Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

         (Mark One)

For the quarterly period ended December 31, 2002

OR

For the transition period from                       to                      

Commission file number 000-33071

Charter Financial Corporation
(Exact name of registrant as specified in its charter)

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 o

             As of January 31, 2003, 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

TABLE OF CONTENTS

Table of Contents

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:

         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. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

Table of Contents

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

December 31, 2002 and September 30, 2002
(unaudited)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

For the Three Months ended December 31, 2002 and 2001
(unaudited)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the Three Months ended December 31, 2002 and 2001
(unaudited)

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

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, 2002 and September 30, 2002, and for the three-month periods ended December 31, 2002 and 2001. Significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements for the three months ended December 31, 2002 and 2001 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, 2002.

         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.

         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.

(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

Table of Contents

Financial in the offering, using the proceeds of a loan from Charter Financial. The ESOP loan is recorded as unearned compensation reducing stockholders’ equity of Charter Financial. The net proceeds of the offering, adjusted for the ESOP, totaled approximately $34.0 million.

         As part of its reorganization in structure, 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 its investment in Charter Financial and 400,000 shares of Freddie Mac common stock. First Charter, MHC does not engage in any business activity other than its investment in a majority of the common stock of Charter Financial, management of Freddie Mac common stock, and the management of any cash dividends received from Freddie Mac common stock. Federal law and regulations require that as long as First Charter, MHC is in existence it must own at least a majority of Charter Financial’s common stock.

(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.” ESOP shares are only considered outstanding for earnings per share calculations when the shares have been committed to be released. Presented below are the calculations for basic and diluted earnings per share for the three months ended December 31, 2002 and 2001:

Table of Contents

(4) Comprehensive Income

         The primary component of other comprehensive income for the Company is net unrealized gains and losses on Freddie Mac common stock and investment and mortgage backed securities available for sale. The table below summarizes total comprehensive income for the three months ended December 31, 2002 and 2001.

(5) Stock-Based Compensation

         During 2002, the Company adopted the 2001 Stock Option Plan (the Plan) which allows for stock option awards for up to 396,448 shares of the Company’s common stock to eligible directors and employees. At December 31, 2002, the Company had granted 152,000 options under the Plan. Under the provisions of the Plan, the option price is determined by a committee of the board of directors at the time of grant and may not be less than 100% of the fair market value of the common stock on the date of grant of such option. When granted, these options vest over a five-year period. The Company accounts for the Plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the Plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

Table of Contents

No stock options were granted during the three months ended December 31, 2001.

Table of Contents

General

         Charter Financial Corporation (“Charter Financial,” “Company”, “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 Company, 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 owns 4,655,000 shares of Freddie Mac common stock.

         CharterBank currently operates a main office, four full-service branch offices, and three 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 long-term, profitable relationships. 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. We anticipate closing the acquisition of EBA Bancshares, Inc. and its wholly-owned subsidiary, Eagle Bank of Alabama, in February 2003. The acquisition will add three branches in the Auburn-Opelika area of Alabama.

         Charter Financial’s results of operations depend primarily on earnings on investments and 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 real estate loans, consumer loans, mortgage related securities, and investment securities such as our Freddie Mac common stock investment. Interest-bearing liabilities consist primarily of retail and wholesale deposits, repurchase agreements and borrowings from the Federal Home Loan Bank (FHLB) of Atlanta.

Table of Contents

         Our balance sheet at December 31, 2002 also contains noninterest-bearing liabilities of approximately $116.8 million, of which $102.2 million represents deferred taxes, principally relating to the unrealized gain on our Freddie Mac common stock. Our results of operations also depend on our provision for loan losses, noninterest income and noninterest expense. Noninterest expense includes salaries and employee benefits, occupancy expenses and other general and administrative expenses. Noninterest income includes gains on sale of loans, gains (losses) on sales of investment and mortgage backed securities, and service fees and charges.

         Our results of operations may also be affected significantly by economic and competitive conditions in our market area and elsewhere, including those conditions that influence market interest rates, government policies and the actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact us. Furthermore, because our lending activity is concentrated in loans secured by real estate located in Georgia and Alabama, downturns in the regional economy encompassing these states could have a negative impact on our earnings.

Critical Accounting Policies

         In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies which are used in preparing the consolidated financial statements of the Company.

         These policies are described in Note 1 to the consolidated financial statements which were presented in the Company’s 2002 annual report on Form 10-K. Of these policies, management believes that the accounting for the allowance for loan losses is one of the most critical. Please see “Asset Quality” for a further discussion of the Company’s methodology in determining the allowance.

         Losses on loans result from a broad range of causes, from borrower-specific problems to industry issues to the impact of the economic environment. The identification of the factors that lead to default or non-performance under a loan agreement and the estimation of loss in these situations are very subjective. In addition, a dramatic change in the performance of one or a small number of borrowers can have a significant impact in the estimate of losses. As described further below, management has implemented a process that has been applied consistently to systematically consider the many variables that impact the estimation of the allowance for loan losses.

