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
JUNE 30, 1997
File Commission No. 0-27304
Charter Financial, Inc.
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(Exact name of registrant as specified in its charter)
Illinois
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(State or other jurisdiction of incorporation or organization)
37-1345386
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(I.R.S. Employer Identification No.)
114 West Broadway
Sparta, Illinois 62286
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code:
(618) 443-2166
Not Applicable
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(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 4,149,758 shares of the Bank's common stock
outstanding as of July 18, 1997.
<PAGE>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
INDEX
<TABLE>
PART I FINANCIAL INFORMATION PAGE
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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 17
SIGNATURES 19
</TABLE>
<PAGE>
Charter Financial, Inc. and Subsidiary
Consolidated Balance Sheets
June 30, 1997 and September 30, 1996
(Unaudited)
<TABLE>
June 30, September 30,
1997 1996
ASSETS
<S> <C> <C>
Cash $ 2,174,919 $ 1,492,740
Interest-bearing deposits 7,278,333 7,475,682
Investment securities, net 58,902,665 67,473,525
Mortgage-backed securities, net 15,454,686 16,632,214
Loans receivable, net 289,796,698 275,486,929
Accrued interest receivable 2,660,302 3,098,131
Real estate acquired by foreclosure, net 506,018 428,279
Stock in Federal Home Loan Bank, at cost 2,549,800 3,049,900
Office properties and equipment, at cost
less accumulated depreciation 5,940,355 5,990,392
Prepaid expenses and other assets 534,329 1,995,423
Deferred tax asset, net 916,153 955,304
Cost in excess of fair value of net assets acquired 5,624,012 3,320,843
Core deposit intangible 929,792 1,031,729
----------- -----------
$ 393,268,062 $ 388,431,091
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 274,184,197 248,722,627
Accrued interest on deposits 704,493 576,341
Borrowed money 58,330,728 76,353,783
Advance payments by borrowers for taxes and insurance 1,384,448 1,084,720
Income taxes payable 725,396 188,097
Accrued expenses and other liabilities 1,037,352 5,111,072
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Total liabilities 336,366,614 332,036,640
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Stockholders' Equity:
Preferred stock, $0.10 par value per share:
1,000,000 shares authorized; none issued - -
Common stock, $0.10 par value per share:
8,000,000 shares authorized; 4,365,458 and
4,253,459 issued at June 30, 1997 and
September 30, 1996, respectively 436,546 425,346
Additional paid-in capital 30,448,820 28,762,464
Treasury stock, at cost: 215,700 shares and -0-
shares at June 30, 1997 and September 30,
1996, respectively (3,617,138) --
Retained earnings-substantially restricted 32,220,890 28,885,198
Unrealized gain (loss) on securities available for sale, net 13,327 (206,204)
Unamortized restricted stock awards (1,294,272) --
Unearned ESOP shares (1,306,725) (1,472,353)
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Total stockholders' equity 56,901,448 56,394,451
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$ 393,268,062 $ 388,431,091
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----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Charter Financial, Inc. and Subsidiary
Consolidated Statements of Income
For the three months and nine months ended
June 30, 1997 and 1996
(Unaudited)
<TABLE>
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 6,240,859 $ 4,883,520 $ 18,029,314 $13,812,489
Mortgage-backed securities 285,169 288,638 835,160 853,426
Investments 984,418 956,728 3,136,978 2,695,645
Other 52,057 70,170 139,047 219,306
------------ ------------ ------------ -----------
Total interest income 7,562,503 6,199,056 22,140,499 17,580,866
------------ ------------ ------------ -----------
Interest expense:
Deposits 3,116,395 2,529,930 9,198,712 6,905,079
Borrowed money 870,715 498,344 2,528,766 1,740,612
------------ ------------ ------------ -----------
Total interest expense 3,987,110 3,028,274 11,727,478 8,645,691
------------ ------------ ------------ -----------
Net interest income 3,575,393 3,170,782 10,413,021 8,935,175
Provision for losses on loans 65,000 50,000 221,250 110,000
------------ ------------ ------------ -----------
Net interest income after provision for losses on loans 3,510,393 3,120,782 10,191,771 8,825,175
------------ ------------ ------------ -----------
Noninterest income:
Late charges and other loan fees 145,432 108,632 419,626 252,710
Gain on sale of investment securities
and mortgage-backed securities 60,890 - 147,352 -
Deposit account fees 238,207 202,953 710,388 570,057
Commissions and fees 56,460 80,092 162,909 209,696
Other 1,388,103 155,557 1,643,733 317,278
------------ ------------ ------------ -----------
Total noninterest income 1,889,092 547,234 3,084,008 1,349,741
------------ ------------ ------------ -----------
Noninterest expense:
Compensation and employee benefits 1,010,091 940,008 2,876,424 2,671,467
Office buildings and equipment 232,529 170,133 687,354 448,746
Data processing 122,181 104,526 363,546 284,039
Advertising 40,573 61,908 145,249 187,293
Deposit insurance premiums 57,247 117,587 94,942 325,000
Other 502,020 402,126 1,588,686 1,200,674
Provision for losses and expenses
on real estate acquired by foreclosure 49,582 30,601 133,948 62,864
Amortization of cost in excess of fair value
of net assets acquired 124,577 64,158 327,784 130,576
------------ ------------ ------------ -----------
Total noninterest expense 2,138,800 1,891,047 6,217,933 5,310,659
------------ ------------ ------------ -----------
Income before income taxes 3,260,685 1,776,969 7,057,846 4,864,257
Income taxes 1,351,326 699,529 2,853,925 1,978,570
------------ ------------ ------------ -----------
Net income $ 1,909,359 $ 1,077,440 $ 4,203,921 $ 2,885,687
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Earnings per share $ 0.45 $ 0.22 $ 0.98 $ 0.62
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
PAGE
<PAGE>
Charter Financial, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
Nine Months Ended June 30, 1997
(Unaudited)
<TABLE>
Unrealized
gain (loss)
Retained on securities Unamortized
Additional earnings, available for restricted Unearned Total
Common paid-in Treasury substantially sale, net, of stock ESOP stockholders'
stock capital stock restricted applicable taxes awards shares equity
<S> <C> <C> <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 - - - 4,203,921 - - - 4,203,921
Issuance of restricted
stock awards 11,200 1,426,880 - - - (1,438,080) - -
Purchase of treasury
stock - - (3,617,138) - - - - (3,617,138)
Amortization of unearned
ESOP shares - 259,476 - - - - 165,628 425,104
Amortization of restricted
stock awards - - - - - 143,808 - 143,808
Dividends declared on
common stock - - - (868,229) - - - (868,229)
Change in unrealized gain
(loss) on securities
available for sale, net - - - - (219,531) - - (219,531)
-------- ----------- ----------- ----------- --------- ----------- ----------- -----------
Balance, June 30, 1997 $436,546 $30,448,820 $(3,617,138) $32,220,890 $ 13,327 $(1,294,272) $(1,306,725) $56,901,448
-------- ----------- ----------- ----------- --------- ----------- ----------- -----------
-------- ----------- ----------- ----------- --------- ----------- ----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
PAGE
<PAGE>
Charter Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Nine months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
June 30, June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,203,921 $ 2,885,687
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 519,498 352,379
Discounts related to purchase accounting (40,144) (49,834)
Cost in excess of fair value of net assets acquired 327,784 130,575
Fees, discounts and premiums (847,687) (2,163,708)
Stock plans 568,912 614,359
Decrease (increase) in accrued interest receivable 574,826 (242,311)
Increase (decrease) in accrued interest on deposits 16,173 (446,591)
Provision for losses on loans 221,250 110,000
Net change in income taxes 602,273 318,722
Gain on sale of investment securities and
mortgage-backed securities, net (147,352) -
Net change in other assets and other liabilities (2,460,434) 1,652,062
Net cash provided by operating activities 3,539,020 3,161,340
Cash flows from investing activities:
Principal repayment on:
Loans receivable 84,132,152 76,408,019
Mortgage-backed securities 3,296,970 3,333,851
Investment securities 1,036,468 1,742,281
Proceeds from sale of:
Loans receivable 1,016,371 1,390,541
Mortgage-backed securities 1,760,221 -
Investment securities 5,618,707 -
Maturity of investment securities 16,590,000 15,685,996
Proceeds from redemption of FHLB stock 695,100 656,000
Purchase of:
Loans receivable (1,056,550) (25,433,335)
Mortgage-backed securities (1,998,351) (2,032,884)
Investment securities (11,201,026) (24,574,604)
Cash invested in loans receivable (76,684,537) (60,037,346)
Cash paid for acquisition, net of cash received (5,789,109) (6,930,243)
