SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-33071
Charter Financial Corporation
(Exact name of registrant as specified in its charter)
United States 58-2659667
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
600 Third Avenue, West Point, Georgia 31833
(Address of principal executive offices)
(Zip Code)
(706) 645-1391
(Registrant's telephone number including area code)
NA
(Former name, former address and former fiscal year,
if changed from 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 requirement for the past 90 days.
Yes X No ___
-----
As of February 8, 2002, the registrant had 19,822,405 shares of common
stock, $0.01 par value, outstanding. Of such shares outstanding, 15,857,924
shares were held by First Charter, MHC, the registrant's mutual holding company
and 3,964,481 shares were held by the public and directors, officers and
employees of the registrant.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of Charter Financial Corporation.
Consolidated Statements of Financial Condition (Unaudited)
December 31, 2001 and September 30, 2001 ..................................... Page 1
Consolidated Statements of Income (Unaudited) - Three months
ended December 31, 2001 and 2000 ............................................. Page 2
Consolidated Statements of Cash Flows (Unaudited) - Three months
ended December 31, 2001 and 2000 ............................................. Page 3
Notes to Unaudited Consolidated Financial Statements ......................... Page 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................... Page 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................... Page 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................................ Page 22
Item 2. Changes in Securities and Use of Proceeds .................................... Page 22
Item 3. Defaults Upon Senior Securities .............................................. Page 22
Item 4. Submission of Matters to a Vote of Security Holders .......................... Page 22
Item 5. Other Information ............................................................ Page 22
Item 6. Exhibits and Reports on Form 8-K ............................................. Page 22
Signatures
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements"
which may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated," and "potential." Examples of
forward-looking statements include, but are not limited to, estimates with
respect to our financial condition and results of operation and business that
are subject to various factors which could cause actual results to differ
materially from these estimates. These factors include, but are not limited to:
. general and local economic conditions;
. changes in interest rates, deposit flows, demand for mortgages and
other loans, real estate values, and competition;
. changes in accounting principles, policies, or guidelines;
. changes in legislation or regulation; and
. other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products,
and services.
Any or all of our forward-looking statements in this Quarterly Report on
Form 10-Q and in any other public statements we make may turn out to be wrong.
They can be affected by inaccurate assumptions we might make or known or unknown
risks and uncertainties. Consequently, no forward-looking statements can be
guaranteed.
ii
CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2001 and September 30, 2001
December 31, September 30,
Assets 2001 2001
---------------------- ---------------------
(unaudited)
Cash and amounts due from depository institutions $ 6,835,843 10,761,296
Interest-bearing deposits in other financial institutions 2,139,672 5,367,428
---------------------- ---------------------
Cash and cash equivalents 8,975,515 16,128,724
---------------------- ---------------------
Loans held for sale, market value of $155,000 and $1,300,000
at December 31, 2001 and September 30, 2001, respectively 154,000 1,299,913
Freddie Mac common stock and other equity securities 304,492,637 302,623,174
Mortgage-backed securities and collateralized mortgage
obligations available for sale 365,183,444 326,613,736
Other investment securities available for sale 14,587,310 --
Federal Home Loan Bank stock 13,450,000 11,587,500
Loans receivable 230,272,112 229,946,625
Less:
Unamortized loan origination fees, net (116,638) (66,025)
Allowance for loan losses (5,301,261) (5,289,778)
---------------------- ---------------------
Loans receivable, net 224,854,213 224,590,822
---------------------- ---------------------
Real estate owned 380,380 434,142
Accrued interest and dividends receivable 3,949,302 3,175,819
Premises and equipment, net 5,346,637 4,825,304
Other assets 4,061,451 3,640,791
---------------------- ---------------------
Total assets $ 945,434,889 894,919,925
====================== =====================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 196,215,360 200,354,967
Borrowings 350,146,000 309,424,000
Advance payments by borrowers for taxes and insurance 957,572 1,794,285
Deferred income taxes 112,705,772 112,378,627
Offering proceeds in escrow -- 19,978,915
Other liabilities 12,558,867 14,073,306
---------------------- ---------------------
Total liabilities 672,583,571 658,004,100
---------------------- ---------------------
Stockholders' Equity:
Common stock - $0.01 par value; 19,822,405 shares
issued and outstanding at December 31, 2001 198,224 --
Additional paid-in capital 37,278,304 --
Unearned compensation (2,793,449) --
Retained earnings 56,790,321 56,058,287
Accumulated other comprehensive income - net unrealized
holding gains on securities available for sale 181,377,918 180,857,538
---------------------- ---------------------
Total stockholders' equity 272,851,318 236,915,825
---------------------- ---------------------
Total liabilities and stockholders' equity $ 945,434,889 894,919,925
====================== =====================
See accompanying notes to the unaudited consolidated financial statements.
1
CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months ended December 31, 2001 and 2000
2001 2000
----------- ------------
(unaudited)
Interest and dividend income:
Debt securities $ 78,734 245,209
Equity securities 1,121,910 1,036,828
Mortgage-backed securities and collateralized
mortgage obligations 3,753,244 6,463,564
Loans receivable 4,555,375 5,691,744
Interest-bearing deposits in other financial institutions 33,871 46,642
----------- ------------
Total interest and dividend income 9,543,134 13,483,987
----------- ------------
Interest expense:
Deposits 2,037,102 3,434,573
Borrowings 3,681,996 6,106,328
----------- ------------
Total interest expense 5,719,098 9,540,901
----------- ------------
Net interest income 3,824,036 3,943,086
Provision for loan losses 150,000 150,000
----------- ------------
Net interest income after provision for loan losses 3,674,036 3,793,086
----------- ------------
Noninterest income:
Loan servicing fees 80,815 101,111
Service charges on deposit accounts 178,692 186,333
Gain on sale of loans and servicing released loan fees 529,080 211,001
Gain (loss) on sale of mortgage-backed securities, collateralized
mortgage obligations, and other investments 444,441 (8,270)
Equity in loss of limited partnership (94,657) --
Other 92,933 11,519
----------- ------------
Total noninterest income 1,231,304 501,694
----------- ------------
Noninterest expenses:
Salaries and employee benefits 2,230,192 1,574,390
Occupancy 482,253 406,076
Furniture and equipment 111,508 98,542
Net cost of operations of real estate owned 25,648 (6,330)
Federal insurance premiums and other regulatory fees 53,438 55,462
Marketing 227,791 86,808
Charitable contributions 2,394 8,390
Legal and professional 307,171 183,418
Other 524,242 387,997
----------- ------------
Total noninterest expenses 3,964,637 2,794,753
----------- ------------
Income before income taxes 940,703 1,500,027
Income tax expense 208,668 360,913
----------- ------------
Net income $ 732,035 1,139,114
=========== ============
See accompanying notes to the unaudited consolidated financial statements.
