Bank and/or the Holding Company 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 and/or the Holding Company. The parties hereto,
recognizing that irreparable injury will result to the Bank and/or the Holding
Company, its business and property in the event of Executive's breach of this
Subsection 10(a) agree that in the event of any such breach by Executive, the
Bank and/or the Holding Company 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 in the event of the termination of her employment pursuant to
Sections 4(c) hereof, 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/or the Holding Company, 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
and/or the Holding Company from pursuing any other remedies available to the
Bank and/or the Holding Company 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 her 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.
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. In the
event of a breach or threatened breach by the Executive of the Provisions 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. The Holding Company, however,
guarantees payment and provision of all amounts and benefits due hereunder to
Executive and, if such amounts and benefits due from the Bank are not timely
paid or provided by the Bank, such amounts and benefits shall be paid or
provided by the Holding Company.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLAN
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 the 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 her 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 by 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 may terminate the Executive's employment at any time, but
any termination by the Bank 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 as defined in Section 7
hereinabove.
(b) If the 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)(12U.S.C. ss.ss. 1818 (e)(3)) or 8(g)(12 U.S.C. ss.
1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, 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 shall (i) pay the 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 the 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)(12U.S.C. ss.ss. 1818(e)) or 8(g) (12 U. S.C. ss. 1818 (g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, 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)(l)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, 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 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, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1982; 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.
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 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 her
right to be paid 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.
21. INDEMNIFICATION
The Bank shall provide Executive (including her heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and her heirs, executors and administrators) to the fullest extent
permitted under federal law or state law against all expenses and liabilities
reasonably incurred by her in connection with or arising out of any action, suit
or proceeding in which he may be involved by reason of her 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, judgements, 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 her 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 her duties. No Indemnification shall be paid that would
violate 12 U.S.C. 1828 (k) or applicable 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 Holding 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 and the Holding Company have caused this
Agreement to be executed and their seals to be affixed hereunto by theur duly
authorized officers, and the Executive has signed this Agreement, on the 17th
day of April, 1997.
ATTEST: CHARTERBANK, S.B.
[SEAL]
ATTEST: CHARTER FINANCIAL, INC.
WITNESS:
EXECUTIVE
EXHIBIT 13
ANNUAL REPORT TO SECURITY HOLDERS
<PAGE>
1997 ANNUAL REPORT TO STOCKHOLDERS
CHARTER FINANCIAL, INC.
- --------------------------------------------------------------------------------
Table of Contents
Page
----
Message from the Chairman 1
Common Stock and Related Matters 2
Selected Consolidated Financial Information 3
Management's Discussion and Analysis 5
Independent Auditors' Report 18
Consolidated Financial Statements 19
Notes to Consolidated Financial Statements 24
Stockholder Information 52
<PAGE>
MESSAGE FROM THE CHAIRMAN
- --------------------------------------------------------------------------------
To Our Stockholders:
As announced in July 1997, Charter Financial, Inc. engaged Charles Webb & Co., a
division of Keefe, Bruyette & Woods, to advise Charter Financial, Inc. with
respect to enhancement of shareholder value. A review of alternative methods to
enhance shareholder value, including a strategic affiliation with other
entities, was made.
I am pleased to report that on November 19, 1997, Charter Financial, Inc.
entered into an Agreement and Plan of Merger with Magna Group, Inc. Terms of the
Agreement provide for each share of Charter common stock to be exchanged for
.5751 of a share of Magna common stock. The purchase price represents
approximately 1.6 times Charter's book value.
We are excited about the opportunities to be derived from the alliance with
Magna, which is a $7 billion bank. Many new services, including trust services
and commercial products, will be made available to our customers as a result of
the merger. The transaction will require approval of the regulators and our
shareholders and is anticipated to be completed in the second quarter of 1998.
One of our major accomplishments during the past year was the acquisition of
$28.6 million Home Federal Savings Bank in Carbondale, Illinois. The addition of
the Home Federal branch facility provides another convenient location for the
high traffic area in Carbondale. Additionally two new automatic teller machines
(ATM's) were installed in the Carbondale market. One ATM was installed in the
Southern Illinois University Student Center and the other at our new branch
located at 635 E. Walnut Street.
As a shareholder you have benefited from the continued improvement and
performance of Charter Bank through the increase in dividends from $.06 per
share to $.08 per share during the past three quarters.
I want to thank the directors, employees and customers who made 1997 another
successful year. Your continued support during this time of transition will be
greatly appreciated.
Sincerely,
/s/John A. Becker
- -----------------
John A. Becker
Chairman of the Board, President,
and Chief Executive Officer
- 1 -
<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 November 28, 1997, there were 820 stockholders of record and 4,150,123
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.
Dividends
Quarter ended High Low paid
------------- ---- --- ----
December 31, 1995 $ 10.8125 $ 10.8125 $ .15*
March 31, 1996 12.2500 10.8125 .06
June 30, 1996 12.0000 11.2500 .06
September 30, 1996 13.0000 10.8750 .06
December 31, 1996 13.0000 12.5000 .06
March 31, 1997 17.2500 12.2500 .08
June 30, 1997 18.0000 16.7500 .08
September 30, 1997 21.5000 17.2500 .08
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.
- 2 -
<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,
------------------------------------------------------------
1997 1996 1995 1994 1993
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets .................. $387,032 $388,431 $293,135 $261,297 $259,042
Loans receivable, net ......... 287,650 275,487 206,074 178,058 157,342
Investments, net (1) .......... 66,768 77,999 60,174 58,798 68,957
Mortgage-backed securities, net 14,606 16,632 16,670 16,071 20,950
Deposits (2) .................. 275,980 248,723 197,103 189,947 198,183
Borrowed money ................ 50,317 76,354 57,080 35,566 27,095
Stockholders' equity (3) ...... 58,417 56,394 35,622 31,581 22,016
<CAPTION>
Year ended September 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income ....................... $ 29,636 $ 24,819 $ 20,009 $ 18,233 $ 18,391
Interest expense ...................... 15,724 12,426 10,309 8,387 8,730
-------- -------- -------- -------- --------
Net interest income ................ 13,912 12,393 9,700 9,846 9,661
Provision for losses on loans ......... 321 170 360 140 1,004
-------- -------- -------- -------- --------
Net interest income after
provision for losses on loans .... 13,591 12,223 9,340 9,706 8,657
-------- -------- -------- -------- --------
Noninterest income:
Late charges and other loan fees ... 579 391 241 266 173
Gain (loss) on sale of invesment
securities, net .................. 369 (29) (14) 121 8
Gain (loss) on sale of mortgage-
backed securities, net ........... 15 (9) -- -- --
Deposit account fees ............... 961 797 677 603 530
Other .............................. 2,082 691 506 454 458
-------- -------- -------- -------- --------
Total noninterest income ......... 4,006 1,841 1,410 1,444 1,169
-------- -------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Noninterest expense:
Compensation and employee benefits . 3,970 3,661 3,025 2,778 2,106
Office buildings and equipment
and data processing .............. 1,418 1,083 835 825 836
Advertising ........................ 195 237 148 196 152
Deposit insurance premiums ......... 147 458 438 461 380
SAIF special assessment ............ -- 1,479 -- -- --
Other .............................. 2,129 1,641 1,306 1,199 880
Provision for losses and
expenses on real estate
acquired by foreclosure .......... 188 81 4 184 84
Amortization of cost in
excess of fair value of net
assets acquired ................ 455 211 136 142 142
-------- -------- -------- -------- --------
Total noninterest expense ........ 8,502 8,851 5,892 5,785 4,580
-------- -------- -------- -------- --------
Income before income tax
expense and cumulative effect of
change in accounting principle . 9,095 5,213 4,858 5,365 5,246
Income tax expense .................... 3,657 2,155 1,874 2,054 2,173
-------- -------- -------- -------- --------
Income before cumulative effect of
change in accounting principle ... 5,438 3,058 2,984 3,311 3,073
Cumulative effect of change in
accounting principle ............. -- -- -- 786 --
-------- -------- -------- -------- --------
Net income ......................... $ 5,438 $ 3,058 $ 2,984 $ 4,097 $ 3,073
======== ======== ======== ======== ========
Earnings per share:
Income before cumulative effect of
change in accounting principle .... $ 1.27 $ 0.67 $ 0.69 $ 0.78 $ N/A
Cumulative effect of change in
accounting principle ............. -- -- -- 0.19 N/A
-------- -------- -------- -------- --------
Net Income ......................... $ 1.27 $ 0.67 $ 0.69 $ 0.97 $ N/A
======== ======== ======== ======== ========
</TABLE>
- 3 -
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION, Cont.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the year ended September 30,
---------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance ratios:
Return on average assets (4) ........ 1.40% 0.93% 1.09% 1.27%(5) 1.26%
Return on average stockholders'
equity (4) ....................... 9.57 5.57 8.92 15.29 15.10
Stockholders' equity as a percent
of average assets ................ 15.02 17.18 12.97 12.14 9.02
Stockholders' equity to total
assets (end of period) ........... 15.09 14.52 12.15 12.09 8.50
Interest rate spread (6) ............ 3.24 3.27 3.25 3.48 3.86
Net interest margin (7) ............. 3.78 3.95 3.68 3.85 4.12
Average interest-earning assets as
a percent of average interest-
bearing liabilities (8) ......... 112.72 117.30 110.80 111.17 107.06
Asset quality ratios:
Nonperforming loans as a percent
of loans receivable, net (9) ..... 0.52 0.78 0.32 0.23 1.40
Nonperforming assets as a percent
of total assets (10) ............. 0.56 0.67 0.27 0.24 0.94
Allowance for loan losses as a
percent of nonperforming loans (9) 150.79 111.89 336.65 528.29 100.09
Number of full-service offices ......... 8 7 6 5 5
</TABLE>
- ----------------
(1) Includes Federal Home Loan Bank stock and interest-bearing deposits.
(2) During the years ended September 30, 1994 and 1993, $1.8 million and $7.6
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.
- 4-
<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, Employee Stock Ownership Plan
(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).
