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, 1997
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
- --------------------------------------------------------------------------------
(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 4,177,673
shares of the Bank's common stock outstanding as of February 6, 1998.
<PAGE>
CHARTER FINANCIAL, INC. AND SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated Balance Sheets
- Consolidated Statements of Income
- Consolidated Statement of Stockholders'
Equity
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
PART II OTHER INFORMATION
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
Charter Financial, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 1997 and September 30, 1997
(Unaudited)
December 31, September 30,
1997 1997
------------- -------------
<S> <C> <C>
Assets
Cash ........................................................... $ 2,144,964 $ 1,342,727
Interest-bearing deposits ...................................... 6,711,203 4,954,102
Investment securities, net ..................................... 60,456,584 61,813,779
Mortgage-backed securities, net ................................ 13,875,365 14,605,919
Loans receivable, net .......................................... 283,365,630 287,649,998
Accrued interest receivable .................................... 2,597,451 2,693,331
Real estate acquired by foreclosure, net ....................... 476,916 670,274
Office properties and equipment, at cost
less accumulated depreciation .............................. 5,660,281 5,862,896
Prepaid expenses and other assets .............................. 858,295 765,415
Income taxes receivable ........................................ -- 280,655
Cost in excess of fair value of net
assets acquired ............................................ 5,373,903 5,497,576
Core deposit intangible ........................................ 863,378 895,813
------------- -------------
$ 382,383,970 $ 387,032,485
============= =============
Liabilities and Stockholders' Equity
Deposits ....................................................... 271,945,538 275,979,748
Accrued interest on deposits ................................... 679,046 783,851
Borrowed money ................................................. 48,263,779 50,317,037
Advance payments by borrowers for taxes
and insurance .............................................. 537,738 313,840
Income taxes payable ........................................... 636,364 --
Deferred tax liability, net .................................... 193,911 210,831
Accrued expenses and other liabilities ......................... 687,507 1,009,882
------------- -------------
Total liabilities ........ 322,943,883 328,615,189
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Charter Financial, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 1997 and September 30, 1997
(Unaudited)
December 31, September 30,
1997 1997
------------- -------------
<S> <C> <C>
Stockholders' Equity:
Common stock, $0.10 par value per share:
8,000,000 shares authorized; 4,389,373 and
4,365,823 issued at December 31, 1997 and at
September 30, 1997, respectively ........................... 438,937 436,582
Additional paid-in capital ................................... 30,823,290 30,592,730
Retained earnings - substantially restricted ................. 33,806,875 33,137,223
Unrealized gain (loss) on securities available for sale, net . 297,360 326,291
Unamortized restricted stock awards .......................... (1,158,773) (1,222,368)
Unearned ESOP shares ......................................... (1,150,464) (1,236,024)
Treasury stock, at cost: 215,700 shares at
December 31, 1997 and September 30, 1997,
respectively ............................................... (3,617,138) (3,617,138)
------------- -------------
Total stockholders' equity 59,440,087 58,417,296
------------- -------------
$ 382,383,970 $ 387,032,485
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Charter Financial, Inc. and Subsidiary
Consolidated Statements of Income
For the three months ended
December 31, 1997 and 1996
(Unaudited)
For the Three Months Ended
December 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Interest income:
Loans receivable ............................ $6,138,506 $5,692,505
Mortgage-backed securities................... 242,999 260,710
Investments ................................. 983,699 1,144,441
Other ....................................... 43,943 58,285
---------- ----------
Total interest income ................... 7,409,147 7,155,941
---------- ----------
Interest expense:
Deposits .................................... 3,219,983 2,953,551
Borrowed money .............................. 732,778 926,767
---------- ----------
Total interest expense .................. 3,952,761 3,880,318
---------- ----------
Net interest income ..................... 3,456,386 3,275,623
Provision for losses on loans ...................... 75,000 111,250
---------- ----------
Net interest income after provision
for losses on loans ........................ 3,381,386 3,164,373
---------- ----------
Noninterest income:
Late charges and other loan fees............. 144,539 127,461
