UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED
DECEMBER 31, 1996
File Commission No. 0-27304
Charter Financial, Inc.
(Exact name of registrant as specified in its charter)
Illinois
(State or other jurisdiction of incorporation or organization)
37-1345386
(I.R.S. Employer Identification No.)
114 West Broadway
Sparta, Illinois 62286
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code:
(618) 443-2166
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / X / No / /
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: There were 4,253,459 shares of the Bank's common stock
outstanding as of February 6, 1997.
<PAGE>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated Balance Sheets 1
- Consolidated Statements of Income 2
- Consolidated Statement of Stockholders'
Equity 3
- Consolidated Statements of Cash Flows 4
- Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
PART II OTHER INFORMATION 16
SIGNATURES 18
</TABLE>
<PAGE>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
Assets 1996 1996
- ------------------------ ------------ -------------
<S> <C> <C>
Cash $ 2,058,790 $ 1,492,740
Interest-bearing deposits 11,383,957 7,475,682
Investment securities, net 60,153,143 67,473,525
Mortgage-backed securities, net 15,900,511 16,632,214
Loans receivable, net 272,301,766 275,486,929
Accrued interest receivable 2,632,283 3,098,131
Real estate acquired by
foreclosure, net 574,408 482,279
Stock in Federal Home Loan Bank,
at cost 3,049,900 3,049,900
Office properties and equipment,
at cost less accumulated
depreciation 5,918,412 5,990,392
Prepaid expenses and other assets 1,038,544 1,995,423
Deferred tax asset 801,171 995,304
Cost in excess of fair value
of net assets acquired 3,240,010 3,320,843
Core deposit intangible 997,750 1,031,729
------------ ------------
$380,050,642 $388,431,091
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $258,073,843 $248,722,627
Accrued interest on deposits 521,122 576,341
Borrowed money 59,857,454 76,353,783
Advance payments by borrowers for
taxes and insurance 594,375 1,084,720
Income taxes payable 910,812 188,097
Accrued expenses and other
liabilities 2,231,906 5,111,072
------------ ------------
Total liabilities 322,189,512 332,036,640
------------ ------------
Stockholders' Equity:
Preferred stock, $0.10 par value
per share: 1,000,000 shares
authorized; none issued - -
Common stock, $0.10 par value
per share: 8,000,000 shares
authorized; 4,253,459 shares
issued at December 31, 1996
and at September 30, 1996 425,346 425,346
Additional paid-in capital 28,822,365 28,762,464
Retained earnings-substantially
restricted 29,810,216 28,885,198
Unrealized gain (loss) on
securities available for
sale, net 251,333 (206,204)
Unearned ESOP shares (1,448,127) (1,472,353)
------------ ------------
Total stockholders' equity 57,861,133 56,394,451
------------ ------------
$380,050,645 $388,431,091
------------ ------------
------------ ------------
See accompanying notes to unaudited consolidated financial
statements.
</TABLE>
<PAGE>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the three months ended
December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------
1996 1995
<S> <C> <C>
Interest income:
Loans receivable $5,692,505 $4,472,098
Mortgage-backed securities 260,710 279,500
Investments 1,144,441 868,016
Other 58,285 70,524
---------- ----------
Total interest income 7,155,941 5,690,138
---------- ----------
Interest expense:
Deposits 2,953,551 2,201,982
Borrowed money 926,767 768,078
---------- ----------
Total interest expense 3,880,318 2,970,060
---------- ----------
Net interest income 3,275,623 2,720,078
Provision for losses on loans
Net interest income after provision
for losses on loans 3,164,373 2,690,078
Noninterest income:
Late charges and other loan fees 127,461 68,381
Gain on sale of investment
securities 55,595 -
Deposit account fees 244,704 186,612
Commissions and fees 50,032 40,313
Other 140,001 68,350
---------- ----------
Total noninterest income 617,793 363,656
---------- ----------
Noninterest expense:
Compensation and employee benefits 803,437 858,149
Office buildings and equipment 215,597 137,279
Data processing 120,830 84,211
Advertising 55,796 36,642
Deposit insurance premiums - 100,878
Other 518,540 417,974
Provision for losses and expenses
on real estate acquired by
foreclosure 55,221 31,282
Amortization of cost in excess of
fair value of net assets acquired 80,833 33,353
---------- ----------
Total noninterest expense 1,850,254 1,699,768
---------- ----------
Income before income taxes 1,931,912 1,353,966
Income taxes 772,357 561,016
---------- ----------
Net income $1,159,555 792,950
---------- ----------
---------- ----------
Earnings per share $ 0.29 $ 0.18
---------- ----------
---------- ----------
See accompanying notes to unaudited consolidated financial
statements.