2
CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months ended December 31, 2001 and 2000
2001 2000
-------------- ------------
(unaudited)
Cash flows from operating activities:
Net income $ 732,035 1,139,114
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses 150,000 150,000
Depreciation and amortization 114,040 119,604
Market value component of ESOP expense 257,128
Deferred income tax (benefit) expense -- 2,021,652
Accretion of discounts, net (1,290,516) (2,961)
Gain on sale of loans (529,080) (211,001)
(Gain) loss on sales of mortgage-backed securities, collateralized
mortgage obligations, and other investments (444,441) 8,270
Proceeds from sale of loans 28,170,357 10,808,662
Originations and purchases of loans held for sale (26,495,364) (10,880,000)
Loss (gain) on sales of real estate owned 20,224 (16,683)
Changes in assets and liabilities:
Increase in accrued interest and dividends receivable (773,483) (267,929)
Increase in other assets (420,660) (329,046)
Decrease in other liabilities (1,514,439) (1,995,801)
-------------- ------------
Net cash (used in) provided by operating activities (2,024,199) 543,881
-------------- ------------
Cash flows from investing activities:
Purchases of equity securities and other investment
securities available for sale (16,682,462) (112,500)
Purchases of mortgage-backed securities and collateralized
mortgage obligations available for sale (121,438,436) (4,005,930)
Proceeds from sale of mortgage-backed securities and
collateralized mortgage obligations available for sale 50,969,031 17,741,567
Proceeds from maturity and repayment of mortgage-backed
securities and collateralized mortgage obligations available for sale 32,845,368 5,572,765
Net increase in loans receivable, exclusive of loan sales (534,629) (779,867)
Proceeds from sale of real estate owned 154,776 154,245
Purchases of premises and equipment, net of dispositions (635,373) (233,868)
-------------- ------------
Net cash (used in) provided by investing activities (55,321,725) 18,336,412
-------------- ------------
Cash flows from financing activities:
Offering proceeds held in escrow (19,978,915) --
Proceeds from stock offering 34,047,819 --
Cash payment received from ESOP Plan 378,131 --
Net decrease in deposits (4,139,607) (63,100,365)
Net increase in borrowings 40,722,000 46,244,136
Net decrease in advance payments by borrowers
for taxes and insurance (836,713) (987,132)
-------------- ------------
Net cash provided by (used in) financing activities 50,192,715 (17,843,361)
-------------- ------------
Net (decrease) increase in cash and cash
equivalents (7,153,209) 1,036,932
Cash and cash equivalents at beginning of period 16,128,724 8,192,442
-------------- ------------
Cash and cash equivalents at end of period $ 8,975,515 9,229,374
============== ============
Supplemental disclosures of cash flow information:
Interest paid $ 5,518,085 9,997,079
============== ============
Income taxes paid $ 3,907,260 --
============== ============
3
CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
For the Three Months ended December 31, 2001 and 2000
2001 2000
-------------- ------------
(unaudited)
Financing activities:
Real estate acquired through foreclosure of the
loans receivable $ 121,238 54,132
============== ============
See accompanying notes to the unaudited consolidated financial statements.
4
Charter Financial Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
Charter Financial Corporation ("Charter Financial") is a federal
corporation organized on October 16, 2001 by CharterBank ("Bank") in connection
with the reorganization of the Bank from a federal mutual savings and loan
association into a two-tiered mutual holding company structure, as described
more fully in Note 2.
The accompanying unaudited consolidated financial statements include the
accounts of Charter Financial and its wholly owned subsidiaries, CharterBank and
Charter Insurance Company as of December 31, 2001 and September 30, 2001, and
for the three month periods ended December 31, 2001 and 2000. Significant
intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements for the three months ended December 31,
2001 and 2000 are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes included in Charter
Financial's annual report on Form 10-K for the year ended September 30, 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In the opinion of management the unaudited consolidated financial
statements include all necessary adjustments, consisting of normal recurring
accruals, necessary for a fair presentation for the periods presented.
The consolidated financial statements of Charter Financial and subsidiaries
prior to October 16, 2001 reflect the assets and liabilities transferred to
Charter Financial in the reorganization. Specifically, historical financial
information is of the predecessor entity, CharterBank and subsidiary, adjusted
to retroactively reflect the transfer of the 400,000 shares of Freddie Mac
common stock and the $100,000 in cash to First Charter, MHC. Operating data
prior to October 16, 2001 has also been retroactively adjusted for such effects.
Charter Financial believes that the disclosures are adequate to make the
information presented not misleading; however, the results for the periods
presented are not necessarily indicative of results to be expected for the
entire fiscal year.
5
(2) Plan of Reorganization
On October 16, 2001, CharterBank converted from a federally-chartered
mutual savings and loan association into a two-tiered mutual holding company
structure and became a wholly-owned subsidiary of Charter Financial. Charter
Financial sold 3,964,481 shares of its common stock to the public, representing
20% of the outstanding shares, at $10.00 per share and received net proceeds of
$37.2 million. Charter Financial contributed 50% of the net proceeds from the
initial public offering to CharterBank. An additional 15,857,924 shares, or 80%
of the outstanding shares of Charter Financial, were issued to First Charter,
MHC. An Employee Stock Ownership Plan (ESOP) was established and such ESOP
acquired 317,158 shares of Charter Financial in the offering, using the proceeds
of a loan from Charter Financial. Such ESOP obligation is recorded as unearned
compensation reducing shareholders' equity of Charter Financial. The net
proceeds of the offering, adjusted for the ESOP, amounted to approximately $34
million.