Proceeds from sales of real estate acquired by foreclosure, net 368,960 192,016
Proceeds from sales of office properties and equipment 134,280 18,550
Purchase of office properties and equipment (384,374) (508,568)
Net cash provided by (used in) investing activities 17,535,282 (20,089,726)
Cash flows from financing activities:
Increase in deposits 1,641,219 4,983,098
Repayments of FHLB Advances (106,697) (9,908)
Decrease in securities sold under agreements to repurchase, net (1,440,358) (89,073)
Repayments of ESOP indebtedness (576,000) (216,000)
Decrease in other borrowings, net (15,900,000) (12,300,000)
Increase in advance payments by borrowers for taxes & insurance 277,731 378,081
Proceeds from sale of common stock, net - 27,051,859
Exercise of stock options - 59,348
Dividends paid (868,229) (551,018)
Capital contribution from Charter Bancorp, M.H.C. - 100,000
Purchase of treasury stock (3,617,138) -
Purchase of treasury stock and retirement of shares - (1,162,500)
Net cash provided by (used in) financing activities (20,589,472) 18,243,887
Net increase in cash and cash equivalents 484,830 1,315,501
Cash and cash equivalents, beginning of period 8,968,422 6,347,803
Cash and cash equivalents, end of period 9,453,252 7,663,304
Supplemental disclosure of cash flow information:
Interest paid $ 11,599,325 $ 8,846,788
Taxes paid 2,340,500 1,659,848
Loans transferred to real estate acquired by foreclosure 591,355 636,428
Interest credited to deposits 6,252,352 4,739,631
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<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 and nine
month periods ended June 30, 1997 and 1996. For information on
earnings per share data - see footnote 5.
Operating results for the three and nine month periods ended
June 30, 1997 are not necessarily indicative of the results that
may be expected for the fiscal 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.
Earnings per share have been computed based upon net income
for the three months ended June 30, 1997 and 1996, using weighted
average common shares of 4,202,530 and 4,830,732, respectively.
Earnings per share for the nine months ended June 30, 1997 and
(Continued)
<PAGE>
Charter Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1996 have been computed based upon net income for the nine months
using weighted average common shares of 4,277,594 and 4,671,846,
respectively.
(4) Business Combination
At the close of business on January 15, 1997, Charter Bank,
S.B. purchased Home Federal Savings Bank of Carbondale, Illinois,
for $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.
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
book value of $219,000.
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion reviews the consolidated financial
condition and the results of operations of the Company and
Subsidiary at and for the three and nine month periods ended June
30, 1997.
Financial Condition
Assets
Total assets increased approximately $4.8 million, or 1.2%,
to $393.3 million at June 30, 1997 from $388.4 million at
September 30, 1996. For the nine months ended June 30, 1997
loans receivable, net increased $14.3 million, or 5.2%, to $289.8
million from $275.5 million at September 30, 1996. The increase
in assets and loans receivable was attributable primarily to the
acquisition of Home Federal Savings Bank ("Home Federal") that
occurred on January 15, 1997.
Investment securities decreased $8.6 million, or 12.7%, to
$58.9 million at June 30, 1997 from $67.5 million at September
30, 1996. This decrease was primarily due to the maturity of
$16.6 million of investment securities, the sale of $5.6 million
of investment securities held as available for sale, and the $1.0
million in investment security principal repayments. These
decreases were partially offset by the $11.2 million purchase of
investment securities during the nine months ended June 30, 1997.
The Company also added $3.1 million of investment securities to
its investment portfolio as a result of the acquisition of Home
Federal.
Mortgage-backed securities decreased approximately $1.2
million, or 7.1%, to $15.5 million at June 30, 1997 from $16.6
million at September 30, 1996. The decrease in mortgage-backed
securities resulted from $3.3 million in repayments and
prepayments and the sale of $1.8 million mortgage-backed
securities which were held as available for sale. The decrease
was partially offset by the purchase of $2.0 million in mortgage-
backed securities. Additionally, the Company added $1.8 million
of mortgage-backed securities to its investment portfolio as a
result of the acquisition of Home Federal.