Gain on sale of investment securities ...... 103,091 55,595
Deposit account fees......................... 264,652 244,704
Commissions and fees ........................ 37,285 50,032
Other ....................................... 118,024 140,001
---------- ----------
Total noninterest income ................ 667,591 617,793
---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Charter Financial, Inc. and Subsidiary
Consolidated Statements of Income
For the three months ended
December 31, 1997 and 1996
(Unaudited)
(continued)
For the Three Months Ended
December 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Noninterest expense:
Compensation and employee benefits ......... 1,166,618 803,437
Office buildings and equipment .............. 229,499 215,597
Data processing ............................. 150,269 120,830
Advertising ................................. 50,397 55,796
Deposit insurance premiums................... 40,531 --
Other ....................................... 515,297 518,540
Provision for losses and expenses
on real estate acquired by foreclosure ... 52,599 55,221
Amortization of cost in excess of fair value
of net assets acquired..................... 123,673 80,833
---------- ----------
Total noninterest expense................ 2,328,883 1,850,254
---------- ----------
Income before income taxes .............. 1,720,094 1,931,912
Income taxes ........................................ 730,432 772,357
---------- ----------
Net income .............................. $ 989,662 $1,159,555
========== ==========
Earnings per share:
Basic ....................................... $ 0.25 $ 0.29
========== =========
Diluted ..................................... $ 0.23 $ 0.28
========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Charter Financial, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
Three Months Ended December 31, 1997
(Unaudited)
Unrealized
gain (loss)
Retained on securities Unamortized
Additional earnings, available for restricted
Common paid-in substantially sale, net, of stock
stock capital restricted applicable taxes awards
--------- ------------ ------------ ------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1997 .... $ 436,582 $ 30,592,730 $ 33,137,223 $326,291 $(1,222,368)
Net income ..................... -- -- 989,662 -- --
Exercise of stock options ...... 2,715 153,347 -- -- --
Shares cancelled ............... (360) (87,199) -- -- --
Amortization of unearned
ESOP shares ........... -- 164,412 -- -- --
Amortization of restricted
stock awards .......... -- -- -- -- 63,595
Dividends declared on
common stock .......... -- -- (320,010) -- --
Change in unrealized gain
(loss) on securities
available for sale, net -- -- -- (28,931) --
--------- ------------ ------------ ------- ----------
Balance, December 31, 1997 ..... $ 438,937 $ 30,823,290 $ 33,806,875 297,360 (1,158,773)
========= ============ ============ ======= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Charter Financial, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
Three Months Ended December 31, 1997
(Unaudited)
(continued)
Unearned Total
ESOP Treasury stockholders'
shares stock equity
---------- ---------- ------------
<S> <C> <C> <C>
Balance, September 30, 1997 .... $(1,236,024) $ (3,617,138) $ 58,417,296
Net income ..................... -- -- 989,662
Exercise of stock options ...... -- -- 156,062
Shares cancelled ............... -- -- (87,559)
Amortization of unearned
ESOP shares ........... 85,560 -- 249,972
Amortization of restricted
stock awards .......... -- -- 63,595
Dividends declared on
common stock .......... -- -- (320,010)
Change in unrealized gain
(loss) on securities
available for sale, net -- -- (28,931)
---------- ---------- ------------
Balance, December 31, 1997 ..... (1,150,464) (3,617,138) 59,440,087
========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Charter Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three months ended December 31, 1997 and 1996
(Unaudited)
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 989,662 $ 1,159,555
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment .................................. 212,786 66,585
Discounts related to purchase accounting ......................... (17,078) (13,381)
Cost in excess of fair value of net assets acquired .............. 123,673 80,833
Fees, discounts and premiums ..................................... (426,017) (555,636)
Stock plans ...................................................... 313,567 84,127
Decrease in accrued interest receivable .............................. 95,880 465,848
Decrease in accrued interest on deposits ............................. (104,805) (55,219)
Provision for losses on loans ........................................ 75,000 111,250
Net change in income taxes ........................................... 917,019 722,715
Gain on sale of investment securities ................................ (103,091) (55,595)
Net change in other assets and other liabilities ..................... (483,536) (1,998,145)
------------ ------------
Net cash provided by operating activities ........................ 1,593,060 12,937
------------ ------------
Cash flows from investing activities:
Principal repayment on:
Loans receivable ..................................................... 27,287,981 24,702,202
Mortgage-backed securities ........................................... 653,818 832,981
Investment securities ................................................ 297,870 605,451
Proceeds from sale of:
Loans receivable ..................................................... 695,773 708,358
Investment securities ................................................ 1,104,063 3,048,750
Maturity of investment securities .......................................... 2,170,000 10,405,000
Purchase of:
Loans receivable ..................................................... -- (313,929)
Investment securities ................................................ (2,084,017) (6,101,263)
Cash invested in loans receivable .......................................... (23,313,561) (21,561,562)
Proceeds from sales of real estate acquired by foreclosure, net ............ 211,318 --
Proceeds from sales of office properties and equipment ..................... -- 130,976
Purchase of office properties and equipment ................................ (10,171) (125,581)
------------ ------------
Net cash provided by investing activities ........................ 7,013,074 12,331,383
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Charter Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three months ended December 31, 1997 and 1996
(Unaudited)
(continued)
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposits ............................................ (4,034,210) 9,351,216
Repayments of FHLB Advances ................................................ (57,224) (1,447,838)
Decrease in securities sold under agreements to repurchase, net ............ 3,966 (72,491)
Repayments of ESOP indebtedness ............................................ -- (576,000)
Decrease in other borrowings, net .......................................... (2,000,000) (14,400,000)
Increase (decrease) in advance payments by borrowers for taxes and insurance 223,898 (490,345)
Exercise of stock options .................................................. 68,503 --
Dividends paid ............................................................. (251,729) (234,537)
------------ ------------
Net cash used in financing activities ............................ (6,046,796) (7,869,995)
------------ ------------
Net increase in cash and cash equivalents ........................ 2,559,338 4,474,325
Cash and cash equivalents, beginning of period ....................................... 6,296,829 8,968,422
------------ ------------
Cash and cash equivalents, end of period ............................................. $ 8,856,167 $ 13,442,747
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 4,057,565 $ 3,935,537
Taxes paid - 125,500
Loans transferred to real estate acquired by foreclosure 212,324 333,403
Interest credited to deposits 1,960,439 1,715,074
============= ============
</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,
1997 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 period ended December 31,
1997 and 1996. For information on earnings per share data - see
footnote 5.
Operating results for the three month period ended December 31, 1997
are not necessarily indicative of the results that may be expected
for the fiscal year ending September 30, 1998.
(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
During the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS No. 128"). The Statement required restatement of all
prior-period earnings per share ("EPS") data presented. It replaces
the presentation of primary EPS with basic EPS, and requires dual
presentation of basic and diluted EPS on the face of the income
statement. Basic EPS is computed by dividing income available to
common stockholders 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. The
following table presents the computation of EPS.
(Continued)
<PAGE>
Charter Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Three Months
December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
BASIC EPS:
Income available to common shareholders ........... $ 989,662 $1,159,555
========== ==========
Average common shares outstanding ................. 3,984,963 4,042,849
========== ==========
Basic EPS ......................................... 0.25 0.29
========== ==========
DILUTED EPS:
Income available to common shareholders ........... 989,662 1,159,555
========== ==========
Average common shares outstanding ................. 3,984,963 4,042,849
Dilutive potential common shares outstanding
due to common stock options ................... 272,076 147,247
---------- ----------
Average number of common shares
and dilutive potential common shares outstanding 4,257,039 4,190,096
========== ==========
Diluted EPS ....................................... 0.23 0.28
========== ==========
</TABLE>
(4) Business Combination
OnNovember 20, 1997, Magna Group, Inc. and Charter Financial, Inc.
jointly announced that they had entered into a definitive agreement
for Magna to acquire Charter. The acquisition is anticipated to be
completed in the second calendar quarter of 1998 and is subject to,
among other things, regulatory approval and the vote of the Charter
shareholders.