</TABLE>
PAGE
<PAGE>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
The three months ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
gain (loss)
Retained on securities
Additional earnings, available for Unearned Total
Common paid-in substantially sale, net, of ESOP stockholders'
stock capital restricted applicable taxes shares equity
------- ---------- ------------- ---------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September
30, 1996 $425,346 $28,762,464 $28,885,198 $ (206,204) $(1,472,353) $56,394,451
Net income - - 1,159,555 - - 1,159,555
Amortization of unearned
ESOP shares - 59,901 - - 24,226 84,127
Dividends declared on
common stock - - (234,537) - - (234,537)
Change in unrealized gain
(loss) on securities
available for sale, net - - - 457,537 - 457,537
-------- ----------- ----------- ------------- ------------ -----------
Balance, December 31,
1996 $425,346 $28,822,365 $29,810,216 $ 251,333 $(1,448,127) $57,861,133
-------- ----------- ----------- ------------- ------------ -----------
-------- ----------- ----------- ------------- ------------ -----------
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
PAGE
<PAGE>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,159,555 $ 792,950
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization:
Office properties and equipment 66,585 109,522
Discounts related to purchase accounting (13,381) (16,612)
Cost in excess of fair value of net
assets acquired 80,833 33,353
Fees, discounts and premiums (555,636) (646,929)
Stock plans 84,127 195,138
Increase (decrease) in accrued interest
receivable 465,848 88,312
Decrease in accrued interest on deposits (55,219) (217,865)
Provision for losses on loans 111,250 30,000
Net change in income taxes 722,715 537,793
Net change in other assets and other
liabilities (1,998,145) 176,900
------------ ------------
Net cash provided by operating activities 68,532 1,082,562
------------ ------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 24,702,202 22,873,332
Mortgage-backed securities 832,981 1,023,112
Investment securities 605,451 412,426
Proceeds from sale of:
Loans receivable 708,358 914,323
Investment securities 2,993,155 -
Maturity of investment securities 10,405,000 2,310,000
Purchase of:
Loans receivable (313,929) (999,323)
Mortgage-backed securities - -
Investment securities (6,101,263) (7,434,469)
Cash invested in loans receivable (21,561,562) (17,417,686)
Proceeds from sales of office properties
and equipment 130,976 214,398
Purchase of office properties and equipment (125,581) (153,305)
------------ ------------
Net cash used in investing activities 12,275,788 1,742,808
------------ ------------
Cash flows from financing activities:
Increase (decrease) in deposits 9,351,216 (460,118)
Increase in securities sold under agreements to
repurchase, net (72,491) 3,711
Repayments of FHLB Advances (1,447,838) -
Repayments of ESOP indebtedness (576,000) (72,000)
Decrease (increase) in other borrowings, net (14,400,000) (24,000,000)
Increase in advance payments by borrowers
for taxes and insurance (490,345) (30,429)
Proceeds from sale of common stock, net - 27,203,394
Exercise of stock options - 57,600
Dividends paid (234,537) (134,948)
Capital contribution from Charter Bancorp, M.H.C. - 100,000
------------ ------------
Net cash provided by financing activities (7,869,995) 2,667,210
------------ ------------
Net decrease in cash and cash equivalents 4,474,325 5,492,580
Cash and cash equivalents, beginning of period 8,968,422 6,347,803
------------ ------------
Cash and cash equivalents, end of period $ 13,442,747 $ 11,840,383
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Interest paid $ 3,935,537 $ 3,187,924
Taxes paid 125,500 23,223
Loans transferred to real estate acquired by
foreclosure 333,403 86,090
Interest credited to deposits 1,715,047 1,439,690
Securities transferred to available for sale - 5,971,820
See accompanying notes to unaudited consolidated financial
statements.