When used in this Annual Report the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions which may be made to any forward
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
- 5 -
<PAGE>
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 provide 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 January 16, 1997, the Company completed its acquisition of Home Federal
Savings Bank, Carbondale, Illinois ("Home Federal") in exchange for cash of $6.3
million. Home Federal's assets consisted primarily of loans receivable of $21.4
million, investment securities of $3.1 million and mortgage-backed securities of
$1.8 million, while liabilities consisted primarily of savings deposits of $23.8
million. The acquisition was accounted for using the purchase method and,
accordingly, the operating results of Home Federal 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 $2.6
million.
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 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.
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 $5.4 million, $3.1
million, and $3.0 million for the fiscal years ended September 30, 1997, 1996,
and 1995, respectively.
- 6 -
<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,
-------------------------------------------------------------------------
1997 1996
------------------------------------ ----------------------------------
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) $ 285,700 $ 24,247 8.49% $ 230,765 $ 19,439 8.42%
Investments, net (2) 62,572 4,123 6.59 62,243 3,937 6.33
Mortgage-backed securities, net 15,803 1,092 6.91 16,353 1,173 7.17
Interest-bearing deposits 4,130 174 4.21 4,563 270 5.92
--------- -------- --------- --------
Total interest-earning assets $ 368,205 29,636 8.05 $ 313,924 24,819 7.91
========= -------- ========= --------
Interest-bearing liabilities:
Deposits $ 268,767 12,378 4.61 $ 219,092 9,793 4.47
Borrowed money 57,888 3,346 5.78 48,544 2,633 5.42
-------- -------- --------- --------
Total interest-bearing liabilities $ 326,655 15,724 4.81 $ 267,636 12,426 4.64
========= -------- ========= --------
Net interest income $ 13,912 $ 12,393
======== ========
Net interest rate spread (3) 3.24% 3.27%
====== ======
Net interest margin (4) 3.78% 3.95%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.72% 117.30%
====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995
------------------------------------
Average Average
balance Interest yield/cost
------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1) $ 188,897 $ 15,462 8.19%
Investments, net (2) 54,036 3,308 6.12
Mortgage-backed securities, net 17,510 1,087 6.21
Interest-bearing deposits 3,477 152 4.37
--------- --------
Total interest-earning assets $ 263,920 20,009 7.58
========= --------
Interest-bearing liabilities:
Deposits $ 189,309 7,567 4.00
Borrowed money 48,882 2,742 5.61
--------- --------
Total interest-bearing liabilities $ 238,191 10,309 4.33
========= --------
Net interest income $ 9,700
========
Net interest rate spread (3) 3.25%
======
Net interest margin (4) 3.68%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities 110.80%
=======
</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 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,
-------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
----------------------------------------------- ------------------------------------------
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) ........ $ 4,626 $ 220 $ (38) $ 4,808 $ 3,429 $ 434 $ 114 $ 3,977
Investments, net (2) ............. 21 166 (1) 186 502 113 14 629
Mortgage-backed securities, net .. (39) (41) (1) (81) (72) 168 (10) 86
Interest-bearing deposits ........ (26) (77) 7 (96) 47 54 17 118
------- ----- ----- ------- ------- ----- ----- -------
Total interest-earning assets 4,582 268 (33) 4,817 3,906 769 135 4,810
------- ----- ----- ------- ------- ----- ----- -------
Interest expense:
Deposits ......................... 2,220 435 (70) 2,585 1,191 890 145 2,226
Borrowed money ................... 506 241 (34) 713 (19) (93) 3 (109)
------- ----- ----- ------- ------- ----- ----- -------
Total interest-bearing
liabilities .............. 2,726 676 (104) 3,298 1,172 797 148 2,117
------- ----- ----- ------- ------- ----- ----- -------
Change in net interest income .. $ 1,856 $(408) $ 71 $ 1,519 $ 2,734 $ (28) $ (13) $ 2,693
======= ===== ===== ======= ======= ===== ===== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------
1995 vs. 1994
------------------------------------------
Increase (decrease)
due to
------------------------------------------
Rate/ Increase
Volume Rate volume (Decrease)
(In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable, net (1) ........ $ 1,614 $ 526 $ 66 $ 2,206
Investments, net (2) ............. (632) 223 (37) (446)
Mortgage-backed securities, net .. (10) 15 0 5
Interest-bearing deposits ........ (37) 65 (17) 11
------- ------- ----- -------
Total interest-earning assets 935 829 12 1,776
------- ------- ----- -------
Interest expense:
Deposits ......................... (205) 942 (29) 708
Borrowed money ................... 609 432 173 1,214
------- ------- ----- -------
Total interest-bearing
liabilities .............. 404 1,374 144 1,922
------- ------- ----- -------
Change in net interest income .. $ 531 $ (545) $(132) $ (146)
======= ======= ===== =======
</TABLE>
- --------------------------------------------------------------------------------
(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.
- 7 -
<PAGE>
Comparison of Operating Results for the Fiscal Years ended September 30, 1997
and 1996
Interest Income. Interest income totaled $29.6 million for the fiscal year ended
September 30, 1997 compared to $24.8 million for the fiscal year ended September
30, 1996, an increase of $4.8 million, or 19.4%. This increase resulted
primarily from a $54.3 million, or 17.3%, increase in average interest-earning
assets to $368.2 million for fiscal year 1997 from $313.9 million for fiscal
year 1996. The increase in average interest-earning assets resulted primarily
from the acquisition of Home Federal in January 1997 and a full year's effect of
the Community Savings acquisition in May 1996. The increase in interest income
was also impacted by an increase in the average yield on interest-earning assets
to 8.05% in fiscal year 1997 from 7.91% in fiscal year 1996. This resulted
primarily from a shift in the composition of interest-earning assets to a larger
percentage of higher yielding loans.
Interest income earned on loans receivable increased $4.8 million, or 24.7%,
reflecting an increase in average loans outstanding of $54.9 million , or 23.8%,
to $285.7 million in fiscal year 1997, as well as a slight increase in the
average yield on loans receivable to 8.49% from 8.42%. 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 resulted from $21.4 million in loans acquired from
Home Federal in January 1997 and the full year's impact of the $45.4 million of
loans acquired from Community Savings in May 1996.
Interest received from investments increased $187,000, or 4.7%, to $4.1 million
for the fiscal year ended September 30, 1997 compared to $3.9 million for the
fiscal year ended September 30, 1996. This increase reflects the increase in the
average yield on investments to 6.59% from 6.33%.
Interest received from mortgage-backed securities decreased to $1.1 million for
the year ended September 30, 1997 from $1.2 million for the fiscal year ended
September 30, 1996. The average yield on mortgage-backed securities decreased to
6.91% for fiscal year 1997 from 7.17% for fiscal year 1996 and the average
balance on mortgage-backed securities decreased $550,000, or 3.4%, to $15.8
million in fiscal year 1997 from $16.4 million in fiscal year 1996.
Interest income from interest-bearing deposits decreased $96,000, or 35.5%,
reflecting a decrease in the average yield on interest-bearing deposits to 4.21%
for fiscal year 1997 from 5.92% for fiscal year 1996 as well as the decrease in
the average balance of $433,000, or 9.5%, to $4.1 million in fiscal year 1997
from $4.6 million in fiscal year 1996.
Interest Expense. Interest expense increased by $3.3 million, or 26.5%, to $15.7
million for the fiscal year ended September 30, 1997 from $12.4 million for the
fiscal year ended September 30, 1996. This increase resulted primarily from an
increase in average interest-bearing liabilities of $59.0 million, or 22.1%, to
$326.7 million in fiscal year 1997 compared to $267.6 million in fiscal year
1996. The increase in interest expense was also impacted by the increase in the
average cost on interest-bearing liabilities to 4.81% in fiscal year 1997 from
4.64% in fiscal year 1996.
Interest expense on deposits increased $2.6 million, or 26.4%, reflecting an
increase in the average cost of deposits to 4.61% from 4.47% as well as an
increase of $49.7 million, or 22.7%, in average deposits to $268.8 million from
- 8 -
<PAGE>
$219.1 million. The increase in the average balance of deposits resulted
primarily from the $23.8 million of deposits acquired from Home Federal in
January 1997 and the full years impact of the $49.7 million of deposits acquired
from Community Savings in May 1996. The increase in the cost of deposits
reflected the higher cost of time deposits acquired from Home Federal and
Community Savings.
Interest expense on borrowed money increased $713,000, or 27.1%, reflecting an
increase in average borrowed money of $9.3 million, or 19.2%, to $57.9 million
in fiscal year 1997 from $48.5 million in fiscal year 1996 and an increase in
the cost of borrowed money to 5.78% from 5.42%. The increase in 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 Home Federal.
Net Interest Income. Net interest income totaled $13.9 million and $12.4 million
for the fiscal years ended September 30, 1997 and 1996, respectively. The
increase reflects the positive impact of a shift in the composition of
interest-earning assets to a larger percentage of higher yielding loans. Over
the past two years, average loans receivable as a percentage of interest-earning
assets increased 9.1%, with 6.3% of the increase occurring in fiscal year 1997.
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, 1997
was $321,000 compared to $170,000 for the fiscal year ended September 30, 1996.
The higher provision in fiscal year 1997 was necessary to adequately cover the
credit risk associated with a classified commercial real estate loan.
The Company's allowance for losses on loans was $2.3 million, or 0.77%, of loans
receivable at September 30, 1997 compared to $2.4 million, or 0.86%, of loans
receivable at September 30, 1996. 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 Home Federal portfolio acquired by the
Company. Residential real estate loan charge-offs for the Company and Home
Federal 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 0.24% and 0.11% for fiscal years 1997 and 1996, respectively.
Additionally, the Company's nonperforming loans as a percentage of loans
receivable, net, decreased to 0.52% from 0.78% at September 30, 1997 and 1996,
respectively. The increased charge-off level in 1997 was primarily due to the
charge-off of a commercial real estate loan and a commercial business loan in
1997 and the impact of an increased level of auto loan charge-offs. 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 level of charge-offs in recent years, management believes
the allowance is adequate at September 30, 1997.
- 9 -
<PAGE>
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 $2.2
million, or 117.6%, for the fiscal year ended September 30, 1997 to $4.0 million
from $1.8 million for the fiscal year ended September 30, 1996. The increase is
primarily the result of a $1.2 million adjustment for loans purchased in the
1980's as participation loans which were recently determined to have been
discounted whole loans.