Liabilities
Deposits increased approximately $25.5 million, or 10.2%, to
$274.2 million at June 30, 1997 from $248.7 million at September
30, 1996. The increase was primarily the result of the addition
of $23.8 million of deposit liabilities from the Home Federal
acquisition.
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Borrowed money decreased by $18.0 million, or 23.6%, to
$58.3 million at June 30, 1997 from $76.4 million at September
30, 1996. The repayment of short term advances from the FHLB was
funded by investment security maturities and sales and excess
loan repayments.
Results of Operations
The Company's net income increased $832,000, or 77.2%, to
$1.9 million for the three months ended June 30, 1997 from $1.1
million for the three months ended June 30, 1996. Net income
increased $1.3 million, or 45.7%, to $4.2 million for the nine
months ended June 30, 1997, as compared to $2.9 million for the
same period in fiscal year 1996.
Return on average assets and return on average stockholders'
equity were 1.93% and 13.68%, respectively, for the third quarter
of fiscal year 1997 compared to 1.30% and 6.70%, respectively,
for the third quarter of fiscal year 1996. Return on average
assets and return on average stockholders' equity were 1.44% and
9.92%, respectively, for the nine months ended June 30, 1997, and
1.85% and 10.84%, respectively, for the same period in fiscal
year 1996.
Interest Income
Interest income totaled $7.6 million for the quarter ended
June 30, 1997, as compared to $6.2 million for the quarter ended
June 30, 1996, an increase of $1.4 million, or 22.0%. The
increase resulted primarily from an increase of $45.6 million in
average interest-earning assets as well as an increase in the
average yield on interest-earning assets to 8.18% from 7.64%. The
increase in average interest-earning assets resulted primarily
from the acquisition of Community Savings Bank in May 1996 and
Home Federal Savings in January 1997. The increase in average
yield resulted primarily from a change in the asset portfolio
mix.
Interest income totaled $22.1 million for the nine months
ended June 30, 1997, an increase of $4.6 million, or 25.9%,
compared to $17.6 million for the same period in fiscal year
1996. This increase was primarily the result of an increase of
$68.0 million in average interest-earning assets as well as an
increase in the average yield on interest-earning assets to 8.07%
from 7.87%.
Interest income on loans receivable totaled $6.2 million and
$4.9 million for the three months ended June 30, 1997 and 1996,
respectively. The increase resulted primarily from the increase
in average loans receivable of $49.0 million as well as increase
in the average yield on loans receivable
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
to 8.60% from 8.10%. For the nine months ended June 30, 1997 and
1996, interest income on loans receivable totaled $18.0 million
and $13.8 million, respectively. The increase reflects the
increase in average loans receivable of $66.8 million.
Interest income on investment securities increased by
$28,000, or 2.9%, to $984,000 for the three months ended June 30,
1997, from $957,000 for the same period in fiscal year 1996. The
increase resulted primarily from the increase in average yield on
investment securities to 6.33% from 6.10%.
Average investment securities, including FHLB stock,
increased $4.6 million when comparing the nine months ended June
30, 1997 and 1996. Additionally, the average yield on investment
securities increased to 6.64% from 6.16%, respectively, for the
same periods in fiscal years 1997 and 1996. These increases
resulted in an increase in income on investments of $441,000, or
16.4%, to $3.1 million for the nine months ended June 30, 1997,
when compared to $2.7 million for the nine months ended June 30,
1996.
Other interest income decreased $18,000, or 25.8%, for the
three months ended June 30, 1997 to $52,000 from $70,000 for the
same period in fiscal year 1996. The decrease was primarily the
result of a decrease in average interest-bearing assets of $2.2
million which decrease was partially offset by an increase in the
average yield.
For the nine months ended June 30, 1997 and 1996, other
interest income was $139,000 and $219,000, respectively. The
decrease in other interest income of $80,000, or 36.6%, reflects
the decrease in average interest-bearing deposits of $3.5 million
which decrease was partially offset by an increase in the average
yield on interest-bearing deposits.