As part of our reorganization, CharterBank organized First Charter, MHC as
a federally-chartered mutual holding company which is registered as a savings
and loan holding company with the Office of Thrift Supervision ("OTS"). First
Charter, MHC's principal assets are the shares of common stock of Charter
Financial it received in the reorganization, the $100,000 it received as its
initial capitalization, and 400,000 shares of Freddie Mac common stock, which
was transferred from CharterBank as part of the reorganization.
(3) Earnings per Share
Earnings per share are calculated according to the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings per Share" ("Statement 128"). ESOP shares are only considered
outstanding for earnings per share calculations when they are committed to be
released. Presented below are the calculations for basic and diluted earnings
per share for the three months ended December 31, 2001:
Three Months Ended
December 31,
------------
2001
------------
Basic:
Net income ............................................................ $ 732,035
Weighted average common shares outstanding ............................ 19,505,738
Basic earnings per share .............................................. $ 0.04
Diluted:
Net income ............................................................ $ 732,035
Weighted average number of common and common equivalent shares
outstanding ........................................................... 19,505,738
Diluted earnings per share ............................................ $ 0.04
(4) Comprehensive Income
The primary component of other comprehensive income for the Company is net
unrealized gains and losses on investment securities. Total comprehensive income
for the three months ended December 31, 2001 was $1.3 million compared to $49.3
million for the three months ended December 31, 2000.
6
Item 2
------
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
- -------
General. Charter Financial Corporation ("Charter Financial," "us," or "we")
is a federally-chartered corporation organized in 2001, as more fully described
in Note 2 to the unaudited consolidated financial statements, and is registered
as a savings and loan holding company with the Office of Thrift Supervision
("OTS"). Charter Financial serves as the holding company for CharterBank
("Bank"). First Charter, MHC owns 80% of the outstanding shares of Charter
Financial's common stock. Our common stock is quoted on the National Market
System of the Nasdaq Stock Market under the symbol "CHFN." Unless the context
otherwise requires, all references herein to the Bank or Charter Financial
include Charter Financial and the Bank on a consolidated basis.
Charter Financial's principal business is its ownership of CharterBank.
Charter Financial also owns 1,700,000 shares of Freddie Mac common stock and
Charter Insurance Company, a Hawaiian corporation which generates fee income by
reinsuring a portion of CharterBank's loan originations which carry private
mortgage insurance. Charter Insurance Company owns 400,000 shares of Freddie Mac
common stock. Additionally, CharterBank owns 2,555,000 shares of Freddie Mac
common stock. On a consolidated basis, Charter Financial Corporation owns
4,655,000 shares of Freddie Mac common stock.
CharterBank currently operates five full-service branch offices and two
loan production offices in west-central Georgia and east-central Alabama.
CharterBank is a service-oriented bank providing retail and small business
customers with products and services designed to create a long-term, profitable
relationship. We offer numerous loan products, including residential mortgage
loans, commercial real estate loans, commercial loans, home equity loans, second
mortgages, and other products. CharterBank also offers deposit products,
including consumer and commercial checking accounts, savings accounts, money
market accounts, and certificates of deposit.
Charter Financial's results of operations depend primarily on net interest
income. Net interest income is the difference between the interest income we
earn on our interest-earning assets and the interest we pay on interest-bearing
liabilities. Our interest-earning assets consist primarily of residential
mortgage loans, commercial mortgage loans, consumer loans, mortgage related
securities, and investment securities. Interest-bearing liabilities consist
primarily of retail and wholesale deposits, repurchase agreements and borrowings
from the Federal Home Loan Bank (FHLB) of Atlanta. Our balance sheet at December
31, 2001 also contains non-interest bearing liabilities of approximately $136.0
million of which $112.7 million represents deferred taxes, principally relating
to the unrealized gain on our Freddie Mac common stock. Our results of
operations are also impacted by our provision for loan losses, noninterest
income and noninterest expense. Noninterest expense includes salaries and
employee benefits, occupancy expenses and other general and administrative
7
expenses. Noninterest income includes gains on sale of loans and service fees
and charges.
Average Balance Sheet and Analysis of Net Interest Income. The following
tables depict the significant effect of the Freddie Mac common stock on our
traditional bank ratios, such as net interest income, net interest rate spread,
and net interest margin. The tables show these measures with and without the
effects of the Freddie Mac common stock. Freddie Mac common stock had a dividend
return on cost basis of approximately 59% at December 31, 2001. However, the
dividend yield on the market value of the Freddie Mac common stock is only 1.2%.
The appreciation in the market value of the Freddie Mac common stock has created
our strong accumulated comprehensive income.
Our net interest margin weakened slightly for the quarter ended December
31, 2001, as compared to the quarter ended December 31, 2000. During the second
quarter of fiscal 2001, we locked in $102.0 million in fixed rate FHLB
borrowings with maturities of ten years and an average rate of 5.71%, of which
$72.0 million can be called by the FHLB after seven years. Our cost of
borrowings decreased by 198 basis points from the quarter ended December 31,
2000 compared to the quarter ended December 31, 2001. This decrease was
moderated by the additional fixed rate borrowings. We also reduced our fixed
rate mortgage securities by $143.1 million from $220.4 million at December 31,
2000 to $77.2 million at December 31, 2001, which resulted in a decrease in the
yield on mortgage securities 290 basis points. The combined effect of the
additional fixed rate borrowings and reductions of fixed rate mortgage
securities changed our interest risk profile from liability sensitive to asset
sensitive. The yield on loans receivable decreased 81 basis points from 8.98%
for the quarter ended December 31, 2000 to 8.17% for the quarter ended December
31, 2001. This decrease reflects the shift in the allocation of the loan
portfolio as 1-4 family mortgage loans decreased and commercial real estate
loans increased from 2000. The cost of deposits decreased 148 basis points from
5.80% for the quarter ended December 31, 2000 compared to 4.32% for the quarter
ended December 31, 2001. The decrease in the cost of deposits during a time
period of falling interest rates was moderated by our deposit pricing strategy
implemented during 2001 that pays higher rates to customers maintaining larger
balances. The combination of these rate changes reduced the overall net interest
margin by 2 basis points from 1.72% for the quarter ended December 31, 2000
compared to 1.70% for the quarter ended December 31, 2001.