In the early 1980s, the Company purchased from the same Seller three loan
participation packages (with participation interests ranging from 75% to 90%)
which the Company historically accounted for as a purchase of a participation
interest. However, since inception, the Company received 100% of both the
principal and interest payments in said loans. During the third quarter of 1997,
it was concluded that at some point in time the participation agreements were
amended whereby the Company was deemed to have purchased whole loans at a
discount. In order to adjust the anticipated yield of the purchased loans for
the impact of actual cash flows received since the participation packages were
purchased, adjustments were made resulting in an increase to other income of
$1.2 million and to net income of $791,000. The adjustment increased loans
receivable by $785,000, to reflect the portion of said loans not previously
considered owned by the Company and resulted in the establishment of an unearned
discount account of $162,000.
Additionally, the increase reflects the increase in late charges and other loan
fees, gains on sale of investment securities and deposit account fees, which
increases were partially offset by a decrease in commissions and fees. Late
charges and other loan fees increased $188,000, or 48.0%, for the fiscal year
ended September 30, 1997 to $579,000 compared to $391,000 for the fiscal year
ended September 30, 1996. The increase reflects the increase in the loan
portfolio as well as the growth in loan originations. The gain on sale of
investment securities increased $398,000 to $369,000 for fiscal year 1997 from a
loss on sale of investment securities for fiscal year 1996 of $29,000. The gain
on sale of investment securities resulted primarily from the sale of an equity
security and the sale of United States Government obligations. Deposit account
fees increased $164,000, or 20.6%, for the fiscal year ended September 30, 1997
to $961,000 compared to $797,000 for the fiscal year ended September 30, 1996.
The increase resulted from the growth in deposit accounts as well as the
increase in the fee levels charged to customers.
Noninterest Expense. Noninterest expense decreased $350,000, or 4.0%, for the
fiscal year ended September 30, 1997 to $8.5 million from $8.9 million for the
fiscal year ended September 30, 1996. For the fiscal year ended September 30,
1996, noninterest expense included a one-time SAIF special assessment of $1.5
million. During fiscal year 1997, compensation and employee benefits expense
increased $309,000, or 8.5%, to $4.0 million for fiscal year 1997 compared to
$3.7 million for fiscal year 1996. The primary reason for the increase in
compensation and employee benefits expense is due to additional compensation
expense related to the acquisition of Community Savings in May of 1996 and Home
Federal in January 1997, as well as the cost of certain stock benefit plans.
- 10 -
<PAGE>
Primarily as a result of the acquisitions of Community Savings and Home Federal:
office buildings and equipment expense increased $273,000, or 41.2%, to $936,000
for fiscal year 1997 compared to $663,000 for fiscal year 1996; data processing
increased $62,000, or 14.7%, to $482,000 for fiscal year 1997 compared to
$420,000 for fiscal year 1996; and, amortization of cost in excess of fair value
of net assets acquired increased $244,000, or 115.4%, to $455,000 for fiscal
year 1997 from $211,000 for fiscal year 1996. These increases were partially
offset by a decrease in advertising of $43,000, or 18.0%, to $195,000 in fiscal
year 1997 as compared to $237,000 in fiscal year 1996, and the decrease of
$311,000, or 67.9%, in deposit insurance premiums to $147,000 at September 30,
1997, from $458,000 at September 30, 1996. The decrease in deposit insurance
premiums was due to the Federal Deposit Insurance Corporation reduction in
assessment rates.
Other noninterest expense increased $488,000, or 29.7%, to $2.1 million for the
fiscal year ended September 30, 1997 compared to $1.6 million for the fiscal
year ended September 30, 1996. This increase resulted primarily from losses
recognized for a discrepancy that existed in the Company's credit card clearing
account at the time the Company's third-party credit card processor and servicer
went out of business. As a result of pending litigation by the Company against
their former credit card servicer, professional fees have also increased.
Income Taxes. The provision for income taxes totaled $3.7 million and $2.2
million for the fiscal years ended September 30, 1997 and 1996, respectively.
The increase in income taxes resulted from an increase in income before taxes.
The Company's effective income tax rates were 40.2% and 41.3% for the fiscal
years ended September 30, 1997 and 1996, respectively.
Net Income. Net income totaled $5.4 million for the fiscal year ended September
30 1997 compared to $3.1 million for the fiscal year ended September 30, 1996.
The increase in net income reflects: the increase of $1.5 million, or 12.3%, in
net interest income; the increase of $2.2 million, or 117.6%, in noninterest
income; and the decrease in noninterest expense of $350,000, or 4.0%. These
increases were partially offset by an increase in the provision for losses on
loans of $151,000, or 89.0%, and the increase in income taxes of $1.5 million,
or 69.7%.
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
- 11 -
<PAGE>
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.
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.
- 12 -
<PAGE>
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.
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
- 13 -
<PAGE>
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.
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%.
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
- 14 -
<PAGE>
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
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 its 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, 1997, 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 5.36% during the fiscal
year ended September 30, 1997. 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, 1997, 1996, and 1995 amounted to $13.1 million, $29.6 million, and $26.3
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.
- 15 -
<PAGE>
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, 1997, the Company had $37.0 million in
borrowings from the FHLB.
At September 30, 1997, the Company had outstanding mortgage loan commitments of
$2.0 million. Certificates of deposit scheduled to mature in one year or less at
September 30, 1997 totaled $112.2 million. Management believes, based on past
experience, that a significant portion of such deposits will remain with the
Company.
At September 30, 1997, 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
In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which
establishes standards for computing and presenting earnings per share (EPS).
SFAS No. 128 simplifies existing standards for computing EPS and makes them
comparable to international standards. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the components of
basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. SFAS No. 128 is effective
for financial statements issued for periods ending after December 31, 1997,
including interim periods, and requires restatement of all prior-period EPS data
presented. The Company does not believe the adoption of SFAS No. 128 will have a
material effect on its financial condition or results of operations.
Also in February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. SFAS No. 129 applies to all entities and establishes
standards for disclosing information about an entity's capital structure. SFAS
No. 129 is effective for financial statements for periods ending after December
15, 1997. The adoption of SFAS No. 129 is not expected to have a material impact
on the Company's consolidated financial statements.
- 16 -
<PAGE>
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. It
does not, however, specify when to recognize or how to measure items that make
up comprehensive income. SFAS No. 130 was issued to address concerns over the
practice of reporting elements of comprehensive income directly in equity.
SFAS No. 130 requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. Enterprises are
required to classify items of "other comprehensive income" by their nature in
the financial statement and display the balance of other comprehensive income
separately in the equity section of a statement of financial position. It does
not require per share amounts of comprehensive income to be disclosed.
SFAS No. 130 is applicable to all entities that provide a full set of financial
statements consisting of a statement of financial position, results of
operations and cash flows.
SFAS No. 130 is effective for both interim and annual periods beginning after
December 15, 1997. Earlier application is permitted. Comparative financial
statements provided for earlier periods are required to be reclassified to
reflect the provisions of this statement. Publicly traded enterprises that issue
condensed financial statements for interim periods are required to report a
total for comprehensive income in those financial statements. The adoption of
SFAS No. 130 is not expected to have a material impact on the Company's
consolidated financial statements.
- 17 -
<PAGE>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
Sparta, Illinois
Consolidated Financial Statements
September 30, 1997 and 1996
(With Independent Auditors' Report Thereon)
<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, 1997 and 1996,
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,
1997. 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, 1997 and 1996, and the results of their
operations and cash flows for each of the years in the three-year period ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
St. Louis, Missouri
November 3, 1997
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
September 30, 1997 and 1996
Assets 1997 1996
------------- -------------
<S> <C> <C>
Cash ............................................................ $ 1,342,727 $ 1,492,740
Interest-bearing deposits ....................................... 4,954,102 7,475,682
Investment securities:
Available for sale, at market value (amortized
cost of $55,686,540 and $61,973,995 at
September 30, 1997 and 1996, respectively) ............... 56,022,239 61,663,300
Held to maturity, at cost (market value of
$5,828,799 and $8,819,034 at September 30,
1997 and 1996, respectively) ............................. 5,791,540 8,860,125
Mortgage-backed securities:
Available for sale, at market value (amortized
cost of $13,185,144 and $15,059,424 at
September 30, 1997 and 1996, respectively) ............... 13,403,729 15,116,592
Held to maturity, at cost (market value of
$1,241,765 and $1,553,881 at September 30,
1997 and 1996, respectively) ............................. 1,202,190 1,515,622
Loans receivable, net ........................................... 287,649,998 275,486,929
Accrued interest receivable ..................................... 2,693,331 3,098,131
Real estate acquired by foreclosure, net ........................ 670,274 428,279
Office properties and equipment, at cost less
accumulated depreciation ................................... 5,862,896 5,990,392
Prepaid expenses and other assets ............................... 765,415 1,995,423
Income taxes receivable ......................................... 280,655 --
Deferred tax asset, net ......................................... -- 955,304
Core deposit intangible ......................................... 895,813 1,031,729
Cost in excess of fair value of net assets acquired ............. 5,497,576 3,320,843
------------- -------------
$ 387,032,485 $ 388,431,091
============= =============
Liabilities and Stockholders' Equity
Deposits ........................................................ $ 275,979,748 $ 248,722,627
Accrued interest on deposits .................................... 783,851 576,341
Borrowed money .................................................. 50,317,037 76,353,783
Advance payments by borrowers for taxes and insurance ........... 313,840 1,084,720
Income taxes payable ............................................ -- 188,097
Deferred tax liability, net ..................................... 210,831 --
Accrued expenses and other liabilities .......................... 1,009,882 5,111,072
------------- -------------
Total liabilities ...................... 328,615,189 332,036,640
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Commitments and contingencies
Stockholders' equity:
Common stock, $0.10 par value, 8,000,000 shares authorized,
4,365,823 and 4,253,459 shares issued at
September 30, 1997 and 1996, respectively ............... 436,582 425,346
Additional paid-in capital ................................. 30,592,730 28,762,464
Retained earnings, substantially restricted ................ 33,137,223 28,885,198
Unrealized gain (loss) on securities available
for sale, net of applicable taxes ........................ 326,291 (206,204)
Unamortized restricted stock awards ........................ (1,222,368) --
Unearned ESOP shares ....................................... (1,236,024) (1,472,353)
Treasury stock, at cost; 215,700 shares
at September 30, 1997 .................................... (3,617,138) --
------------- -------------
Total stockholders' equity ............. 58,417,296 56,394,451
------------- -------------
$ 387,032,485 388,431,091
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
- 19 -
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years ended September 30, 1997, 1996, and 1995
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans receivable ........................ $24,246,665 $19,439,001 $15,461,525
Investment securities ................... 4,123,334 3,936,589 3,307,960
Mortgage-backed securities .............. 1,091,424 1,173,197 1,086,559
Other ................................... 174,310 270,160 152,449
----------- ----------- -----------
Total interest income ........... 29,635,733 24,818,947 20,008,493
----------- ----------- -----------
Interest expense:
Deposits ................................ 12,377,941 9,792,900 7,566,735
Borrowed money .......................... 3,345,919 2,632,822 2,741,838
----------- ----------- -----------
Total interest expense .......... 15,723,860 12,425,722 10,308,573
----------- ----------- -----------
Net interest income ............. 13,911,873 12,393,225 9,699,920
Provision for losses on loans .............. 321,250 170,000 360,000
----------- ----------- -----------
Net interest income after
provision for losses on loans 13,590,623 12,223,225 9,339,920
----------- ----------- -----------
Noninterest income:
Late charges and other loan fees ........ 578,795 391,113 241,049
Gain (loss) on sale of investment
securities, net ...................... 369,474 (28,806) (13,719)
Gain (loss) on sale of mortgage-backed
securities, net ...................... 14,859 (8,916) --
Deposit account fees .................... 961,377 797,034 677,134
Commissions and fees .................... 221,300 274,747 179,851
Other ................................... 1,861,192 416,239 326,157
----------- ----------- -----------
Total noninterest income ........ 4,006,997 1,841,411 1,410,472
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Noninterest expense:
Compensation and employee benefits ...... 3,970,386 3,660,994 3,025,291
Office buildings and equipment .......... 936,123 662,845 477,326
Data processing ......................... 481,550 419,906 357,828
Advertising ............................. 194,641 237,479 147,918
Deposit insurance premiums .............. 147,162 457,818 437,794
SAIF special assessment ................. -- 1,479,021 --
Other ................................... 2,128,763 1,641,149 1,306,395
Provision for losses and expenses on
real estate acquired by foreclosure .. 188,181 81,197 3,531
Amortization of cost in excess of fair
value of net assets acquired ......... 455,061 211,271 136,409
----------- ----------- -----------
Total noninterest expense ....... 8,501,867 8,851,680 5,892,492
----------- ----------- -----------
Income before income tax expense 9,095,753 5,212,956 4,857,900
Income tax expense ......................... 3,657,373 2,155,311 1,874,023
----------- ----------- -----------
Net income ...................... $ 5,438,380 $ 3,057,645 $ 2,983,877
=========== =========== ===========
Earnings per share ......................... $ 1.27 $ .67 $ .69
</TABLE>
See accompanying notes to consolidated financial statements.