(Continued)
<PAGE>
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
month period ended December 31, 1997.
Financial Condition
Assets
Total assets decreased approximately $4.6 million, or 1.2%, to $382.4
million at December 31, 1997 from $387.0 million at September 30, 1997. For the
three months ended December 31, 1997 loans receivable, net decreased $4.3
million, or 1.5%, to $283.4 million from $287.6 million at September 30, 1997.
The decrease in assets and loans receivable was primarily attributable to the
$27.3 million repayment and prepayment of loans which decrease was partially
offset by the $23.3 million in loan orginations.
Investment securities decreased $1.4 million, or 2.2%, to $60.5 million
at December 31, 1997 from $61.8 million at September 30, 1997. This decrease was
primarily due to the maturity of $2.2 million of investment securities, the sale
of $1.1 million of investment securities held as available for sale, and the
$298,000 in investment security principal repayments. These decreases were
partially offset by the $2.1 million purchase of investment securities during
the three months ended December 31, 1997.
Mortgage-backed securities decreased approximately $731,000, or 5.0%,
to $13.9 million at December 31, 1997 from $14.6 million at September 30, 1997.
The decrease in mortgage-backed securities resulted from $654,000 in repayments
and prepayments.
Liabilities
Deposits decreased approximately $4.0 million, or 1.5%, to $271.9
million at December 31, 1997 from $276.0 million at September 30, 1997. The
decrease resulted primarily from a $2.7 million decline in demand deposits and a
$2.8 million decrease in money market accounts. The decrease was partially
offset by a $1.4 million increase in certificates of deposit.
(Continued)
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Borrowed money decreased by $2.1 million, or 4.1%, to $48.3 million at
December 31, 1997 from $50.3 million at September 30, 1997. 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 decreased $170,000, or 14.7%, to $990,000 for
the three months ended December 31, 1997 from $1.2 million for the three months
ended December 31, 1996. Return on average assets and return on average
stockholders' equity were 1.03% and 6.71%, respectively, for the first quarter
of fiscal year 1998 compared to 1.21% and 8.10%, respectively, for the first
quarter of fiscal year 1997.
Interest Income
Interest income totaled $7.4 million for the quarter ended December 31,
1997, as compared to $7.2 million for the quarter ended December 31, 1996, an
increase of $253,000, or 3.5%. The increase resulted primarily from an increase
of $5.3 million in average interest-earning assets as well as an increase in the
average yield on interest-earning assets to 8.12% from 7.96%. The increase in
average interest-earning assets resulted primarily from the acquisition of Home
Federal Savings in January 1997. The increase in average yield resulted
primarily from a change in the asset portfolio mix.
Interest income on loans receivable totaled $6.1 million and $5.7
million for the three months ended December 31, 1997 and 1996, respectively. The
increase of $446,000, or 7.8%, resulted primarily from the increase in average
loans receivable of $12.5 million as well as an increase in the average yield on
loans receivable to 8.60% from 8.34%.
The income on the mortgage-backed securities portfolio decreased
$18,000, or 6.8%, to $243,000 for the quarter ended December 31, 1997 compared
to $261,000 for the quarter ended December 31, 1996. The decrease in interest
income on the mortgage-backed securities was primarily the result of a decrease
in the average mortgage-backed securities outstanding of $2.1 million which
decrease is partially offset by an increase in the average yield on
mortgage-backed securities to 6.95% from 6.51%.
(Continued)
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Interest income on investment securities decreased by $161,000, or
14.0%, to $984,000 for the three months ended December 31, 1997, from $1.1
million for the same period in fiscal year 1997. The decrease resulted primarily
from the decrease in average yield on investment securities to 6.45% from 7.06%,
as well as the $3.9 million decrease in average investments.