</TABLE>
<PAGE>
Charter Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements
were prepared in accordance with instructions for Form 10-Q and,
therefore, do not include information for footnotes necessary for
a complete presentation of financial position, results of
operations, and cash flows in conformity with generally accepted
accounting principles. The following material under the heading
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" is written with the presumption that the
users of the interim consolidated financial statements have read,
or have access to, the Company's latest audited consolidated
financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and
Results of Operations as of September 30, 1996 and for the three
year period then ended. Therefore, only material changes in
financial condition and results of operations are discussed in
the remainder of Part I.
All adjustments (consisting only of normal recurring
accruals) which, in the opinion of management, are necessary for
a fair presentation of the consolidated financial statements have
been included in the results of operations for the three month
periods ended December 31, 1996 and 1995. For information on
earnings per share data - see footnote 5.
Operating results for the three month period ended December
31, 1996 are not necessarily indicative of the results that may
be expected for the year ending September 30, 1997.
(2) Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements
include the accounts of Charter Financial, Inc., Charter Bank,
S.B. and Sparta First Service Corporation. All significant
intercompany items have been eliminated.
(3) 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. For purposes of computing earnings per share, only
Employee Stock Option Plan ("ESOP") shares that have been
committed to be released are considered outstanding.
<PAGE>
Earnings per share have been computed based upon net income
for the three months ended December 31, 1996 and 1995, using
weighted average common shares of 4,042,849 and 4,503,169,
respectively.
Charter Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(4) Recent Event
------------
At the close of business on January 15, 1997, Charter Bank,
S.B. purchased Home Federal Savings of Carbondale, Illinois, for
$6.3 million. The acquisition was accounted for as a purchase
and the Bank recorded approximately $2.2 million of goodwill. The
goodwill will be amortized over a 15 year period. 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 $1.9 million, investment securities of $3.1
million and buildings and equipment with a value of $567,000.
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion reviews the financial condition and
the results of operations of the Company and Subsidiary at and
for the three months ended December 31, 1996.
Financial Condition
Assets
- ------
Total assets decreased approximately $8.4 million, or 2.2%,
to $380.1 million at December 31, 1996 from $388.4 million at
September 30, 1996. For the three months ended December 31, 1996
loans receivable, net decreased $3.2 million, or 1.2%, to $272.3
million from $275.5 million at September 30, 1996. This decrease
was primarily attributable to the $24.7 million in repayments and
prepayments on loans receivable which decrease was partially
offset by the $21.6 million in loan originations and purchases.
Investment securities decreased approximately $7.3 million,
or 10.8%, to $60.2 million at December 31, 1996 from $67.5
million at September 30, 1996. This decrease was primarily due to
the maturity of $10.4 million of investment securities, the sale
of $3.0 million of investment securities held as available for
sale and the $605,000 in principal repayments. The decrease was
partially offset by the purchase of $6.1 million in securities as
well as the $573,000 change in unrealized gain on investment
securities held as available for sale.
Mortgage-backed securities decreased approximately $732,000,
or 4.4%, to $15.9 million at December 31, 1996 from $16.6 million
at September 30, 1996. The decrease in mortgage-backed securities
resulted from $833,000 in repayments and prepayments, which was
partially offset by $115,000 change in unrealized gain on
mortgage-backed securities held as available for sale.
Liabilities
- -----------
Deposits increased approximately $9.4 million, or 3.8%, to
$258.1 million at December 31, 1996 from $248.7 million at
September 30, 1996. The increase was primarily the result of the
increase in personal and commercial checking accounts and short-
term deposits.
Borrowed money decreased by $16.5 million, or 21.6%, to
$59.9 million at December 31, 1996 from $76.4 million at
September 30, 1996. The decrease resulted primarily from the
$14.4 million repayment of short term advances from the FHLB.
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The Company's net income increased $367,000, or 46.2%, to
$1.2 million for the three months ended December 31, 1996 from
$793,000 for the three months ended December 31, 1995. Return on
average assets and return on average stockholders' equity were
1.21% and 8.10%, respectively, for the first quarter of 1997
compared to 1.08% and 8.70%, respectively, for the first quarter
of 1996.