- 20 -
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1997, 1996, and 1995
Unrealized
gain (loss)
on securities
Retained available Unamor-
earnings, for sale, tized Total
Additional substan- net of restricted Unearned stock-
Common stock paid-in ially applicable stock ESOP Treasury holders'
Shares Amount capital restricted taxes awards shares stock equity
------ ------ ------- ---------- ----- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, Septem-
ber 30, 1994 2,170,160 $2,170,160 $ 7,131,365 $24,349,064 $(620,508) $(297,333) $(1,152,000) $ - $ 31,580,748
Net income - - - 2,983,877 - - - - 2,983,877
Amortization of -
restricted
stock awards - - - - - 148,666 - - 148,666
Amortization of
ESOP awards - - 259,045 - - - 288,000 - 547,045
Exercise of stock
options 965 965 8,685 - - - - - 9,650
Dividends declared on
nonmutual holding
company-owned
common stock
at $.60 per share - - - (569,572) - - - - (569,572)
Change in unrealized
gain (loss) on
securities
available for
sale, net of
applicable taxes - - - - 921,566 - - - 921,566
---------- ---------- ----------- ----------- -------- --------- ----------- ---- ------------
Balance, Septem-
ber 30, 1995 2,171,125 2,171,125 7,399,095 26,763,369 301,058 (148,667) (864,000) - 35,621,980
Net income - - - 3,057,645 - - - - 3,057,645
Net proceeds from
sale of common
stock of Charter
Financial, Inc. 2,919,414 291,941 27,728,948 - - - (969,030) - 27,051,859
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 stock-
holders (986,051) (986,051) 986,051 - - - - - -
Insurance of common
stock of Charter
Financial, Inc. to
minority
stockholders of
Charter Bank, S.B. 2,054,832 205,483 (205,483) - - - - - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital contribution
from Charter
Bancorp, M.H.C - - 100,000 - - - - - 100,000
Cash paid to minority
stockholders for
fractional shares (230) (23) (2,303) - - - - - (2,326)
Purchase of treasury
stock and retirement
of shares (721,285) (72,129) (8,911,580) - - - - - (8,983,709)
Exercise of stock
options 6,488 5,834 55,262 - - - - - 61,096
Tax benefit of non-
incentive stock
options - - 27,400 - - - - - 27,400
exercised
Cancellation of
restricted stock
awards (834) (834) (7,506) - - 8,340 - - -
Amortization of
restricted stock
awards - - - - - 140,327 - - 140,327
Amortization of
ESOP awards - - 402,580 - - - 360,677 - 763,257
Dividend declared
on nonmutual
holding company-
owned common stock
at $.15 per - - - (132,780) - - - - (132,780)
share
Dividends declared
on common stock of
Charter Financial,
Inc. at $.18 per
share - - - (803,036) - - - - (803,036)
Cumulative effect of
transfer of
securities to
available for sale,
net of - - - - (59,952) - - - (59,952)
applicable taxes
Change in unrealized
gain (loss) on
securities
available for
sale, net of
applicable taxes - - - - (447,310) - - - (447,310)
---------- ---------- ----------- ----------- -------- --------- ----------- ---- ------------
Balance, Septem-
ber 30, 1996 4,253,459 $ 425,346 $28,762,464 $28,885,198 $(206,204) $ - $ (1,472,353) $ - $56,394,451
========= ========== =========== =========== ========= ========== ============ ==== ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 21 -
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity, Continued
Unrealized
gain (loss)
on securities
Retained available Unamor-
earnings, for sale, tized Total
Additional substan- net of restricted Unearned stock-
Common stock paid-in ially applicable stock ESOP Treasury holders'
Shares Amount capital restricted taxes awards shares stock equity
------ ------ ------- ---------- ----- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, Septem-
ber 30, 1996 4,253,459 $425,346 $28,762,464 $28,885,198 $ (206,204) $ - $(1,472,353) $ - $56,394,451
Net income - - - 5,438,380 - - - - 5,438,380
Issuance of re-
stricted stock
awards 112,000 11,200 1,426,880 - (1,438,080) - - - -
Purchase of treasury
stock - - - - - - - (3,617,138) (3,617,138)
Exercise of stock
options 364 36 1,715 - - - - - 1,751
Amortization of
restricted stock
awards - - - - 215,712 - - - 215,712
Amortization of
ESOP awards - - 401,671 - - - 236,329 - 638,000
Dividends declared
on common stock of
Charter Financial,
Inc. at $.30 per
share - - - (1,186,355) - - - - (1,186,355)
Change in unrealized
gain (loss) on
securities
available for
sale, net of
applicable taxes - - - - 532,495 - - - 532,495
--------- -------- ----------- ---------- ---------- ---------- ------------ --------- ----------
Balance, Septem-
ber 30, 1997 4,365,823 $436,582 $30,592,730 $33,137,223 $ 326,291 $(1,222,368)$(1,236,024) $(3,617,138) $58,417,296
========= ======== =========== =========== ========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 22-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 5,438,380 $ 3,057,645 $ 2,983,877
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment ..................... 710,394 507,285 351,612
Discounts related to purchase accounting ............ (53,525) (63,272) (28,334)
Cost in excess of fair value of net assets acquired . 455,061 211,271 136,409
Fees, discounts, and premiums ....................... (1,597,827) (1,894,383) (1,717,121)
Stock plans ......................................... 853,712 903,584 695,711
Decrease (increase) in accrued interest receivable .... 541,797 (664,241) (498,481)
Increase (decrease) in accrued interest on deposits ... 95,531 (230,264) 47,005
Provision for losses on loans ......................... 321,250 170,000 360,000
Stock dividend from FHLB .............................. -- -- (27,000)
Decrease (increase) in income taxes, net .............. 486,239 (348,536) 257,939
(Gain) loss on sale of investment securities, net ..... (369,474) 28,806 13,719
(Gain) loss on sale of mortgage-backed securities, net (14,859) 8,916 --
Net change in other assets and other liabilities ...... (2,717,310) 2,169,206 125,068
----------- ----------- -----------
Net cash provided by operating activities ......... 4,149,369 3,856,017 2,700,404
----------- ----------- -----------
Cash flows from investing activities:
Principal repayments on:
Loans receivable ........................................ 112,698,300 102,481,371 67,036,963
Mortgage-backed securities .............................. 4,238,302 4,224,776 2,442,953
Investment securities ................................... 1,142,042 2,447,789 2,158,335
Proceeds from sale of:
Loans receivable ........................................ 2,630,969 1,549,116 1,722,721
Mortgage-backed securities .............................. 1,758,789 64,471 --
Investment securities ................................... 6,753,867 3,876,723 39,500
Redemption of FHLB stock .................................. 1,094,300 656,000 955,000
Maturity of investment securities ......................... 19,811,970 17,130,000 7,635,000
Purchase of:
Loans receivable ........................................ (906,792) (37,362,675) (28,213,309)
Mortgage-backed securities .............................. (1,998,351) (3,095,523) (2,542,936)
Investment securities ................................... (15,356,585) (32,556,167) (11,988,779)
FHLB stock .............................................. (448,900) (1,176,900) (1,505,900)
Cash invested in loans receivable ......................... (104,320,244) (89,278,254) (67,058,169)
Cash paid for acquisition, net of cash received ........... (5,739,607) (6,936,679) --
Proceeds from sales of real estate acquired by
foreclosure, net ........................................ 360,103 345,722 335,148
Purchase of office properties and equipment ............... (412,811) (780,856) (1,507,572)
----------- ----------- -----------
Net cash provided by (used in) investing activities 21,305,352 (38,411,086) (30,491,045)
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposits ........................... 3,436,770 1,895,605 (13,873,930)
Deposits acquired, net of premium ......................... -- -- 19,794,592
Repayments of FHLB advances ............................... (124,290) (2,119,864) (2,010,000)
Increase (decrease) in securities sold under agreements
to repurchase, net ...................................... (1,436,456) 1,365,957 (1,987,822)
Increase (decrease) in other borrowings, net .............. (23,900,000) 18,800,000 25,800,000
Repayments of ESOP indebtedness ........................... (576,000) (288,000) (288,000)
Increase (decrease) in advance payments by borrowers
for taxes and insurance ................................. (792,877) 115,265 39,149
Proceeds from sale of common stock, net ................... -- 27,051,859 --
Cash paid to minority stockholders ........................ -- (2,326) --
Exercise of stock options ................................. 1,751 61,096 9,650
Dividends paid ............................................ (1,118,074) (820,195) (1,773,219)
Purchase of treasury stock and retirement of shares ....... -- (8,983,709) --
Purchase of treasury stock ................................ (3,617,138) -- --
Capital contribution from Charter Bancorp, M.H.C .......... -- 100,000 --
----------- ----------- -----------
Net cash provided by (used in)
financing activities ........................... (28,126,314) 37,175,688 25,710,420
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents ........................... (2,671,593) 2,620,619 (2,080,221)
Cash and cash equivalents, beginning of year ................. 8,968,422 6,347,803 8,428,024
----------- ----------- -----------
Cash and cash equivalents, end of year ....................... $ 6,296,829 $ 8,968,422 $ 6,347,803
============= ============= ============
Supplemental disclosure of cash flow information:
Interest paid ............................................. 15,380,434 $ 12,260,869 $ 10,352,617
Taxes paid ................................................ 3,045,500 2,508,882 1,590,000
Loans transferred to real estate acquired by foreclosure .. 961,615 720,040 258,078
Interest credited to deposits ............................. 8,609,797 6,619,453 5,464,128
Securities transferred to available for sale .............. -- 5,971,820 --
============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 23 -
<PAGE>
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(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 Stock Corporation
On December 28, 1995, Charter Bancorp, M.H.C. (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
Charter Bank S.B.'s (the Bank) depositors, Employee Stock
Ownership Plan (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).