Other interest income decreased $14,000, or 24.6%, for the three months
ended December 31, 1997 to $44,000 from $58,000 for the same period in fiscal
year 1997. The decrease was primarily the result of a decrease in average
interest-bearing assets of $1.3 million as well as a decrease in the average
yield to 4.05% from 4.11%.
Interest Expense
Interest expense increased $72,000, or 1.9%, to $4.0 million for the
quarter ended December 31, 1997 compared to $3.9 million for the quarter ended
December 31, 1996. The increase in interest expense resulted primarily from the
$6.2 million increase in average interest-bearing liabilities. The average cost
of deposits increased to 4.75% from 4.64% and average deposits increased $16.8
million. These increases were partially offset by the decrease in average cost
of borrowed money to 5.64% from 5.93%, as well as the $10.6 million decrease in
average borrowed money.
Net Interest Income
Net interest income totaled $3.5 million and $3.3 million for the three
months ended December 31, 1997 and 1996, respectively, reflecting an increase of
$181,000, or 5.5%. 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 December 31, 1997 and 1996, $75,000 and
$111,000, 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 increased to $1.9 million at December 31, 1997 from $1.5
million at September 30, 1997. Management determined that the allowance at
December 31, 1997 was adequate to absorb potential losses. At December 31, 1997,
the allowance for loans losses totaled approximately $2.2 million, or 113.68% of
nonperforming loans.
(Continued)
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Noninterest Income
The principal sources of noninterest income includes late charges and
other loan fees, deposit account fees, and commissions and fees from brokerage
activities. During the first quarter of fiscal year 1998, noninterest income
included a gain on sale of investment securities of $103,000 as compared to
$56,000 for the same period in fiscal year 1997. Noninterest income for the
quarter ended December 31, 1997 increased $50,000, or 8.1%, to $668,000 compared
to $618,000 for the same period in fiscal year 1997.
Noninterest Expense
Noninterest expense totaled $2.3 million and $1.9 million for the
quarters ended December 31, 1997 and 1996, respectively, an increase of $479,000
or 25.9%.
Compensation and employee benefits increased $363,000, or 45.2%, for
the three months ended December 31, 1997 as compared to the three months ended
December 31, 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 that resulted from
the acquisition of Home Federal Savings Bank ("Home Federal") in January 1997.
Office building and equipment expenses increased $14,000, or 6.4%, to
$229,000 for the three months ended December 31, 1997, compared to $216,000 for
the same period in fiscal year 1997. The increase resulted primarily from the
acquisition of Home Federal that occurred in January 1997.
For the three months ended December 31, 1997, data processing increased
$29,000, or 24.4%, to $150,000 from $121,000 for the same period in fiscal year
1997. The increase resulted primarily from the increase in cost due to the
acquisition that occurred in January 1997. The entity acquired, Home Federal,
was converted to the Bank's in-house data processing system subsequent to the
acquisition. The increased expenses reflect additional cost of expanded
operations.
Deposit insurance premiums were $41,000 for the first quarter of fiscal
year 1998. Due to the Deposit Insurance Funds Act of 1996 and the result of the
recapitalization of SAIF, the Bank did not expense any insurance premium during
the first quarter of fiscal year 1997. The current annual assessment rate on the
SAIF deposits is .0648%.
(Continued)
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Amortization of cost in excess of fair value of net assets acquired
increased $43,000, or 53.0%, to $124,000 for the three months ended December 31,
1997, compared to $81,000 for the three months ended December 31, 1996. The
increase is the result of the acquisition of Home Federal in January 1997.
Income Taxes
Income taxes decreased $42,000 for the three months ended December 31,
1997 as compared to December 31, 1996. The decrease was primarily the result of
a decrease in income before income taxes. The effective income tax rate was
42.5% and 40.0% at December 31, 1997 and 1996, respectively. The increase in the
effective tax rate is primarily the result of increases in nondeductible
expenses.
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 $1.3 million at December 31,
1997 increased $463,000, or 56.0%, from the level of nonperforming residential
real estate at September 30, 1997. The increase was primarily due to the
increased deliquency rate in the purchased loans portfolio. Nonperforming
consumer loans decreased $49,000, or 16.9%, to $240,000 at December 31, 1997
from $289,000 at September 30, 1997.