Interest Income
- ---------------
Interest income totaled $7.2 million for the quarter ended
December 31, 1996, as compared to $5.7 million for the quarter
ended December 31, 1995, an increase of $1.5 million, or 25.8%.
The increase resulted primarily from an increase of $75.7 million
in average interest-earning assets which increase was partially
offset by a decrease in the average yield on interest-earning
assets to 8.02% from 8.10%. The increase in average interest-
earning assets resulted primarily from the acquisition of
Community Savings Bank in May 1996. The decrease in the average
yield reflects the change in the composition of the interest-
earning assets.
Interest income on loans receivable totaled $5.7 million and
$4.5 million for the three months ended December 31, 1996 and
1995, respectively. The increase resulted primarily from the
increase in average loans receivable of $70.5 million, or 34.8%,
which increase was partially offset by the decrease in the
average yield in loans receivable to 8.34% from 8.83%.
The income on the mortgage-backed securities portfolio
decreased $19,000, or 6.7%, to $261,000 for the quarter ended
December 31, 1996 compared to $280,000 for the quarter ended
December 31, 1995. The decrease in interest income on the
mortgage-backed securities was primarily the result of a decrease
in the average yield on mortgage-backed securities to 6.51% from
7.04% which decrease was partially offset by a $179,000 increase
in average mortgage-backed securities outstanding.
Interest income on investment securities increased to $1.1
million for the three months ended December 31, 1996, from
$868,000 for the same period in 1995, an increase of $276,000, or
31.8%. The increase resulted primarily from the increase in the
average yield on investments (including investment securities and
FHLB stock) to 7.06% from 6.10% as well as the increase in
average investments of $7.9 million.
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Other interest income decreased $12,000 for the three months
ended December 31, 1996 to $58,000 from $71,000 for the same
period in 1995. The decrease was primarily the result of a
decrease in the average other interest-bearing assets by $2.9
million.
Interest Expense
- ----------------
Interest expense increased $910,000, or 30.6%, to $3.9
million for the quarter ended December 31, 1996 compared to $3.0
million for the quarter ended December 31, 1995. The increase
resulted from the increase in the cost of average deposits to
4.64% from 4.45% as well as the increase in average deposits and
borrowed money by $56.2 million and $14.8 million, respectively,
which increases were partially offset by a decrease in the cost
of average borrowed money to 5.93% from 6.44%. The increase in
the cost of average deposits resulted primarily from acquisition
of deposits from Community Savings.
Net Interest Income
- -------------------
Net interest income totaled $3.3 million and $2.7 million
for the three months ended December 31, 1996 and 1995,
respectively, reflecting an increase of $556,000, or 20.4%. The
increase reflects the impact of a more significant increase in
the level of higher yielding interest-earning assets as compared
to the increase in average interest-bearing liabilities.
Provision for Losses on Loans
- -----------------------------
During the three months ended December 31, 1996 and 1995,
$111,000 and $30,000, respectively, were added to the allowance
for loan losses. The loan portfolio is regularly reviewed by
management, including problem loans, and changes in the relative
makeup of the portfolio to determine whether any loans require
classification or the establishment of additional reserves.
Total nonperforming loans decreased to $1.5 million at December
31, 1996 from $2.2 million at September 30, 1996. Management
determined that the allowance at December 31, 1996 was adequate
to absorb potential losses. At December 31, 1996, the allowance
for loans losses totaled $2.3 million, or 152.81%, of
nonperforming loans.
Noninterest Income
- ------------------
The principal sources of noninterest income include late
charges and other loan fees, deposit account fees, and
commissions and fees from brokerage activities. Noninterest
income for the quarter ended December 31, 1996 increased to
$618,000 compared to $364,000 for the same period in fiscal
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
year 1996. The increase is primarily the result of an increase
in late charges and other loan fees, deposit account fees and
gain on sale of investment securities held as available for sale.
Noninterest Expense
- -------------------
Noninterest expense totaled $1.9 million and $1.7 million
for the quarters ended December 31, 1996 and 1995, respectively,
an increase of $150,000 or 8.9%.
Compensation and employee benefits decreased $55,000, or
6.4%, for the three months ended December 31, 1996 as compared to
the three months ended December 31, 1995. The principal reason
for the decrease in compensation and employee benefits is due to
the full amortization of the MRP plan at September 30, 1996.