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 seven 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.
- 24 -
<PAGE>
Notes to Consolidated Financial Statements
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.
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).
- 25 -
<PAGE>
Notes to Consolidated Financial Statements
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 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.
Premiums and discounts are amortized 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, the Special Report was issued to
allow all entities a one-time opportunity to reconsider their
ability and intent to hold
- 26 -
<PAGE>
Notes to Consolidated Financial Statements
securities to maturity and transfer securities from held to
maturity without "tainting" the remaining held-to-maturity
securities. 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.
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.
Loanorigination 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.
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 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, the Company measures
impairment based on the fair value of the collateral when it
determines foreclosure is probable. Additionally, impairment of
loans for which terms
- 27 -
<PAGE>
Notes to Consolidated Financial Statements
have been modified in a troubled-debt restructuring 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 for impaired loans 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.
Interest income on impaired loans is recognized on a cash basis.
Real Estate Acquired by Foreclosure
Realestate 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.
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.
- 28 -
<PAGE>
Notes to Consolidated Financial Statements
Cost in Excess of Fair Value of Net Assets Acquired
Costin excess of fair value of net assets acquired (goodwill) arose
from the acquisitions of Home Federal Savings Bank, Carbondale,
Illinois in 1997 (see note 2), Community Savings Bank, Marion,
Illinois in 1996 (see note 2), and Carbondale Savings and Loan
Association in 1983, all of which were accounted for by the
purchase method. 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. This intangible asset is being
amortized on an accelerated basis over 10 years. The remaining
unamortized intangible totaled $895,813 at September 30, 1997.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under repurchase
agreements (reverse repurchase agreements). Reverse repur-chase
agreements are treated as financings, and the obligation to
repurchase securities sold is reflected as a liability in the
consolidated balance sheets.
Stock Option Plans
Prior to October 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
On October 1, 1996, the Company adopted SFAS 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income for employee stock option
grants made in 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
Income Taxes
The Company files a consolidated federal income tax return. Deferred
income taxes result from income and expense recogni-tion in
different accounting periods for tax purposes than for financial
reporting purposes (timing differences).
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized
- 29 -
<PAGE>
Notes to Consolidated Financial Statements
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. 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.
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 4,293,449, 4,550,068, and 4,314,838 for the years ended
September 30, 1997, 1996, and 1995, respectively. As a result of
the Conversion, the weighted average number of common shares
outstanding for 1995 was restated based on the Exchange Ratio.
Reclassifications
Certain reclassifications of 1996 and 1995 information have been made
to conform to the 1997 presentation.
(2) Business Combinations
On January 15,1997, the Company completed its acquisition of Home Federal
Savings Bank, Carbondale, Illinois (Home Federal) in exchange for cash
of $6.3 million. Home Federal's assets consisted primarily of loans
receivable of $21.4 million, investment securities of $3.1 million,
and mortgage-backed securities of $1.8 million, while liabilities
consisted primarily of savings deposits of $23.8 million. The
acquisition was accounted for using the purchase method and,
accordingly, the operating results of Home Federal 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 $2.6 million.
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 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.
- 30 -
<PAGE>
Notes to Consolidated Financial Statements
(3) Investment Securities
Theamortized cost and market value of investment securities classified
as available for sale at September 30, 1997 and 1996 follow:
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Market
cost gains losses value
----------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Debt securities:
U.S. government
and agencies ....... $37,419,828 $ 437,682 $ (25,905) $37,831,605
Corporate debentures . 2,098,299 2,018 (387) 2,099,930
Collateralized
mortgage obligations 5,622,860 11,252 (53,113) 5,580,999
Municipal bonds ...... 1,255,891 9,850 -- 1,265,741
Equity securities:
Mutual funds ......... 6,690,162 1,915 (47,613) 6,644,464
Stock in Federal
Home Loan Bank ..... 2,599,500 -- -- 2,599,500
----------- --------- ------------ -----------
$55,686,540 $ 462,717 $ (127,018) $56,022,239
=========== ========= ============ ===========
<CAPTION>
September 30, 1996
---------------------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized 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
Stock in Federal
Home Loan Bank ..... 3,049,900 -- -- 3,049,900
----------- --------- ------------ -----------
$61,973,995 $ 269,539 $ (580,234) $61,663,300
=========== ========= ============ ===========
</TABLE>
<PAGE>
Gross realized gains, gross realized losses, and gross proceeds from
sales of debt and equity securities follow:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- --------
<S> <C> <C> <C>
Gross realized gains ........ $ 374,767 $ 1,425 $ --
Gross realized losses ....... (5,293) (30,231) (13,719)
----------- ----------- --------
Net realized gain
(loss) ............. $ 369,474 $ (28,806) $(13,719)
=========== =========== ========
Gross proceeds .............. $ 6,753,867 $ 3,876,723 $ 39,500
=========== =========== ========
</TABLE>
- 31 -
<PAGE>
Notes to Consolidated Financial Statements
Theamortized cost and market value of debt securities classified as
available for sale at September 30, 1997, by contractual maturity,
follow:
<TABLE>
<CAPTION>
Amortized Market
cost value
----------- -----------
<S> <C> <C>
Within one year ...................... $ 3,388,338 $ 3,404,863
Between one and five years ........... 23,479,669 23,610,544
Between five and ten years ........... 9,115,974 9,170,589
After ten years ...................... 10,412,897 10,592,279
----------- -----------
$46,396,878 $46,778,275
=========== ===========
</TABLE>
Theamortized cost and market value of investment securities classified
as held to maturity at September 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Market
cost gains losses value
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Debt securities:
Corporate debentures .. $1,002,147 $ 583 $ -- $1,002,730
Collateralized mortgage
obligations ......... 1,935,570 6,392 (11,865) 1,930,097
Municipal bonds ....... 2,853,823 42,159 (10) 2,895,972
---------- -------- ----------- ----------
$5,791,540 $ 49,134 $ (11,875) $5,828,799
========== ======== =========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Market
cost gains losses value
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Debt securities:
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>
- 32 -
<PAGE>
Notes to Consolidated Financial Statements
Theamortized cost and market value of debt securities classified as held
to maturity at September 30, 1997, by contractual maturity, follows:
<TABLE>
<CAPTION>
Amortized Market
cost value
---------- ----------
<S> <C> <C>
Within one year ........................ $1,325,678 $1,326,693
Between one and five years ............. 1,150,925 1,164,375
Between five and ten years ............. 150,000 150,000
After ten years ........................ 3,164,937 3,187,731
---------- ----------
$5,791,540 $5,828,799
========== ==========
</TABLE>
(4) Mortgage-Backed Securities
Theamortized cost and market value of mortgage-backed securities
classified as available for sale at September 30, 1997 and 1996
follow:
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------- --------- ------------ -----------
GNMA ...... $ 639,203 $ 69,387 $ -- $ 708,590
FHLMC ..... 8,792,346 166,706 (99,022) 8,860,030
FNMA ...... 3,753,595 95,490 (13,976) 3,835,109
----------- --------- ------------ -----------
$13,185,144 $ 331,583 $ (112,998) $13,403,729
=========== ========= ============ ===========
<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>
<PAGE>
The amortized cost and market value of mortgage-backed securities
classified as available for sale at September 30, 1997, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities due to scheduled repayments and because
borrowers may have the right to prepay obligations with or without
prepayment penalties. The following table does not take into
consideration the effects of possible prepayments:
<TABLE>
<CAPTION>
Amortized Market
cost value
----------- -----------
<S> <C> <C>
Within one year ........................ $ -- $ --
Between one and five years ............. 644,136 641,384
Between five and ten years ............. 18,874 19,250
After ten years ........................ 12,522,134 12,743,095
----------- -----------
$13,185,144 $13,403,729
=========== ===========
</TABLE>
- 33 -
<PAGE>
Notes to Consolidated Financial Statements
Gross realized gains, gross realized losses, and gross proceeds from
sales of mortgage-backed securities follows:
<TABLE>
<CAPTION>
1997 1996
----------- --------
<S> <C> <C>
Gross realized gains .................... $ 19,064 $ --
Gross realized losses ................... (4,205) (8,916)
----------- --------
Net realized gain (loss) .......... $ 14,859 $ (8,916)
=========== ========
Gross proceeds .......................... $ 1,758,789 $ 64,471
=========== ========
</TABLE>
There were no sales of mortgage-backed securities during the year ended
September 30, 1995.