Interest Expense
Interest expense increased $959,000, or 31.7%, to $4.0
million for the quarter ended June 30, 1997 compared to $3.0
million for the quarter ended June 30, 1996. The increase in
interest expense resulted primarily from the $61.5 million
increase in average interest-bearing liabilities. In addition,
the average cost of deposits increased to 4.58% from 4.36% and
the average cost of borrowed money increased to 5.68% from 5.04%.
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Interest expense increased $3.1 million, or 35.6%, for the
nine months ended June 30, 1997 to $11.7 million from $8.6
million for the same period during fiscal year 1996. The
increase resulted from the $58.2 million increase in average
deposits as well as the $17.3 million increase in average
borrowed money. The increase also reflects the increase in the
average cost of funds on interest-bearing liabilities to 4.79%
from 4.60%.
Net Interest Income
Net interest income totaled $3.6 million and $3.2 million
for the three months ended June 30, 1997 and 1996, respectively,
reflecting an increase of $405,000, or 12.8%. For the nine
months ended June 30, 1997 and 1996, net interest income was
$10.4 million and $8.9 million, respectively, reflecting an
increase of $1.5 million, or 16.5%. 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 June 30, 1997 and 1996,
$65,000 and $50,000, respectively, were added to the allowance
for loan losses. During the nine months ended June 30, 1997 and
1996, $221,000 and $110,000, 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 $1.7 million at
June 30, 1997 from $2.2 million at September 30, 1996.
Management determined that the allowance at June 30, 1997 was
adequate to absorb potential losses. At June 30, 1997, the
allowance for loans losses totaled $2.3 million, or 135.92% 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 June 30, 1997 increased $1.3
million, or 245.2%, to $1.9 million compared to $547,000 for the
same period in fiscal year 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 (see - Other Information).
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Noninterest income increased $1.7 million, or 128.5%, to
$3.1 million for the nine months ended June 30, 1997 when
compared to $1.3 million for the same period in fiscal year 1996.
In addition to the $1.2 million adjustment for discounted whole
loans, the increase is primarily the result of an increase in
late charges and other loan fees, gain on sale of investment
securities and mortgage-backed securities, and deposit account
fees which increases were partially offset by a decrease in
commissions and fees.
Noninterest Expense
Noninterest expense totaled $2.1 million and $1.9 million
for the quarters ended June 30, 1997 and 1996, respectively, an
increase of $248,000 or 13.1%. Noninterest expense totaled $6.2
million and $5.3 million for the nine months ended June 30, 1997
and 1996, respectively, an increase of $907,000, or 17.1%.
Compensation and employee benefits increased $70,000, or
7.5%, for the three months ended June 30, 1997 as compared to the
three months ended June 30, 1996. For the nine months ended June
30, 1997, compensation and employee benefits increased
approximately $205,000, or 7.7%, to $2.9 million from $2.7
million for the nine months ended June 30, 1996. The principal
reason for the increase in compensation and employee benefits is
due to the increased cost of stock plans, including a new
management recognition plan that was initiated during the quarter
ended March 31, 1997, as well as an increase in the number of
employees.
Office building and equipment expenses increased $62,000, or
36.7%, to $233,000 for the three months ended June 30, 1997,
compared to $170,000 for the same period in fiscal year 1996.
For the nine months ended June 30, 1997, office building and
equipment expenses increased $239,000, or 53.2%, to $687,000 from
$449,000 for the same period in fiscal year 1996. The increase
resulted primarily from the acquisitions that occurred in May
1996 and January 1997.
For the three months ended June 30, 1997, data processing
increased $18,000, or 16.9%, to $122,000 from $105,000 for the
same period in fiscal year 1996. For the nine months ended June
30, 1997, data processing increased $80,000, or 28.0%, to
$364,000 from $284,000 for the same period in fiscal year 1996.
The increase resulted primarily from the increase in cost due to
the acquisitions that occurred in May 1996 and January 1997. The
two entities acquired, Community Savings and Home Federal, were
converted to the Bank's in-house data processing system
subsequent to their acquisition. The increased expenses reflect
additional cost of expanded operations and the deconversion
expenses of the service bureau used previously by the entities
acquired.