At December 31, 1997, the Company had $380,000 in nonaccrual commercial
real estate loans of which $195,000 was classified as loss due to the
anticipated foreclosure of a commercial business. An adequate allowance for
losses has been established for this loan.
(Continued)
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------ ------
(In Thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential real estate ................... $1,290 $ 827
Commercial real estate .................... 380 381
Consumer .................................. 240 289
Commercial business ....................... -- --
------ ------
Total ............................ 1,910 1,497
Total real estate acquired through
foreclosure ............................... 477 670
------ ------
Total nonperforming assets ................ $2,387 $2,167
====== ======
Total nonperforming assets to
total assets .............................. 0.62% 0.56%
====== ======
</TABLE>
At December 31, 1997, the Company had $380,000 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.
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 December 31, 1997, the $380,000
of impaired loans had reserves of $195,000.
Liquidity and Capital Resources
Total stockholders' equity at December 31, 1997 was $59.4 million, an
increase of approximately $1.0 million, or 1.8%, from $58.4 million at September
30, 1997. The increase is largely attributable to $990,000 in net income for the
three months ended December 31, 1997.
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, 1997 and September 30, 1997, the
Company's cash and interest-bearing deposits totaled $8.9 million and $6.3
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 $34.9 million at
December 31, 1997.
As of December 31, 1997, the Bank exceeded all regulatory capital
requirements. The Bank's required, actual, and excess capital levels as of
December 31, 1997 are as follows:
(Continued)
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
<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) Capital
Leverage Ratio $ 11,467,014 3.00% $ 47,900,600 12.53% $ 36,433,586
Tier 1 Risk-Based
Capital Ratio 8,698,381 4.00% 47,900,600 22.03% 39,202,219
Tier 2 Risk-Based
Capital Ratio 17,396,762 8.00% 49,644,804 22.83% 32,248,042
</TABLE>
At December 31, 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
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.
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.
(Continued)
<PAGE>
Charter Financial, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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.
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.
(Continued)
<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
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 $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.
(Continued)
<PAGE>
On November 20, 1997, Magna Group, Inc. and Charter Financial, Inc.
jointly announced that they had entered into a definitive agreement for Magna to
acquire Charter. The acquisition is anticipated to be completed in the second
calendar quarter of 1998 and is subject to, among other things, regulatory
approval and the vote of the Charter shareholders.
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: 2/11/98 s/s John A. Becker
------------------
John A. Becker
Chairman of the Board and President
Date: 2/11/98 /s/ Michael R. Howell
---------------------
Michael R. Howell
Executive Vice President and Treasurer
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 2,145
<INT-BEARING-DEPOSITS> 6,711
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,641
<INVESTMENTS-CARRYING> 6,691
<INVESTMENTS-MARKET> 6,800
<LOANS> 285,537
<ALLOWANCE> 2,171
<TOTAL-ASSETS> 382,384
<DEPOSITS> 271,946
<SHORT-TERM> 48,049
<LIABILITIES-OTHER> 2,735
<LONG-TERM> 214
439
0
<COMMON> 0
<OTHER-SE> 59,001
<TOTAL-LIABILITIES-AND-EQUITY> 382,384
<INTEREST-LOAN> 6,138
<INTEREST-INVEST> 1,227
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 7,409
<INTEREST-DEPOSIT> 3,220
<INTEREST-EXPENSE> 3,953
<INTEREST-INCOME-NET> 3,456
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 103
<EXPENSE-OTHER> 2,329
<INCOME-PRETAX> 1,720
<INCOME-PRE-EXTRAORDINARY> 1,720
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 990
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.23
<YIELD-ACTUAL> 8.12
<LOANS-NON> 1,910
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,258
<CHARGE-OFFS> 247
<RECOVERIES> 85
<ALLOWANCE-CLOSE> 2,171
<ALLOWANCE-DOMESTIC> 426
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,745
</TABLE>