Theamortized cost and market value of mortgage-backed securities
classified as held to maturity at September 30, 1997 and 1996 follow:
<TABLE>
<CAPTION>
September 30, 1997
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------- ------- ---------- ----------
<S> <C> <C> <C> <C>
GNMA .............. $ 446,629 $21,093 $ -- $ 467,722
FHLMC ............. 316,617 8,031 -- 324,648
FNMA .............. 118,138 5,669 -- 123,807
Private pass-
throughs ........ 320,806 4,782 -- 325,588
---------- ------- ---------- ----------
$1,202,190 $39,575 $ -- $1,241,765
========== ======= ========== ==========
<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>
- 34 -
<PAGE>
Notes to Consolidated Financial Statements
The amortized cost and market value of mortgage-backed securities
classified as held to maturity at September 30, 1997, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities due to scheduled repayments and because
borrowers may have the right to prepay obligations with or without
prepayment penalties. The following table does not take into
consideration the effects of possible prepayments:
<TABLE>
<CAPTION>
Amortized Market
cost value
---------- ----------
<S> <C> <C>
Between five and ten years ............. $ 72,740 $ 75,881
After ten years ........................ 1,129,450 1,165,884
---------- ----------
$1,202,190 $1,241,765
========== ==========
</TABLE>
<PAGE>
(5) Loans Receivable
A comparative summary of loans receivable follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Loans secured by real estate:
Residential:
1-4 family .......................... $200,610,239 $193,301,481
Multifamily ......................... 3,053,705 1,748,587
------------ ------------
Total residential ............ 203,663,944 195,050,068
Land held for development ............. 1,531,653 1,055,501
Commercial ............................ 13,705,020 11,621,874
------------ ------------
Total loans secured by
real estate ................ 218,900,617 207,727,443
------------ ------------
Commercial business loans ................ 7,880,656 7,767,959
Consumer loans:
Automobile loans ...................... 47,252,503 50,292,567
Mobile home loans ..................... 292,927 169,808
Education loans ....................... 549,648 1,373,526
Loans secured by deposits ............. 1,820,881 1,589,568
Other ................................. 15,735,460 12,119,599
------------ ------------
Total consumer loans ......... 65,651,419 65,545,068
------------ ------------
292,432,692 281,040,470
------------ ------------
Less:
Loans in process ...................... 769 35,787
Unearned discount, net ................ 2,057,724 2,648,056
Deferred loan fees .................... 274,593 205,280
Allowance for losses .................. 2,257,515 2,418,800
Purchase accounting discounts ......... 192,093 245,618
------------ ------------
4,782,694 5,553,541
------------ ------------
$287,649,998 $275,486,929
============ ============
</TABLE>
The weighted average interest rate on loans was 8.65% and 8.48% at
September 30, 1997 and 1996, respectively.
- 35 -
<PAGE>
Notes to Consolidated Financial Statements
A summary of activity in the allowance for losses for the years
ended September 30, 1997, 1996, and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year .. $ 2,418,800 $ 2,232,016 $ 2,129,296
Provision charged to expense 321,250 170,000 360,000
Acquisition of Home Federal . 190,000 -- --
Acquisition of Community
Savings .................. -- 265,000 --
Charge-offs ................. (829,402) (421,652) (349,839)
Recoveries .................. 156,867 173,436 92,559
----------- ----------- -----------
Balance, end of year ........ $ 2,257,515 $ 2,418,800 $ 2,232,016
=========== =========== ===========
</TABLE>
A summary of loans receivable contractually in arrears three months or
more is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Residential real estate loans .......... $ 826,582 $1,068,570
Commercial real estate loans ........... 381,374 849,529
Consumer loans ......................... 289,219 243,426
---------- ----------
$1,497,175 $2,161,525
========== ==========
Percent of loans receivable ............ .52% .78%
========== ==========
Number of loans ........................ 93 66
========== ==========
</TABLE>
A summary of loans on which interest is not being accrued and impaired
loans at September 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Nonaccrual loans ............................. $381,374 $765,662
Impaired loans continuing to
accrue interest ........................... -- --
-------- --------
Total impaired loans ............. $381,374 $765,662
======== ========
</TABLE>
<PAGE>
The allowance for losses on impaired loans was $204,000 and $375,000 at
September 30, 1997 and 1996, respectively. The average balance of
impaired loans during the years ended September 30, 1997 and 1996 was
$573,518 and $524,403, respectively.
A summary of interest income on nonaccrual and other impaired loans for
the years ended September 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Income recognized - nonaccrual loans .............. $ -- $ --
======== =======
Interest income if interest had accrued -
nonaccrual loans ............................... $ 48,675 $53,681
======== =======
</TABLE>
- 36 -
<PAGE>
Notes to Consolidated Financial Statements
(6) Real Estate Acquired by Foreclosure
A comparative summary of real estate acquired by foreclosure is as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Foreclosed real estate ................... $632,473 $385,074
Deficiency judgments ..................... 37,801 43,205
-------- --------
$670,274 $428,279
======== ========
</TABLE>
(7) Office Properties and Equipment
A comparative summary of office properties and equipment follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Land ...................................... $ 903,727 $ 855,373
Office buildings and improvements ......... 5,245,362 5,321,618
Furniture, fixtures and equipment ......... 4,100,865 3,636,287
Automobiles ............................... 102,833 102,833
----------- ----------
10,352,787 9,916,111
Less accumulated depreciation ............. 4,489,891 3,925,719
----------- ----------
$ 5,862,896 $5,990,392
=========== ==========
</TABLE>
Depreciation expense for the years ended September 30, 1997, 1996, and
1995 amounted to $710,394, $507,285, and $351,612, respectively.
<PAGE>
(8) Deposits
A comparative summary of deposits follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Percent Percent
Stated to to
rate Amount total Amount total
---- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Demand deposits:
Checking 0-2.70% $ 42,257,489 15.3% $ 35,809,064 14.4%
Money market
demand 2.50-3.75 18,158,607 6.6 17,448,651 7.0
Passbook 2.00-2.75 41,577,326 15.1 35,694,715 14.4
------------ ----- ------------ -----
101,993,422 37.0 88,952,430 35.8
------------ ----- ------------- -----
Certificates of
deposit:
Less than 3.00 14,222 - 26,463 -
3.00-4.99 3,111,382 1.1 14,826,775 6.0
5.00-6.99 169,123,261 61.3 141,335,188 56.8
7.00-8.99 1,324,695 .5 3,086,126 1.2
9.00-11.00 412,766 .1 495,645 .2
========== ------------ ----- ------------ -----
173,986,326 63.0 159,770,197 64.2
------------ ----- ------------ -----
$275,979,748 100.0% $248,722,627 100.0%
============ ===== ============ =====
</TABLE>
- 37 -
<PAGE>
Notes to Consolidated Financial Statements
The weighted average interest rate on deposits was 4.67% and 4.63% at
September 30, 1997 and 1996, respectively.
A summary of the maturities of certificates of deposit at September
30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Amount Percent Amount Percent
------------ ----- ------------ -----
<S> <C> <C> <C> <C>
Within one year ...... $112,180,098 64.5% $109,803,423 68.7%
Second year .......... 46,667,854 26.8 32,827,662 20.5
Third year ........... 13,637,680 7.8 10,989,454 6.9
Fourth year .......... 939,670 .6 5,400,553 3.4
Thereafter ........... 561,024 .3 749,105 .5
------------ ----- ------------ -----
$173,986,326 100.0% $159,770,197 100.0%
============ ===== ============ =====
</TABLE>
Interest expense on deposits, by type, for the years ended September 30,
1997, 1996, and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Checking and money
market ..................... $ 1,437,091 $1,334,117 $1,199,954
Savings accounts .............. 1,382,156 953,487 898,191
Certificates of deposit ....... 9,422,778 7,363,202 5,370,258
Amortization of core
deposit intangible ......... 135,916 142,094 98,332
----------- ---------- ----------
$12,377,941 $9,792,900 $7,566,735
=========== ========== ==========
</TABLE>
Certificates of deposit of $100,000 or more totaled $17,535,643 and
$11,837,210 at September 30, 1997 and 1996, respectively. Investment
securities and mortgage-backed securities with a carrying value of
approximately $26,226,000 and $12,207,000 at September 30, 1997 and
1996, respectively, were pledged to secure certain of these
certificates of deposit. Investment securities and mortgage-backed
securities with a carrying value of approximately $4,300,000 and
$3,296,000 at September 30, 1997 and 1996, respectively, were pledged
to secure a commercial checking account.
- 38 -
<PAGE>
Notes to Consolidated Financial Statements
(9) Borrowed Money
A summary of borrowed money at September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
Weighted Weighted
average average
interest interest
Amount rate Amount rate
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Reverse repurchase
agreements ....................... $13,345,251 5.48% $14,781,706 5.35%
Line of credit advances
from FHLB ........................ 17,200,000 6.48 53,600,000 6.22
Fixed-term advances from FHLB due in:
1998 19,500,000 5.42 7,000,000 5.11
2001 271,786 8.36 396,077 8.36
ESOP ................................ -- -- 576,000 8.00
----------- ----
$50,317,037 5.81% $76,353,783 5.97%
=========== ==== =========== ====
</TABLE>
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 $13,948,000 and $14,229,000, respectively, at
Septem-ber 30, 1997. At September 30, 1996, the investment securities
had an amortized cost and market value of $16,878,000 and $16,851,000,
respectively.