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Deposit insurance premiums decreased $60,000, or 51.3%, to
$57,000 for the third quarter of fiscal year 1997 compared to
$118,000 for the third quarter of fiscal year 1996. For the nine
months ended June 30, 1997, deposit insurance premiums decreased
$230,000, or 70.8%, to $95,000 from $325,000 for the same period
in fiscal year 1996. These decreases are the result of no
deposit insurance premiums being expensed during the first
quarter of fiscal year 1997 and the reduced assessment rate. 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 decreased to .000648
compared to the prior annual assessment rate of .0023.
Amortization of cost in excess of fair value of net assets
acquired increased $60,000, or 94.2%, to $125,000 for the three
months ended June 30, 1997, compared to $64,000 for the three
months ended June 30, 1996. For the nine months ended June 30,
1997, the amortization of cost in excess of fair value of net
assets acquired increased $197,000, or 151.0%, to $328,000 from
$131,000 for the same period in fiscal year 1996. These
increases are the result of the acquisition of Community Savings
Bank in Marion, Illinois in May 1996 and the acquisition of Home
Federal Savings Bank in January 1997.
Other noninterest expense increased $100,000, or 24.8%, to
$502,000 for the three months ended June 30, 1997 as compared to
$402,000 for the same period in fiscal year 1996. For the nine
months ended June 30, 1997 and 1996, other noninterest expenses
were $1.6 million and $1.2 million, respectively. The increase
of $388,000, or 32.3%, is primarily a result of increased
professional fees, expenses relating to credit cards, and
provisions for losses related to mismanagement of accounts by
the Company's credit card processor (see-Other Information).
Income Taxes
Income taxes increased $652,000 for the three months ended
June 30, 1997 as compared to June 30, 1996. The increase was
primarily the result of an increase in income before income
taxes. The effective income tax rate was 41.4% and 39.4% at June
30, 1997 and 1996, respectively. For the nine months ended June
30, 1997 and 1996, income taxes were $2.9 million and $2.0
million, respectively. The effective income tax rate was 40.4%
at June 30, 1997, compared to 40.7% at June 30, 1996.
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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
fair value less estimated selling cost.
Nonperforming residential real estate of $1.1 million at
June 30, 1997 increased $15,000, or 1.4%, from the level of
nonperforming residential real estate at September 30, 1996.
Nonperforming consumer loans decreased $8,000 to $235,000 at June
30, 1997 from $243,000 at September 30, 1996.
At June 30, 1997, the Company had $386,000 in nonaccrual
commercial real estate loans of which $195,000 was classified as
loss due to the anticipated foreclosure of a commercial business.
Adequate allowances for losses have been established for this
loan.
<TABLE>
June 30, September 30,
1997 1996
(In Thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential real estate $1,084 $1,069
Commercial real estate 386 850
Consumer 235 243
Commercial business - -
Total 1,705 2,162
Total real estate acquired through
foreclosure 506 428
Total nonperforming assets $2,211 $2,590
Total nonperforming assets to
total assets 0.56% 0.67%
</TABLE>
At June 30, 1997, the Company had $386,000 of impaired
loans. The Company applies the recognition criteria of impaired
loans to multi-family residential loans, commercial real estate
loans, agriculture loans and restructured loans that are on
nonaccrual status or internally classified.
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Specifically, a loan is considered impaired when it is probable a
creditor will be unable to collect all amounts due, both
principal and interest, according to the contractual terms of the
loan agreement. At June 30, 1997, the $386,000 of impaired loans
had reserves of $195,000.
Liquidity and Capital Resources
Total stockholders' equity at June 30, 1997 was $56.9
million, an increase of approximately $507,000, or 0.9%, from
$56.4 million at September 30, 1996. The increase is largely
attributable to $4.2 million in net income for the nine months
ended June 30, 1997 which increase is partially offset by the
open market purchase of $3.6 million in the Company's common
stock (which upon repurchase has been classified as Treasury
shares).
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 June 30, 1997 and September 30, 1996, the Company's
cash and interest-bearing deposits totaled $9.5 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 approximately $45.0 million at June 30, 1997.
As of June 30, 1997, the Bank exceeded all regulatory
capital requirements. The Bank's required, actual, and excess
capital levels as of June 30, 1997 are as follows:
<TABLE>
Required Actual
--------------- -------------------------------
Excess of
Actual Over
% of % of Regulatory
Amount Assets Amount Assets Requirement
------- ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
Tier 1 (Core) $11,692,835 3.00% $45,408,867 11.65% $33,716,032
Capital Leverage
Ratio
Tier 1 Risk-
Based Capital
Ratio 8,824,060 4.00% 45,408,867 20.58% 36,584,807
Tier 2 Risk-
Based Capital
Ratio 17,648,120 8.00% 47,364,572 21.47% 29,716,452
</TABLE>
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
At June 30, 1997, 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 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.