Office buildings and equipment increased $78,000, or 57.1%,
to 216,000 for the three months ended December 31, 1996, compared
to $137,000 for the same period ended December 31, 1995. The
increase resulted primarily from the acquisition of Community
Savings Bank in May 1996.
Deposit insurance premiums were not expensed during the
first quarter of fiscal year 1997. Due to the Deposit Insurance
Funds Act of 1996 and the result of the recapitalization of SAIF,
the Bank was refunded the quarterly assessment. Beginning with
the January 1, 1997, the annual assessment rate on the SAIF
deposits will be .000648 compared to the prior annual assessment
rate of .0023.
Income Taxes
- ------------
Income taxes increased approximately $211,000 for the three
months ended December 31, 1996 as compared to December 31, 1995.
The effective income tax rate was 40.0% and 41.4% at December 31,
1996 and 1995, respectively.
Net Income
- ----------
Net income totaled $1.2 million for the quarter ended
December 31, 1996 as compared with $793,000 for the quarter ended
December 31, 1995. The increase resulted primarily from an
increase in net interest income.
<PAGE>
Nonperforming Assets
The following table sets forth information with respect to
nonperforming assets. Nonaccrual loans are those loans on which
the accrual of interest has ceased. Generally, loans are placed
on nonaccrual status when they are more than 90 days
contractually delinquent, and in the opinion of management,
collection of additional interest is unlikely. Other
nonperforming assets represent property acquired through
foreclosure or repossession. Foreclosed property is carried at
the lower of its fair value or the principal balance of the
related loan.
Nonperforming residential real estate of $833,000 at
December 31, 1996 decreased $236,000, or 22.1%, from the level of
nonperforming residential real estate at September 30, 1996.
Nonperforming consumer loans increased slightly to $255,000 at
December 31, 1996 from $243,000 at September 30, 1996.
Nonperforming commercial real estate loans of $386,000
decreased at December 31, 1996, by $464,000, or 54.6%, from
$850,000 at September 30, 1996. The decrease is primarily the
result of proceeds of funds received from a bankruptcy trustee
for one commercial loan. Additionally, one commercial loan for
$145,000, which had previously been classified as a loss and 100%
reserved for, was written off.
<TABLE>
<CAPTION>
December 31, September 30,
1996 1995
------------ -------------
(In Thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual
basis:
Residential real estate $ 833 $ 1,069
Commercial real estate 386 850
Consumer 255 243
Commercial business --- ---
Total 1,474 2,162
Total real estate acquired through
foreclosure 574 428
Total nonperforming assets $ 2,048 $ 2,590
Total nonperforming assets to
total assets 0.54% 0.67%
</TABLE>
<PAGE>
Liquidity and Capital Resources
Total stockholders' equity at December 31, 1996 was $57.9
million, an increase of approximately $1.5 million, or 2.6%, from
$56.4 million at September 30, 1996. The increase was largely
attributable to the net income for the quarter ended December 31,
1996.
The Company's primary sources of funds include deposits,
principal and interest payments on loans, investments and
mortgage-backed securities, maturities of investments and
mortgage-backed securities, borrowings from the Federal Home Loan
Bank and repurchase agreements. While maturities and scheduled
repayments on loans, mortgage-backed securities and investments
are predictable sources of funds, deposit flows and prepayments
are greatly influenced by market interest rates and competition.
The Company's most liquid assets are cash and interest-bearing
deposits. At December 31, 1996 and September 30, 1996, the
Company's cash and interest-bearing deposits totaled $13.4
million and $9.0 million, respectively. The Company's other
sources of liquidity include investment securities classified as
available for sale and the proceeds from Federal Home Loan Bank
advances which totaled $46.5 million at December 31, 1996.
As of December 31, 1996, the Bank exceeded all capital
requirements. The required, actual, and excess capital levels as
of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Required Actual
--------------- -------------------------------
Excess of
Actual Over
% of % of Regulatory
Amount Assets Amount Assets Requirement
------- ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
Tier 1 (Core) $11,688,633 3.00% $47,404,476 12.03% $35,715,843
Capital Leverage
Ratio
Tier 1 Risk-
Based Capital
Ratio 8,348,802 4.00% 47,404,476 22,71% 39,055.674
Tier 2 Risk-
Based Capital
Ratio 16,697,603 8.00% 49,262,050 23,60% 32,564,447
</TABLE>
At December 31, 1996, the Bank was required to maintain
minimum levels of liquid assets by FDIC regulations. The Bank'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 5.00%.