The agreements averaged approximately $13,320,000 and $13,510,000 during
1997 and 1996, respectively. The maximum amounts outstanding at any
month-end during 1997 and 1996 were approximately $13,345,000 and
$14,782,000, respectively. Interest expense on reverse repurchase
agreements was approximately $720,000, $741,000, and $803,000 for the
years ended September 30, 1997, 1996, and 1995, 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 $56,491,000 and $53,600,000 during 1997 and 1996,
respectively. Interest expense on line of credit advances was
approximately $1,528,000, $1,180,000, and $973,000 for the years ended
September 30, 1997, 1996, and 1995, respectively.
Interest expense on fixed-term advances from the FHLB was approximately
$1,090,000, $649,000, and $878,000 for the years ended September
30, 1997, 1996, and 1995, respectively.
- 39 -
<PAGE>
Notes to Consolidated Financial Statements
At September 30, 1997 and 1996, total borrowings from the FHLB of Chicago
were $36,971,786 and $60,996,077, 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, 1997, the Company's available credit from the FHLB cannot exceed
the lesser of 35% of total assets ($135.5 million), or 60% of
one-to-four-family residential mortgages not more than 90 days
delinquent ($119.9 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 was collateralized by the ESOP
shares and was reflected as a liability in the consolidated balance
sheet. During 1997, the Company repaid the remaining balance on the
debt. Principal payments totaling $576,000 in 1997 and $288,000 in
1996 and interest payments of approximately $9,000 and $63,000 were
made during 1997 and 1996, respectively.
(10) Income Taxes
The composition of income tax expense for the years ended September 30,
1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal ........... $2,531,015 $ 2,336,702 $ 1,689,259
State ............. 235,537 286,175 198,905
Deferred ............. 890,821 (467,566) (14,141)
---------- ----------- -----------
$3,657,373 $ 2,155,311 $ 1,874,023
========== =========== ===========
</TABLE>
- 40 -
<PAGE>
Notes to Consolidated Financial Statements
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>
1997 1996 1995
------------------------ ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
income tax expense .. $ 3,092,556 34.0% $ 1,772,405 34.0% $ 1,651,686 34.0%
Items affecting
federal income
tax rate:
Amortization
of ESOP awards .. 131,709 1.4 161,587 3.1 72,114 1.5
Tax-exempt
interest ........ (46,663) (.5) (38,824) (.8) (45,269) (.9)
Amortization of
cost in excess
of fair value
of net assets
acquired ........ 154,721 1.7 71,832 1.4 46,379 .9
State income taxes,
net of federal
benefit ......... 306,173 3.4 147,347 2.8 163,020 3.4
Other ............. 18,877 .2 40,964 .8 (13,907) (.3)
----------- ---- ----------- ---- ----------- ----
$ 3,657,373 40.2% $ 2,155,311 41.3% $ 1,874,023 38.6%
=========== ==== =========== ==== =========== ====
</TABLE>
<PAGE>
The components of deferred tax assets and deferred tax liabilities at
September 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
General loan loss allowance ......... $ 735,498 $ 726,528
SAIF special assessment ............. -- 572,973
Available-for-sale securities market
valuation ......................... -- 47,321
Discounts and premiums related to
purchase method of accounting ..... 115,640 57,005
Accrued liabilities ................. 190,817 --
Core deposit intangible ............. 54,515 33,773
Other, net .......................... 33,495 64,437
----------- -----------
Total deferred tax assets .... 1,129,965 1,502,037
----------- -----------
Deferred tax liabilities:
Available-for-sale securities market
valuation ......................... (227,993) --
Loans, due to bad debts taken in
excess of base year reserve ....... (287,590) (217,535)
Restricted stock awards ............. (423,803) --
Tax depreciation in excess of that
recorded for book purposes ........ (238,946) (227,969)
FHLB stock dividends ................ (30,799) (39,929)
Other, net .......................... (131,665) (61,300)
----------- -----------
Total deferred tax liabilities (1,340,796) (546,733)
----------- -----------
Net deferred tax asset
(liability) ............... $ (210,831) $ 955,304
=========== ===========
</TABLE>
-41 -
<PAGE>
Notes to Consolidated Financial Statements
If certain conditions were met, the Company, in determining taxable
income, was 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 and 1995, since this method resulted in the maximum bad debt
deduction. The bad debt deduction under the percentage method was
limited to 8% of taxable income.
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, 1997, the Company had bad debts deducted for tax
purposes in excess of the base year reserve of approximately $742,000.
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, 1997, retained earnings included approximately $9.7
million of base year reserves, for which no deferred federal income
tax liability has been recognized.
(11) Regulatory Matters
The Bank 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 Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
- 42 -
<PAGE>
Notes to Consolidated Financial Statements
Quantitative measures established by regulations to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of September 30, 1997, the Bank meets all capital
adequacy requirements to which they are subject.
As of June 30, 1996, the most recent notification from regulatory
agencies categorized the Bank as well capitalized under the regulatory
framework for prompt correction action. To be well capitalized, banks
must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios of 10%, 6%, and 5%, respectively. There are no
conditions or events since that notification that management believes
have changed the Bank's category.
The Bank's actual and required capital amounts and ratios as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Capital
Actual requirements
-------------------- -------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Total capital (to risk-
weighted assets) ............... $48,699 22.16% $17,579 8.00%
======= ===== ======= ====
Tier I capital (to risk-
weighted assets) ............... $46,800 21.30% $ 8,789 4.00%
======= ===== ======= ====
Tier I capital (to average
assets) ........................ $46,800 12.10% $11,606 3.00%
======= ===== ======= ====
</TABLE>
(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 and 1995 was $113,558 and $102,304, respectively.
There was no expense for the year ended September 30, 1997 since the
plan was fully funded.
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, 1997, 1996, and 1995 was approximately
$67,000, $12,000 and $14,000, respectively.
- 43 -
<PAGE>
Notes to Consolidated Financial Statements
(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 a third party. 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
96,903 shares of common stock at a subscription price of $10.00 per
share using funds loaned by the Company. During 1997, the third party
loan was repaid and added to the Company loan which is being repaid
with level principal payments over 5 years. All shares are held in a
suspense account for allocation among the participants as the loan is
repaid. 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. Compensation expense related to the ESOP was
approximately $638,000, $763,000, and $547,000 for the years ended
September 30, 1997, 1996, and 1995, respectively.
The ESOP shares as of September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Allocated shares ............................. 223,436 180,049
Committed to be released shares .............. -- 7,267
Unreleased shares ............................ 173,549 209,669
---------- ----------
Total ESOP shares ..... 396,985 396,985
========== ==========
Fair value of unreleased shares .............. $3,644,529 $2,620,850
========== ==========
</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.
- 44 -
<PAGE>
Notes to Consolidated Financial Statements
On January 16, 1997, the Company adopted the 1997 Incentive Stock Option
Plan which provided for the granting of options for a maximum of
233,553 shares of common stock at $12.84 per share to directors, key
officers, and employees.
Activity within the plans is summarized as follows:
<TABLE>
<CAPTION>
Number of
shares Price
------ -----
<S> <C> <C>
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
Granted ..................................... 219,500 12.84
Exercised ................................... (365) 4.80
Cancelled ................................... -- --
---------
Balance at September 30, 1997 ............... 456,482 $ 8.67
======== =========
</TABLE>
The Company applies APB Opinion No. 25 in accounting for stock options
and, accordingly, no compensation cost has been recognized in the
consolidated financial statements. Had the Company determined
compensation cost for stock options granted in 1997 based on the fair
value at the grant date under SFAS No. 123, there would be no material
effect on net income nor earnings per share.
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. As of
September 30, 1996, participants had become fully vested and the
shares of stock were released to the appropriate participants.
Compensation expense related to vesting in the plan totaled
approximately $140,000 and $149,000 during the years ended September
30, 1996 and 1995, respectively.
On January 16, 1997, the Company adopted the 1997 Recognition and
Retention Plan which issued 112,000 shares of $0.10 par value common
stock. The market price on the date of issuance was $12.84. The plan
provides that such common stock can be issued to directors and
employees in key management positions to encourage such directors and
key employees to remain with the Company. Interest in the plan for
each participant vests in
- 45 -
<PAGE>
Notes to Consolidated Financial Statements
five equal installments beginning January 16, 1998. The issuance of
the shares has been recorded in the consolidated financial statements
through a $1,438,080 credit to common stock and additional paid-in
capital with a corresponding charge to a contra equity account for the
restricted shares. The contra equity account will be amortized to
compensation expense over the period of vesting. Compensation expense
was $215,712 for the year ended September 30, 1997.
(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, 1997, the Company had outstanding commitments to
originate residential loans of approximately $1,628,000, of which
$425,000 were at fixed rates and $1,203,000 were at adjustable rates.
In addition, the Company had commitments to fund outstanding credit
lines of approximately $9,341,000 at September 30, 1997. 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.
(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.
- 46 -
<PAGE>
Notes to Consolidated Financial Statements
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 approximately $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.
(17) Fair Values of Financial Instruments
The estimated fair values of the Company's interest-earning assets and
interest-bearing liabilities at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
value fair value
------------ ------------
<S> <C> <C>
Interest-earning assets:
Cash and cash equivalents ............. $ 6,296,829 $ 6,296,829
Investment securities ................. 61,813,779 61,851,038
Mortgage-backed securities ............ 14,605,919 14,645,494
Loans receivable ...................... 287,649,998 290,076,173
------------ ------------
$370,366,525 $372,869,534
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Interest-bearing liabilities:
Deposits:
Checking, money market demand,
and passbooks ..................... $101,993,422 $101,993,422
Certificates of deposit ............. 173,986,326 173,876,547
Borrowed money:
Reverse repurchase agreements ...... 13,345,251 13,345,251
Line-of-credit advances
from FHLB ........................ 17,200,000 17,200,000
Fixed-term advances from FHLB ...... 19,771,786 19,771,786
------------ ------------
$326,296,785 $326,187,006
============ ============
</TABLE>
- 47 -
<PAGE>
Notes to Consolidated Financial Statements
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument listed above:
Cash and Cash Equivalents
Cashand 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.
Loans Receivable
Fairvalues 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.
Fairvalue 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, 1997.
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.
- 48 -
<PAGE>
Notes to Consolidated Financial Statements
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) Regulatory Developments
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (DIFA) was
signed into law. DIFA authorized the FDIC to impose a one-time special
assessment on SAIF-assessable deposits of depository institutions.