Accounting Developments
During October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which establishes
financial accounting and reporting standards for stock-based
employee compensation plans and also applies to transactions in
which an entity issues its equity instruments to acquire goods or
services from nonemployees. SFAS No. 123 defines a fair value-
based method of accounting for an employee stock option or
similar equity instruments and encourages all entities to adopt
that method of accounting. However, it also allows an entity to
continue to measure compensation cost for those plans using the
intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Pro forma disclosures required
for entities that elect to continue to measure compensation cost
using APB 25 must include the effect of all awards granted in
fiscal years that begin after December 15, 1994. The Company
plans to continue to measure compensation cost using APB 25;
therefore, the adoption of SFAS No. 123 will not have any impact
on the Company's financial condition or results of operations.
During June 1996, the FASB issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which provides consistent
standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. The
Statement also requires that a liability can be derecognized if
and only if either (a) the debtor pays the creditor and is
relieved of its obligation for the liability or (b) the debtor is
legally released from the liability either judicially or by the
creditor. This statement is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively.
Earlier or retroactive application is not permitted. Management
does not believe the statement will have a material impact on the
financial position of the Company.
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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.
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.
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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
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
<PAGE>
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 $158,000 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.
In the early 1980s, the Bank purchased from the same Seller
three loan participation packages (with participation interests
ranging from 75% to 90%) which the Bank has historically
accounted for as a purchase of a participation interest.
However, since inception the Bank has received 100% of both the
principal and interest payments in said loans. The Bank has
recorded the additional interest payments received in accounts
payable and has reflected the additional principal payments as a
reduction in the recorded loan balances. At each quarter end and
fiscal year end an adjustment was made to gross up the loan
participation balances based on the original participation
percentages with an offsetting credit to accounts payable.
Recently, it was concluded that at some point in time the
participation agreements were amended whereby the Bank was deemed
to have purchased whole loans at a discount. In order to account
for these loan purchases based on this conclusion, adjustments
were made resulting in an increase to net income of approximately
$791,000. The adjustment increased loans receivable by
approximately $785,000, to reflect the portion of said loans not
previously considered owned by the Bank, and resulted in the
establishment of an unearned discount account of approximately
$162,000. The impact of recording these loan packages as whole
loans should increase monthly interest income by approximately
$8,500 over the next year.
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: 7/18/97 /s/ John A. Becker
-----------------------------------
John A. Becker
Chairman of the Board and President
Date: 7/18/97 /s/ Michael R. Howell
-----------------------------------
Michael R. Howell
Executive Vice President and
Treasurer
(Chief Financial Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1997
<CASH> 2175
<INT-BEARING-DEPOSITS> 7278
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67020
<INVESTMENTS-CARRYING> 7337
<INVESTMENTS-MARKET> 7388
<LOANS> 292115
<ALLOWANCE> 2318
<TOTAL-ASSETS> 393268
<DEPOSITS> 274184
<SHORT-TERM> 51042
<LIABILITIES-OTHER> 3852
<LONG-TERM> 7289
<COMMON> 437
0
0
<OTHER-SE> 56464
<TOTAL-LIABILITIES-AND-EQUITY> 393268
<INTEREST-LOAN> 6241
<INTEREST-INVEST> 1270
<INTEREST-OTHER> 52
<INTEREST-TOTAL> 7563
<INTEREST-DEPOSIT> 3116
<INTEREST-EXPENSE> 3987
<INTEREST-INCOME-NET> 3575
<LOAN-LOSSES> 65
<SECURITIES-GAINS> 61
<EXPENSE-OTHER> 2139
<INCOME-PRETAX> 3261
<INCOME-PRE-EXTRAORDINARY> 3261
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1909
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 8.18
<LOANS-NON> 1705
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2329
<CHARGE-OFFS> 123
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 2318
<ALLOWANCE-DOMESTIC> 362
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1956
</TABLE>