The Bank historically has maintained a level of liquid assets in
excess of requirements. The Bank adjusts its liquidity levels in
order to meet
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
funding needs for deposit outflows, payment of real estate taxes
on mortgage loan escrow accounts, repayment of borrowings, when
applicable, and loan commitments. The Bank also adjusts
liquidity as appropriate to meet its asset/liability management
objectives. For information regarding funds which the Bank had
on deposit with a financial institution which was seized by state
banking regulatory authorities; see, Part II, Other Information.
Impact of New Accounting Pronouncements
Accounting for Mortgage Servicing Rights. In May 1995, the
FASB issued Statement of Financial Accounting Standards 122,
Accounting for Mortgage Servicing Rights, an amendment of FASB
Statement No. 65 (SFAS 122). SFAS 122 amends Statement of
Financial Accounting Standards No. 65, Accounting for Certain
Mortgage Companying Activities, to require that a mortgage
Companying enterprise recognize as separate assets rights to
service mortgage loans for others, however those servicing rights
are acquired. A mortgage Companying enterprise that acquires
mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those
loans with servicing rights retained should allocate the total
cost of the mortgage loans to the mortgage servicing rights and
the loans (without the mortgage servicing rights) based on their
relative fair values, if it is practicable to estimate those fair
values. If it is not practicable to estimate the fair values of
the mortgage servicing rights and the mortgage loans (without the
mortgage servicing rights), the entire cost of purchasing or
originating the loans should be allocated to the mortgage loans,
and no cost should be allocated to mortgage servicing rights.
SFAS 122 also requires that a mortgage Companying enterprise
assess its capitalized mortgage servicing rights for impairment
based on the fair value of those rights. SFAS 122 must be
applied prospectively for fiscal years beginning after December
15, 1995, with earlier adoption encouraged, to transactions in
which a mortgage Companying enterprise sells or securitizes
mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing
rights, including those purchased before the adoption of SFAS
122. Retroactive capitalization of mortgage servicing rights
retained in transactions in which a mortgage Companying
enterprise originates mortgage loans and sells or securitizes
those loans before the adoption of SFAS 122 is prohibited. The
Company plans to adopt the provisions of SFAS 122 effective
October 1, 1996. Management does not believe the adoption of
SFAS 122 will have a material effect on the Company's financial
position.
During October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which establishes
financial accounting and reporting standards for stock-based
employee compensation plans and also applies to transactions in
which an entity issues its equity instruments to acquire goods or
services from nonemployees. SFAS No. 123 defines a fair value-
based method of accounting for an employee stock option or
similar equity instruments
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
and encourages all entities to adopt that method of accounting.
However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value-based
method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"). Pro forma disclosures required for entities that elect to
continue to measure compensation cost using APB 25 must include
the effect of all awards granted in fiscal years that begin after
December 15, 1994. The Company plans to continue to measure
compensation cost using APB 25; therefore, the adoption of SFAS
No. 123 will not have any impact on the Company's financial
condition or results of operations.
During June 1996, the FASB issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which provides consistent
standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. The
Statement also requires that a liability can be derecognized if
an only if either (a) the debtor pays the creditor and is
relieved of its obligation for the liability or (b) the debtor is
legally released from the liability either judicially or by the
creditor. This statement is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively.
Earlier or retroactive application is not permitted. Management
does not believe the statement will have a material impact on the
financial position of the Company.
Impact of Inflation and Changing Prices
The unaudited consolidated financial statements and related
data presented 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.
Recent Developments
At the close of business on January 15, 1997, Charter Bank,
S.B. purchased Home Federal Savings of Carbondale, Illinois, for
$6.3 million. The acquisition was accounted for as a purchase
and the Bank recorded approximately $2.2 million of goodwill. As
part of the purchase, the Bank assumed $23.8 million in deposit
liabilities. The Bank acquired loans
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
receivable of $21.4 million, mortgage-backed securities of $1.9
million, investment securities of $3.1 million and buildings and
equipment with a value of $567,000.