The table below shows the actual balance of interest-earning assets and
interest-bearing liabilities with their yield or interest cost as of December
31, 2001.
8
At December 31, 2001
---------------------------
Actual Balance Yield/Cost
-------------- ------------
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits in other
financial institutions ...................... $ 2,140 1.53%
FHLB common stock ............................. 13,450 6.25
Mortgage-backed securities and collateralized
mortgage obligations available for sale ..... 365,183 3.73
Other investments securities available for sale 14,587 4.43
Loans receivable .............................. 224,854 8.01
--------
Total interest-earning assets excluding
Freddie Mac common stock .................. 620,214 5.35
Freddie Mac common stock and other equity
securities available for sale ............. 304,493 1.22
--------
Total interest-earning assets including
Freddie Mac common stock .................... 924,707 3.99
Total non-interest earning assets ............. 20,728 -
--------
Total assets ................................ $945,434
========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts .................................. $ 15,516 .98%
Savings accounts .............................. 8,148 1.00
Money market deposit accounts ................. 17,352 1.65
Certificates of deposit accounts .............. 145,800 4.48
--------
Total interest-bearing deposits ............. 186,816 3.77
Borrowed funds ................................ 350,146 4.19
--------
Total interest-bearing liabilities .......... 536,962 4.05
Noninterest-bearing deposits .................. 9,399 -
Other noninterest-bearing liabilities ......... 126,223 -
--------
Total noninterest-bearing liabilities ....... 135,622 -
Total liabilities ........................... 672,584
Total stockholders' equity .................. 272,851
--------
Total liabilities and stockholders' equity .. $945,435
========
In the table below, we derived the yields and costs by dividing income or
expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods shown. We derived average balances
from actual daily balances over the periods indicated. Interest income includes
the recognition of certain fees over the lives of the underlying loans.
9
For the Three Months Ended December 31,
-------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------
Average Average
--------- ---------
Average Yield/ Average Yield/
--------- --------- ---------
Balance Interest Cost Balance Interest Cost
--------- -------- --------- --------- -------- ---------
Assets:
Interest-earning assets:
Interest-bearing deposits in other
financial institutions ................................. $ 5,213 $ 34 2.61% $ 4,094 $ 47 4.59%
FHLB common stock and other equity ....................... 12,087 191 6.32 12,625 245 7.76
Mortgage-backed securities and collateralized
mortgage obligations available for sale ............... 347,357 3,753 4.32 358,311 6,464 7.22
Other investment securities available for sale ........... 7,884 79 4.01 14,122 245 6.94
Loans receivable ......................................... 222,948 4,555 8.17 253,511 5,692 8.98
-------------------------------------------------------------------
Total interest-earning assets excluding
Freddie Mac common stock ............................... 595,489 8,612 5.78 642,663 12,693 7.90
Freddie Mac common stock ................................. 303,506 931 1.23 272,760 791 1.16
-------------------------------------------------------------------
Total interest-earning assets including
Freddie Mac common stock ............................... 898,995 9,543 4.25 915,423 13,484 5.89
Total non-interest earning assets ...................... 30,366 17,063
--------- ------------------- ---------
Total assets ........................................... $ 929,361 $ 9,543 4.11% $ 932,486 $ 13,484 5.78%
========= ======== ====== ========= ======== =========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts ............................................. $ 14,653 $ 38 1.04% $ 14,537 $ 71 1.95%
Savings accounts ......................................... 8,488 26 1.23 8,161 40 1.96
Money market deposit accounts ............................ 18,105 84 1.86 11,355 156 5.50
Certificates of deposit accounts ......................... 147,558 1,889 5.12 202,885 3,168 6.25
-------------------------------------------------------------------
Total interest-bearing deposits ........................ 188,804 2,037 4.32 236,938 3,435 5.80
Borrowed funds ........................................... 316,731 3,682 4.65 368,224 6,106 6.63
-------------------------------------------------------------------
Total interest-bearing liabilities ..................... 505,535 5,719 4.53 605,162 9,541 6.31
Noninterest-bearing deposits ............................. 9,404 8,390
Other noninterest-bearing liabilities .................... 149,145 112,445
---------
Total noninterest-bearing liabilities .................. 158,549 120,835
--------- ---------
Total liabilities ...................................... 664,084 5,719 3.44 725,997 9,541 5.26
Total equity ........................................... 265,277 206,489
--------- ---------
Total liabilities and equity ........................... $ 929,361 $ 5,719 $ 932,486 $ 9,541
========= ======== ========= ========
Net interest income, including Freddie Mac
common stock ........................................... $ 3,824 $ 3,943
Net interest rate spread, including Freddie Mac
common stock(1) ........................................ -0.28 -0.42
Net interest margin, including Freddie Mac
common stock(2) ........................................ 1.70 1.72
Ratio of interest-earning assets to average
interest-bearing liabilities, including
Freddie Mac common stock .............................. 177.83 151.27
Net interest income excluding
Freddie Mac common stock dividends ..................... 2,893 3,152
Net interest rate spread excluding
Freddie Mac common stock(3) ............................ 1.25 1.59
Net interest rate margin excluding
Freddie Mac common stock (4) ........................... 1.94 1.96
Ratio of average interest-earning assets to average
interest-bearing liabilities, excluding
Freddie Mac common stock ............................... 117.80% 106.20%
10
- ------------------
(1) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(2) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(3) Net interest rate spread excluding Freddie Mac common stock represents the
difference between the weighted average yield on total interest-earning
assets excluding Freddie Mac common stock and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin excluding Freddie Mac common stock represents net
interest income excluding Freddie Mac common stock dividends as a
percentage of average interest-earning assets excluding Freddie Mac common
stock.
11
Rate/Volume Analysis. The following table shows how changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to:
(1) interest income or expense changes attributable to changes in volume
(changes in volume multiplied by prior rate);
(2) interest income or expense changes attributable to changes in rate
(changes in rate multiplied by prior volume); and
(3) the net change.