This special assessment, which was based on SAIF-assessable deposits
at March 31, 1995, was 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.
(19) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the year ended September 30, 1997
is as follows:
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------
Decem- Septem-
ber 31, March 31, June 30, ber 30,
1996 1997 1997 1997
------ ------ ------ ------
(thousands of dollars,
except per share data)
<S> <C> <C> <C> <C>
Total interest income .............. $7,156 $7,422 $7,562 $7,496
Total interest expense ............. 3,880 3,860 3,987 3,997
------ ------ ------ ------
Net interest income ..... 3,276 3,562 3,575 3,499
Provision for losses on loans ...... 111 45 65 100
------ ------ ------ ------
Net interest income
after provision
for losses
on loans ............. 3,165 3,517 3,510 3,399
Noninterest income ................. 618 577 1,889 923
Noninterest expense ................ 1,851 2,229 2,139 2,283
------ ------ ------ ------
Income before income
tax expense .......... 1,932 1,865 3,260 2,039
Income tax expense ................. 772 730 1,351 805
------ ------ ------ ------
Net income .............. $1,160 $1,135 $1,909 $1,234
====== ====== ====== ======
Earnings per share ................. $ .29 $ .26 $ .45 $ .27
====== ====== ====== ======
</TABLE>
- 49 -
<PAGE>
Notes to Consolidated Financial Statements
Selected quarterly financial data for the year ended September 30, 1996
is as follows:
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------
Decem- Septem-
ber 31, March 31, June 30, ber 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
------ ------ ------ ------
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
====== ====== ====== ======
</TABLE>
(1) Includes SAIF special assessment of $1.5 million.
(20) Parent Company Financial Information
Thefollowing are condensed balance sheets as of September 30, 1997 and
1996 and condensed statements of income and cash flows for the year
ended September 30, 1997 and period from Decem- ber 28, 1995 to
September 30, 1996 for Charter Financial, Inc. (parent company only):
<PAGE>
<TABLE>
<CAPTION>
Condensed Balance Sheets
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Assets:
Cash ........................................ $ 7 $ 268
Repurchase agreements ....................... 5,045 4,401
Investment in subsidiary .................... 53,239 53,404
Other assets ................................ 825 275
------- -------
$59,116 58,348
======= =======
Liabilities and stockholders' equity:
Other liabilities ........................... $ 1,025 $ 1,954
Stockholders' equity ........................ 58,091 56,394
------- -------
$59,116 $58,348
======= =======
</TABLE>
- 50 -
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Condensed Statements of Income
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Interest income ............................ $ 323 $ 401
Interest expense ........................... -- 55
------- -------
323 346
Other income ............................... 65 --
Other operating expenses ................... (95) (43)
------- -------
Income before income taxes and
equity in undistributed
earnings of subsidiary ...... 293 303
Income tax expense ......................... 114 116
------- -------
Income before equity in
undistributed earnings
of subsidiary ............... 179 187
Equity in undistributed earnings
of subsidiary ........................... 5,259 2,871 (1)
------- -------
Net income ..................... $ 5,438 $ 3,058
======= =======
</TABLE>
(1) Includes undistributed earnings of subsidiary for the year
ended September 30, 1996.
- 51 -
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
1997 1996
------- --------
(in thousands)
<S> <C> <C>
Operating activities:
Net income ................................... $ 5,438 $ 3,058
Equity in undistributed earnings of
subsidiary ................................. (5,259) (2,871)
Other, net ................................... (695) 2,032
------- --------
Net cash provided by (used in)
operating activities .............. (516) 2,219
------- --------
Investing activities:
Capital contributions (to)
from subsidiary ............................ 5,632 (15,166)
Increase in repurchase agreements ............ (644) (4,401)
------- --------
Net cash provided by (used in)
investing activities .............. 4,988 (19,567)
------- --------
Financing activities:
Proceeds from issuance of stock .............. -- 27,052
Exercise of stock options .................... 2 3
Cash paid to minority stockholders ........... -- (2)
Dividends paid ............................... (1,118) (553)
Purchase of treasury stock ................... (3,617) --
Retirement of stock .......................... -- (8,984)
Capital contribution from Charter
Bancorp, M.H.C ............................. -- 100
------- --------
Net cash provided by (used in)
financing activities .............. (4,733) 17,616
------- --------
Net change in cash and cash
equivalents ....................... (261) 268
Cash and cash equivalents at beginning
of year ...................................... 268 --
------- --------
Cash and cash equivalents at end
of year $ .................................... 7 $ 268
======= ========
</TABLE>
<PAGE>
(21) Event Subsequent to Date of Independent Auditors' Report -
Adoption of Plan of Merger (Unaudited)
On November 19, 1997, the Company's Board of Directors announced the
execution of a definitive agreement with Magna Group, Inc. (Magna) for
the sale of the Company. Under terms of the agreement, stockholders of
the Company will receive 0.5751 shares of Magna common stock for each
of the Company's outstanding common shares. The total value of the
exchange of common shares outstanding, based on the closing bid price
of Magna on Novem- ber 19, 1997, is approximately $100 million. In
addition, Magna will reserve approximately 263,000 shares for future
issuance for the assumption of the Company's outstanding stock
options. The merger is subject to approval by the Company's
stockholders, the receipt of appropriate regulatory approvals, and
several other conditions. This transaction is expected to be
consummated in the middle of calendar 1998.
- 52 -
<PAGE>
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS OFFICERS
- ------------------ --------
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 W. Seymour
- -------------------------- Vice President
James E. McCoskey
Jerry K. Thomas
CORPORATE HEADQUARTERS Vice President
- ----------------------
114 West Broadway Klay D. Tiemann
Sparta, IL 62286 Vice President
(618) 443-2166
Ronald L. Diel
ANNUAL MEETING Vice President
- --------------
Thursday, January 15, 1998 J. Doug Baker
1:30 P.M. Vice President
Charter Financial, Inc.
Corporate Headquarters Carl E. Eubanks
114 West Broadway Vice President
Sparta, IL 62286
William H. Gardiner
STOCK LISTING Vice President
- -------------
NASDAQ Robert A. Law
Symbol: CBSB Vice President
SPECIAL COUNSEL Cynthia M. Calhoun
- --------------- Assistant Vice President
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W. Bruce N. Uchtman
Washington, D.C. 20005-3934 Assistant Vice President
INDEPENDENT AUDITORS Larry D. Keller
- -------------------- Assistant Vice President
KPMG Peat Marwick, LLP
1010 Market Street Bonnie L. Meacham
St. Louis, MO 63101 Assistant Vice President and
Assistant Secretary
<PAGE>
TRANSFER AGENT
- -------------- Rosalyn K. Thies
Registrar and Transfer Company Assistant Vice President and
10 Commerce Drive Assistant Secretary
Cranford, NJ 07016
(800) 368-5948 Deborah J. Baird
Assistant Vice President and
GENERAL INQUIRIES AND REPORTS Assistant Secretary
- -----------------------------
A copy of the Company's 1997 Kay L. Morrison
Annual Report to the Securities Assistant Secretary
and Exchange Commission,
Form 10-K, may be obtained Elizabeth H. Gearhart
without charge by written Assistant Secretary
request of shareholders to:
Linda M. Johnson, Senior Vice Jo Ann Etherton
President, Charter Financial, Assistant Secretary
Inc., 114 West Broadway, Sparta,
IL 62286 Franny R. Presutti
Assistant Secretary
Theresa M. Richter
Assistant Secretary
Mary E. Yeckley
Assistant Secretary
April G. Kremer
Assistant Secretary
Judith L. Batchelor
Assistant Secretary
Josefina M. Beck
Assistant Secretary
Jolene Falat
Assistant Secretary
Marsha A. Pieron
Assistant Secretary
FDIC Disclaimer
- ---------------
This Annual Report has not been reviewed, or confirmed for accuracy or
relevance, by the FDIC.
- 53 -
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
SUBSIDIARIES OF THE COMPANY
Parent Subsidiary State of Incorporation
------ ---------- ----------------------
Charter Financial, Inc. Charter Bank, S.B. Illinois
Charter Bank, S.B. Sparta First Service Corporation Illinois
Independent Auditors' Consent
The Board of Directors
Charter Financial, Inc.
Sparta, Illinois:
We consent to incorporation by reference in the registration statement (No.
333-20173) on Form S-8 of Charter Financial, Inc. of our report dated November
3, 1997, relating to the consolidated balance sheets of Charter Financial, Inc.
and subsidiary as of September 30, 1997 and 1996, 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, 1997, which report is incorporated
by reference in the September 30, 1997 annual report on Form 10-K of Charter
Financial, Inc.
/s/KPMG Peat Marwick, LLP
-------------------------
KPMG Peat Marwick, LLP
St. Louis, Missouri
December 29, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,343
<INT-BEARING-DEPOSITS> 4,954
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,426
<INVESTMENTS-CARRYING> 6,994
<INVESTMENTS-MARKET> 7,071
<LOANS> 289,908
<ALLOWANCE> 2,258
<TOTAL-ASSETS> 387,032
<DEPOSITS> 275,980
<SHORT-TERM> 50,045
<LIABILITIES-OTHER> 2,318
<LONG-TERM> 272
437
0
<COMMON> 0
<OTHER-SE> 57,981
<TOTAL-LIABILITIES-AND-EQUITY> 387,032
<INTEREST-LOAN> 24,247
<INTEREST-INVEST> 5,215
<INTEREST-OTHER> 174
<INTEREST-TOTAL> 29,636
<INTEREST-DEPOSIT> 12,378
<INTEREST-EXPENSE> 15,724
<INTEREST-INCOME-NET> 13,912
<LOAN-LOSSES> 321
<SECURITIES-GAINS> 384
<EXPENSE-OTHER> 8,502
<INCOME-PRETAX> 9,095
<INCOME-PRE-EXTRAORDINARY> 9,095
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,438
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.27
<YIELD-ACTUAL> 8.05
<LOANS-NON> 1,497
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,419
<CHARGE-OFFS> 829
<RECOVERIES> 157
<ALLOWANCE-CLOSE> 2,258
<ALLOWANCE-DOMESTIC> 359
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,899
</TABLE>