On May 9, 1995, Charter Bank (the Bank) entered into an
agreement with FTA Card Services, Inc. (FTA) wherein FTA would
provide third-party processing and servicing to the Bank for
credit cards to the Bank's customers. FTA billed, collected and
administered payment on said Charter Financial, Inc. and
Subsidiary card program on behalf of the Bank. On November 8,
1996, FTA notified Charter Bank that FTA was withdrawing from the
credit card business and that a deficiency existed in the Bank's
clearing account. According to FTA, the deficiency was due to
FTA's poor bookkeeping and internal controls. FTA's president
accepted full responsibility for said deficiency and that he
would provide to the Bank a viable plan for taking care of said
deficiency. At least nine other financial institutions were also
involved. The Bank has determined its share of said deficiency
to be approximately $330,000 although FTA estimates the Bank's
deficiency to be approximately $142,000. The Bank, to date, has
established a reserve of $128,000 for potential losses. The Bank
is pursuing its options regarding collection of this deficiency
from FTA and its president. The Bank will continue to review its
reserve as more information and facts become available.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
-----------------
From time to time, the Company is involved as a plaintiff or
defendant in various legal actions incident to its business.
None of these actions individually or in the aggregate is
believed to be material to the financial condition of the
Company.
Item 2. Changes in Securities
---------------------
Not applicable
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Subsequent Event
----------------
None
Item 6. Other Information
-----------------
In connection with its mutual holding company reorganization
and stock offering, the Company's employee stock ownership plan
and trust (the "ESOP") borrowed funds from Nationar, a New York
trust company which is owned by savings banks in New York state,
and used such funds to purchase eight percent of the shares of
the Company's common stock in the offering. All of such shares
were pledged as collateral to support the ESOP loan. On February
6, 1995, Nationar was seized by the New York Banking Department
because of liquidity problems and continuing losses. The unpaid
principal balance of the ESOP loan was $792,000 as of December
31, 1995. In connection with the ESOP loan, the Company's mutual
holding
<PAGE>
company entered into a pledge and security agreement with
Nationar pledging cash deposits to secure the ESOP loan.
Subsequent to entering into the loan agreement, the Bank
deposited approximately $340,000 in a non-insured interest-
earning deposit account with Nationar. On December 23, 1996, the
Bank received payment in full from the Superintendent of Banking.
At the close of business on January 15, 1997, Charter Bank,
S.B. purchased Home Federal Savings of Carbondale, Illinois, for
$6.3 million. The acquisition was accounted for as a purchase
and the Bank recorded approximately $2.2 million of goodwill.
The goodwill will be amortized over a 15 year period. 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 $1.9 million, investment
securities of $3.1 million and building and equipment with a
value of $567,000.
On May 9, 1995, Charter Bank (the Bank) entered into an
agreement with FTA Card Services, Inc. (FTA) wherein FTA would
provide third-party processing and servicing to the Bank for
credit cards to the Bank's customers. FTA billed, collected and
administered payment on said card program on behalf of the Bank.
On November 8, 1996, FTA notified Charter Bank that FTA was
withdrawing from the credit card business and that a deficiency
existed in the Bank's clearing account. According to FTA, the
deficiency was due to FTA's poor bookkeeping and internal
controls. FTA's president accepted full responsibility for said
deficiency and that he would provide to the Bank a viable plan
for taking care of said deficiency. At least nine other
financial institutions were also involved. The Bank has
determined its share of said deficiency to be approximately
$330,000 although FTA estimates the Bank's deficiency to be
approximately $142,000. The Bank, to date, has established a
reserve of $128,000 for potential losses. The Bank is pursuing
its options regarding collection of this deficiency from FTA and
its president. The Bank will continue to review its reserve as
more information and facts become available.
Item 7. Exhibits and Reports
--------------------
None
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CHARTER FINANCIAL, INC.
Date: February 13, 1997 /s/ John A. Becker
--------------------------------------
John A. Becker
Chairman of the Board and President
Date: February 13, 1997 /s/ Michael R. Howell
--------------------------------------
Michael R. Howell
Executive Vice President and
Treasurer
(Chief Financial Officer)