Three Months Ended December 31, 2001
Compared to Three Months Ended
December 31, 2000
Increase/(Decrease)
---------------------------------------------------
Due to
------------------------- ------------------------
Volume Rate Combined Net
------------ ----------- ------------ ----------
(In thousands)
Interest-earning assets:
Interest-bearing deposits in other
financial institutions .......................... $ 13 (20) (6) (13)
FHLB common stock and other
equity securities ............................... (10) (45) 1 (54)
Mortgage-backed securities and
collateralized mortgage
obligations available for sale .................. (198) (2,598) 85 (2,711)
Other investment securities
available for sale .............................. (108) (103) 45 (166)
Loans receivable .................................. (686) (513) 62 (1,137)
----------- --------- ---------- --------
Total interest-earning assets,excluding
Freddie Mac stock ............................... (989) (3,279) 187 (4,081)
Freddie Mac common stock .......................... 89 48 3 140
----------- --------- ---------- --------
Total interest-earning assets ................... $ (900) (3,231) 190 (3,941)
=========== ========= ========== ========
Interest-bearing liabilities:
NOW accounts ...................................... $ 1 (33) (1) (33)
Savings accounts .................................. 2 (15) (1) (14)
Money market deposit accounts ..................... 93 (103) (62) (72)
Certificates of deposit ........................... (864) (573) 158 (1,279)
----------- --------- ---------- --------
Total interest-bearing deposits ................. (768) (724) 94 (1,398)
Borrowed funds .................................... (853) (1,823) 252 (2,424)
----------- --------- ---------- --------
Total interest-bearing liabilities ................ (1,621) (2,547) 346 (3,822)
----------- --------- ---------- --------
Change in net interest income ........................ $ 721 (684) (156) (119)
=========== ========= ========== ========
Declining interest rates in the quarter ended December 31, 2001 adversely
affected net interest income as CharterBank was in a net asset sensitive
position in its asset/liability management.
12
Comparison of Financial Condition at December 31, 2001 and September 30, 2001
Our total assets increased $50.5 million, or 5.64%, to $945.4 million at
December 31, 2001 from $894.9 million at September 30, 2001. The increase was
primarily due to growth in the investment securities and the mortgage backed
securities and collateralized mortgage obligations. An increase in the market
value of our Freddie Mac stock from $302.6 million at September 30, 2001 to
$304.4 million at December 31, 2001 also contributed to the growth.
Total loans remained level at $230.3 million at December 31, 2001 compared
to $229.9 million at September 30, 2001. The 1-4 family residential real estate
portfolio decreased by $6.5 million, or 5.03%, from $129.2 million at September
30, 2001 to $122.7 million at December 31, 2001. Our present strategy is to sell
conforming fixed rate loans to the secondary market. With the high level of
refinancing that took place late in fiscal year 2001 and in the first quarter of
fiscal 2002, we were unable to retain the refinanced loans in the loan
portfolio, causing the decline in the overall 1-4 family residential real estate
loan portfolio. The consumer and other loan portfolio decreased $2.0 million or
8.51% from $23.5 million at September 30, 2001 to $21.5 million at December 31,
2001. The decrease in the consumer portfolio was primarily due to runoff of the
loans acquired in the acquisition of Citizen's National Bank in 1999.
Nonresidential real estate increased by $6.3 million.
Mortgage-backed securities and collateralized mortgage obligations
increased from $326.6 million at September 30, 2001 to $365.2 million at
December 31, 2001 for an increase of $38.5 million or 11.78%. The market value
of Freddie Mac stock increased $1.8 million, or .59%, from $302.6 million to
$304.4 million as the price per share of Freddie Mac common stock increased from
$65.00 at September 30, 2001 to $65.40 at December 31, 2001.
Total deposits declined from $200.4 million at September 30, 2001 to $196.2
million at December 31, 2001 mainly due to $4.9 million in brokered deposits
that matured during the quarter ended December 31, 2001 and were not renewed.
This decrease was partially offset by an increase of approximately $814,000 in
retail deposits. In light of the difficulty raising new retail deposits and the
magnitude of CharterBank's funding needs, management will continue to rely on
borrowings, especially FHLB advances and repurchase agreements. The terms of new
advances will be determined at the time based on the Company's interest risk
profile and repurchase agreements are generally less than 90 days to maturity
with rates at or slightly above LIBOR. With overall asset growth increasing,
borrowings increased 13.15% from $309.4 million at September 30, 2001 to $350.1
million at December 31, 2001.
Our total stockholders' equity increased $35.9 million, or 15.15%, to
$272.9 million at December 31, 2001. The increase in equity is primarily due to
the Charter Financial initial stock offering which was completed in October
2001. Accumulated other comprehensive income is comprised of net unrealized
holding gains on securities available for sale. The balance of accumulated other
comprehensive income at December 31, 2001 was $181.4 million, a $500,000
increase from the balance at September 30, 2001 of $180.9 million. The increase
in accumulated other comprehensive income is mainly attributable to the increase
in the market value of our Freddie Mac stock investment.
13
Comparison of Operating Results for the Three Months Ended
December 31, 2001 and 2000
General
Net income was $732,035 for the three months ended December 31, 2001 which
was $407,079 lower than the $1.1 million for the three months ended December 31,
2000. This decrease primarily stemmed from increased noninterest expenses
associated with an ESOP contribution and the opening of the new branch in
Auburn, Alabama. Total comprehensive income was $1.2 million for the three
months ended December 31, 2001 compared to $49.3 million for the three months
ended December 31, 2000. The decrease was primarily due to the change in market
value of Freddie Mac common stock during the comparable quarters (see tables
below).
Interest Income
Interest income decreased by $4.0 million to $9.5 million for the three
months ended December 31, 2001 from $13.5 million for the three months ended
December 31, 2000. The major component of the decrease was a decrease in
interest income on mortgage securities resulting from a decrease in the average
balance of mortgage securities and the declining interest rate environment in
2001. Interest income on loans also decreased by $1.1 million due to a
combination of a decrease in average balances of loans and lower interest rates
during the quarter ended December 31, 2001.
Interest Expense
Interest expense decreased from $9.5 million for the three months ended
December 31, 2000 to $5.7 million for the three months ended December 31, 2001,
for a decrease of $3.8 million. Interest expense on deposits decreased by $1.3
million and interest expense on borrowings decreased by $2.5 million. The
decrease in interest expense on borrowings is primarily due to lower interest
rates while the decrease in interest expense on deposits is due to lower rates,
as well as, lower levels of brokered deposits.
Net Interest Income
Net interest income decreased by $119,050 from $3.9 million for the three
months ended December 31, 2000 to $3.8 million for the three months ended
December 31, 2001. The decrease of $4.0 million in interest income was primarily
offset by the decrease of $3.8 million in interest expense reflecting asset
yields declining faster than the cost of interest-bearing liabilities.
Provision for Loan Losses
The provision for loan losses of $150,000 remained unchanged for the
quarter ended December 31, 2001. Historically, CharterBank has experienced
increased mortgage loan delinquencies in the fourth calendar quarter which again
occurred in 2001. The majority of the Bank's net charge-offs of $139,000
continue to be loans acquired in the Citizens acquisition.
14
Noninterest Income
Noninterest income increased $729,610 from $501,694 for the three months
ended December 31, 2000 compared to $1.2 million for the three months ended
December 31, 2001. During the three months ended December 31, 2001, gain on sale
of loans increased to $529,080 compared to $211,001 for the three months ended
December 31, 2000. This increase was caused by a higher volume of loans
originated and sold as well as a higher profit margin on these sales which was a
result of the declining interest rate environment during 2001. Gain on sale of
securities increased to $444,441 compared to a loss of $8,270 for the three
months ended December 31, 2000 as CharterBank continued to decrease its
investment in fixed-rate mortgage securities.
Noninterest Expense
Noninterest expense increased to $4.0 million for the three months ended
December 31, 2001 from $2.8 million for the three months ended December 31, 2000
for an increase of $1.2 million. Noninterest expense for the three months ended
December 31, 2001 reflected an increase in salary and employee benefits of
$655,802. The major reason for the salary and benefits increase is $682,129 in
ESOP expense, which was partially offset by decreases in other long-term
incentive compensation programs. The ESOP borrowed from Charter Financial to
purchase its stock at the initial public offering price of $10 per share. This
loan is recorded on the Company's books as a reduction of capital and is
disclosed as unearned compensation in stockholders' equity. When the Company
receives a principal payment it reduces the unearned compensation and thus
increases capital. ESOP expense is recorded at the average fair market value of
the common shares that are released to the ESOP trust for allocation to
employees. Because such average fair market value of Charter Financial common
shares for the quarter ended December 31, 2001 exceeded the aforementioned
$10.00 cost per common share ESOP expense included $257,129 as a market value
adjustment which results in a corresponding increase to additional paid-capital.
ESOP expense is not expected to continue at this level. Charter Financial
expects that its future quarterly ESOP expense will range from $100,000 to
$300,000. Although fluctuations in the market value of Charter Financial common
shares and cash dividends, if any, may cause such expense to vary from this
range. The opening of our new Auburn, Alabama branch contributed to the increase
in salaries and benefits as well as an increase in marketing of $140,983. Other
expense includes $100,000 to implement a document imaging system.
Income Taxes
Income taxes decreased to $208,668 for the three months ended December 31,
2001 from $360,913 for the three months ended December 31, 2000 for a decrease
of $152,245. The effective tax rate decreased slightly from 24.06% for the three
months ended December 31, 2000 to 22.18% for the three months ended December 31,
2001. The corporate dividends received deduction, which applies to dividends on
Freddie Mac stock, is the primary reason that the effective rate is less than
the statutory rate.
15
Comprehensive Income
Other comprehensive income was $520,380 for the three months ended December
31, 2001, compared to $48.1 million for the three months ended December 31,
2000. This decrease is primarily the result of the lower level of increase in
the price of Freddie Mac common stock over the comparable periods. During the
three months ended December 31, 2001, the price of Freddie Mac common stock
increased from $65.00 per share at September 30, 2001 to $65.40 per share at
December 31, 2001 or $0.40 per share. During the three months ended December 31,
2000, the price of Freddie Mac common stock increased from $54.0625 per share to
$68.875 per share or $14.8125 per share.
-------------------------------------------------------------
Market Price Total Market Unrealized Gain,
Shares Per Share Value Net of Tax
------------ ------------ ------------ ----------------
September 30, 2001 4,655,000 $ 65.000 $302,575,000 $ 181,902,699
December 31, 2001 4,655,000 65.400 304,437,000 183,045,967
------------ ----------------
Change in Freddie Mac stock ............. $ 0.400 1,143,268
Other comprehensive loss related
to mortgage securities and other
investments ........................ (622,888)
----------------
Total other comprehensive income $ 520,380
================
-------------------------------------------------------------
Market Price Total Market Unrealized Gain,
Shares Per Share Value Net of Tax
------------ ------------ ------------ ----------------
September 30, 2000 4,655,000 $ 54.0625 $251,660,938 $ 150,641,466
December 31, 2000 4,655,000 68.8750 320,613,125 192,978,108
------------ ----------------
Change in Freddie Mac stock ............. $ 14.8125 42,336,644
Other comprehensive income related
to mortgage securities and other
investments ........................ 5,847,451
----------------
Total other comprehensive income $ 48,184,095
================
Other comprehensive income related to mortgage securities and other investments
was a loss of $622,888 for the quarter ended December 31, 2001 compared to
income of $5,847,451 for the quarter ended December 31, 2000. While interest
rates moved in the same direction and approximately the same magnitude as in the
comparable period in 2000, we had income in the December 2000 quarter due to a
much larger portfolio of fixed rate mortgage securities.
Asset Quality
As indicated in the table below, nonperforming loans increased from $2.3 million
at September 30, 2001 to $3.4 million at December 31, 2001. Nonperforming loans
as a percent of total loans increased from 1.01% at September 30, 2001 to 1.49%
at December 31, 2001. The allowance for loan losses as a ratio of non-performing
loans was 2.28x at September 30, 2001 and was 1.55x at December 31, 2001.
CharterBank has traditionally seen an increase in delinquencies in December
which moderates during the first calendar quarter. A weaker economy in 2002 may
thwart this historical trend.
16
We acquired $24.7 million loans in the Citizens acquisition late in fiscal
1999. Approximately $7.7 million of these loans remain on the books at December
31, 2001. Since the acquisition of Citizens, approximately $2.4 million or 75%
of our gross charge-offs have been loans acquired in this acquisition. At the
time of the acquisition $3.8 million was added to the loan loss reserve for
these loans.
Underperforming loans are balloon loans that are 90 or more days past
contractual maturity on which we are still receiving monthly payments and
accruing interest. Non-performing loans are nonaccrual and restructured loans.
The following table shows underperforming and non-performing assets.
December 31, 2001 September 30, 2001
----------------- ------------------
(In Thousands)
Underperforming loans ....................................... $ 651 $ 218
=========== ===========
Total non-performing loans .................................. 3,420 2,312
Foreclosed real estate, net ................................. 380 434
----------- -----------
Total non-performing assets ................................. $ 3,800 $ 2,746
=========== ===========
Non-performing loans as a percent of total loans ............ 1.49% 1.01%
Non-performing assets as a percent of total assets .......... 0.40% 0.31%
Allowance for loan losses as a percent of total loans ....... 2.30% 2.30%
Allowance for loan losses as a ratio of
non-performing loans ..................................... 1.55x 2.28x
Additions to the allowance for loan losses are made periodically to maintain the
allowance at an appropriate level based on management's analysis of potential
risk in the loan portfolio. The amount of the provision for loan losses is
determined by an evaluation of the level of loans outstanding, the level of
non-performing loans, historical loss experience, delinquency trends, the amount
of losses charged to the allowance in a given period, and an assessment of
economic conditions. A provision for losses in the amount of $150,000 was
charged to expense for the quarters ending December 31, 2001 and December 31,
2000. At December 31, 2001 and September 30, 2001 the allowance for loan losses
to total loans was 2.30%. Management considers the current allowance for loan
losses appropriate based upon its analysis of the potential risk in the
portfolio.
Our allowance for loan loss methodology is a loan classification based
system. We base the required reserve on a percentage of the loan balance for
each type of loan and classification level. CharterBank establishes specific
reserves in addition to general reserve when inherent losses are identifiable at
the loan level. In addition to these allocated reserves CharterBank had
unallocated reserves of $342,000 and $789,000 at December 31, 2001 and September
30, 2001, respectively. The basis for the unallocated reserves is due to the
increase in the number of large balance loans in the portfolio, primarily
17
commercial real estate loans, the recent growth in commercial and commercial
real estate loans for which CharterBank has limited loss history, local economic
concerns and overall weakening of the economic environment in the nation and the
states of Georgia and Alabama. Management believes that the allowance is
adequate to cover losses in the portfolio.
Commitments
The Company had commitments to fund loans at December 31, 2001 of
approximately $13.4 million of which the largest component was unused consumer
credit lines of approximately $6.5 million with other significant components
being unused commercial credit lines of approximately $2.6 million and unfunded
construction loans of approximately $2.4 million. Conforming 1-4 family loans
are generally sold on a best efforts basis so the Company has no binding
commitments on these loans.
Liquidity and Capital Resources
The term "liquidity" refers to our ability to generate adequate amounts of
cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of liquidity are deposits, borrowings,
scheduled amortization and prepayments of loan principal and mortgage related
securities, maturities and calls of investment securities and funds provided by
our operations. We can borrow funds from the FHLB based on eligible collateral
of loans and securities up to a limit of 30% of consolidated assets. At December
31, 2001, our maximum borrowing capacity from the FHLB was approximately $291.3
million. At December 31, 2001 we had outstanding borrowings of $269.0 million
with unused borrowing capacity of $22.3 million. In addition, we may enter into
reverse repurchase agreements with approved broker-dealers. Reverse repurchase
agreements are agreements that allow us to borrow money using our securities as
collateral. We can obtain funds in the brokered deposit markets as well as funds
using our Freddie Mac common stock as collateral and have established a line of
credit that provides for borrowing up to half of the market value of the stock.
We consider this source of funds a last resort due to the potential adverse tax
consequences on the dividends received deduction which exempts 70% of our
Freddie Mac dividends from taxable income. CharterBank has increasingly relied
on wholesale fundings including advances from the FHLB, repurchase agreements
and brokered deposits to fund securities and loan growth in the past two fiscal
years. This reflects a growth in our loan portfolio that has outpaced growth in
retail deposits. CharterBank monitors its liquidity position frequently and
anticipates that we will have sufficient funds to meet our current funding
commitments.
At December 31, 2001, repurchase agreements totaled $81.1 million, a $16.6
million decrease from the amount outstanding at September 30, 2001 of $97.7
million. Wholesale deposits were $31.4 million at December 31, 2001 compared to
$36.4 million at September 30, 2001.
Loan repayments and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, general and local economic conditions and
18
competition in the marketplace. These factors reduce the predictability of the
timing of these sources of funds.
Our primary investing activities are the origination of 1-4 family real
estate, commercial real estate, commercial and consumer loans, and the purchase
of mortgage and investment securities. During the quarter ended December 31,
2001, we originated approximately $54.8 million in total loans. Residential
mortgage loans accounted for 59.8% of the originations and commercial real
estate accounted for 21% of the originations. This reflects management's
strategy of increasing the portfolio balance of commercial real estate loans,
especially considering that most of the residential mortgage loans were sold in
the secondary market. Purchases of investment securities totaled $136.4 million
for the quarter ended December 31, 2001. At December 31, 2001 and September 30,
2001, CharterBank had loan commitments to borrowers of approximately $4.2
million and $1.0 million, respectively, and available home equity and unadvanced
lines of credit of approximately $9.2 million and $10.3 million, respectively.
Deposit flows are affected by the level of our interest rates and, by the
interest rates and products offered by competitors, as well as other factors.
Total deposits were $196.2 million at December 31, 2001 as compared to $200.3
million at September 30, 2001. The decrease reflects the maturing of
approximately $4.9 million in brokered deposits during the period, which were
replaced with borrowings. Time deposit accounts scheduled to mature within one
year were $118.9 million and $119.4 million at December 31, 2001 and September
30, 2001, respectively. While CharterBank has experienced deposit run-off, we
anticipate that a significant portion of these certificates of deposit will
remain on deposit.
CharterBank has traditionally been a well-capitalized savings bank, due to,
among other factors, the unrealized gains on Freddie Mac stock. At December 31,
2001, we exceeded each of the applicable regulatory capital requirements.
CharterBank's tier 1 capital was $72.1 million at December 31, 2001. Tier 1
capital represented 16.5% of risk-weighted assets. Tier 1 capital represented
11.2% of total regulatory assets at December 31, 2001, which exceeds the
well-capitalized requirements of 5.0%. At December 31, 2001, we had a risk-based
total capital of $144.0 million and a risk-based capital ratio of 32.9%, which
significantly exceeds the applicable well-capitalized requirements of 10%.
On October 16, 2001 the Company completed its reorganization into a two
tier mutual holding company with a sale of 20% of the Company's stock. The net
proceeds of this offering increased capital by approximately $34.7 million of
which $18.9 million was contributed to CharterBank.
In November 2001, we opened our new Auburn, Alabama branch. We had
previously capitalized $1.6 million in expenses for its construction and
$500,000 for the land. We are actively evaluating additional branch locations.
Establishing other branches and ATMs will involve additional capital
expenditures, which have not yet been determined. Other larger expenditures may
include the purchase of land or buildings for future branch sites within our
target market area. Except for the above, we do not anticipate any other
material capital expenditures during fiscal year 2002. We do not have any
balloon or other payments due on any long-term obligations or any off-
19
balance sheet items other than the commitments and unused lines of credit noted
above.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. The effective date of SFAS No. 133 was delayed until fiscal
years beginning after June 15, 2000 with the issuance of SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133. In June 2000, the Financial Accounting
Standards Board issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities an amendment of FASB Statement No.
133. SFAS No. 138 amended the accounting and reporting standards of SFAS No. 133
for certain derivative instruments and certain hedging activities. CharterBank's
embedded derivatives, have been determined to be clearly and closely related to
its investment and debt instruments. SFAS No. 133 and its related amendments did
not have a material impact on CharterBank's financial statement presentations.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations. SFAS No.
141 specifies criteria that intangible assets acquired in a business combination
must meet to be recognized and reported separately from goodwill. SFAS No. 142
will require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144 after
its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 is effective October 1, 2001. Goodwill and intangible assets
determined to have an indefinite useful life acquired in a purchase business
combination completed after June 30, 2001, but before SFAS No. 142 is adopted in
full, are not amortized. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 continued to be amortized and tested
for impairment prior to the full adoption of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal use of
the assets. The Company also records a corresponding asset which is depreciated
over the life of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation will be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash flows
underlying the obligation. The Company is required to adopt SFAS No. 143 on
October 1, 2002.
20
In August, 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. The Company is
required to adopt SFAS No. 144 on January 1, 2002.
Impact of Inflation and Changing Prices
The unaudited consolidated financial statements and accompanying notes have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). GAAP generally requires the measurement of
financial position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates have
a greater impact on performance than do the effects of inflation.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
As of December 31, 2001, there were no substantial changes from the
interest rate sensitivity analysis or the market value of portfolio equity for
various changes in interest rate analysis calculated as of September 30, 2001.
The foregoing disclosures related to the market risk of Charter Financial should
be read in conjunction with Charter Financial's audited consolidated financial
statements, related notes and management's discussion and analysis of financial
condition and results of operations for the year ended September 30, 2001
included in Charter Financial's 2001 annual report on Form 10-K.
21
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds
Charter Financial's Registration Statement on Form S-1 (File No.
333-57684) (the "Registration Statement") was declared effective by the United
States Securities and Exchange Commission (the "SEC") on August 10, 2001.
3,964,481 shares of common stock, par value of $.01 per share (the "Common
Stock"), registered in the Registration Statement and offered in Charter
Financial's Subscription Offering (the "Offering") were sold at a price of
$10.00 per share. Charter Financial also issued 15,857,924 shares or 80% of the
outstanding shares of its common stock, to First Charter, MHC, a federal mutual
holding company. The Offering closed on October 16, 2001 and raised gross
proceeds of $39,644,810 for Charter Financial. Sandler O'Neill & Partners, L.P.,
served as Sales Agent for the Offering.
No Offering expenses were paid, either directly or indirectly, to
directors or officers of Charter Financial or their associates, to persons
owning ten percent or more of Charter Financial's Common Stock or to any other
affiliates of Charter Financial Corporation.
The net proceeds of the Offering for Charter Financial, after
deducting the expenses of the Offering (including sales agency commissions and
expenses) were approximately $37,200,000. Of such proceeds, $18,600,000 were
distributed to CharterBank, Charter Financial's wholly owned subsidiary, which
will use the proceeds for the following:
o to fund new loans;
o to establish or acquire new branches;
o to diversify products offered by Charter Financial or
CharterBank;
o to increase delivery systems, including the expanded use
of ATMs and the introduction of internet banking;
o to repay debt;
o to invest in securities; and
o for general corporate purposes.
Charter Financial Corporation intends to use the proceeds it has
retained from the Offering for the following purposes:
o to finance possible acquisitions of financial
institutions or other financially-related businesses;
o to pay dividends to stockholders;
o to invest in securities;
o for a loan issued to the Employee Stock Ownership Plan of
Charter Financial Corporation to fund its purchase of
shares of the Common Stock of Charter Financial
Corporation; and
o for general corporate purposes.
The use of proceeds does not represent a material change from the
use of proceeds described in Charter Financial's prospectus.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. - Not applicable
(b) Reports on Form 8-K
None
22
SIGNATURES
Pursuant to 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 Corporation
(Registrant)
Date: February 13, 2002 By: /s/ Robert L. Johnson
------------------------------------------
Robert L. Johnson
President and Chief Executive Officer
Date: February 13, 2002 By: /s/ Curtis R. Kollar
------------------------------------------
Curtis R. Kollar
Vice President, Chief Financial Officer
and Treasurer
(principal financial officer)
23