         Investments, mortgage-backed securities, and collateralized mortgage obligations available for sale are reported at fair value, as determined by independent quotations. Purchase premiums and discounts on investment securities are amortized and accreted to interest income using a method which approximates a level yield over the period to maturity of the related securities. Purchase premiums and discounts on mortgage-backed securities and collateralized mortgage obligations are amortized and accreted to interest income using the interest method over the remaining lives of the securities, taking into consideration assumed prepayment patterns.

Table of Contents

         The carrying value of the Company’s investment in a limited partnership is based on the company’s original investment adjusted for its pro rata share of the partnerships’ net income or losses.

Comparison of Financial Condition at December 31, 2002 and September 30, 2002

         Our total assets decreased $39.6 million, or 4.0%, to $943.0 million at December 31, 2002 from $982.6 million at September 30, 2002. The decrease was primarily due to maturities and prepayments of mortgage-backed securities, collateralized mortgage obligations and loans receivable. An increase in the market value of our Freddie Mac common stock from $260.2 million at September 30, 2002 to $274.9 million at December 31, 2002 partially offset these declines.

         Total loans decreased $5.9 million, or 2.7%, to $216.5 million at December 31, 2002 compared to $222.4 million at September 30, 2002. The one-to-four family residential real estate portfolio decreased by $6.8 million, or 6.2%, from $108.9 million at September 30, 2002 to $102.1 million at December 31, 2002. With the present strategy of selling fixed rate loans to the secondary market and the refinancings that took place late in fiscal year 2002 and 2001, we did not keep the refinanced long term fixed rate loans in our portfolio, causing the decline in the overall one-to-four family real estate portfolio. The consumer and other loan portfolio decreased $1.0 million, or 5.0%, from $19.9 million at September 30, 2002 to $18.9 million at December 31, 2002. The decrease in the consumer portfolio was primarily due to runoff of the loans acquired in the acquisition of Citizens National Bank in 1999 and reductions in second mortgages and home equity loans due to refinancings. Commercial real estate and other commercial loans decreased by $548,000 during the quarter ended December 31, 2002, and real estate construction loans increased by $2.5 million during the quarter.

         Mortgage-backed securities and collateralized mortgage obligations decreased from $455.9 million at September 30, 2002 to $407.1 million at December 31, 2002 for a decrease of $48.8 million or 10.7%. The market value of Freddie Mac common stock increased $14.7 million, or 5.6%, from $260.2 million to $274.9 million as the price per share of Freddie Mac common stock increased from $55.90 at September 30, 2002 to $59.05 at December 31, 2002.

         Total deposits decreased slightly from $210.7 million at September 30, 2002 to $208.6 million at December 31, 2002.

         Management will continue to rely on borrowings, especially FHLB advances and repurchase agreements, to fund purchases in the securities portfolios, and, to a lesser extent, the loan portfolio. The terms of new advances will be determined at the time based on the Company’s interest risk profile. Repurchase agreements are generally less than 90 days to maturity with rates at or slightly above LIBOR. Borrowings decreased from $411.0 million at September 30, 2002 to $360.0 million at December 31, 2002, for a decrease of $51.0 million or 12.4%. Borrowings decreased as the proceeds of the decrease in mortgage securities were used to reduce borrowings.

Table of Contents

         Our total stockholders’ equity, which is comprised of common stock, additional paid-in capital, treasury stock, unearned compensation, retained earnings and accumulated other comprehensive income, increased $8.4 million, or 3.4%, to $257.6 million at December 31, 2002. Accumulated other comprehensive income is comprised of net unrealized holding gains on securities available for sale. Accumulated other comprehensive income at December 31, 2002 was $165.7 million, a $9.7 million increase from the balance at September 30, 2002 of $156.0 million. The increase in accumulated other comprehensive income is mainly attributable to the increase in the market value of our investment in Freddie Mac common stock.

Comparison of Operating Results for the Three Months Ended
December 31, 2002 and 2001

General

         Net income was $499,000 for the three months ended December 31, 2002, which was $233,000 lower than the $732,000 for the three months ended December 31, 2001. This decrease primarily stemmed from the impact of lower interest rates on the loan portfolio and the securities portfolio.

Interest Income

         Interest income decreased by $960,000 to $8.6 million for the three months ended December 31, 2002 from $9.5 million for the three months ended December 31, 2001. One component of the decrease was a decrease in interest income on mortgage securities of $319,000 resulting from declining interest rates in 2002 which caused prepayment of the underlying mortgages and, in turn, increased amortization of related premiums on these securities. Interest income on loans also decreased by $736,000 due to a combination of a decrease in average balances of loans and lower interest rates during the three months ended December 31, 2002.

Interest Expense

         Interest expense decreased from $5.7 million for the three months ended December 31, 2001 to $5.0 million for the three months ended December 31, 2002, for a decrease of $698,000. Interest expense on deposits and borrowings decreased $656,000 and $42,000, respectively. The decrease in interest expense on borrowings is due to lower interest rates while the decrease in interest expense on deposits is due to lower rates, and increased balances in the lower cost transaction accounts.

Net Interest Income

         As a result of the above factors, net interest income decreased by $262,000 from $3.8 million for the three months ended December 31, 2001 to $3.6 million for the three months ended December 31, 2002. The decrease of $960,000 in interest income was partially offset by the decrease of $698,000 in interest expense with the $262,000 decrease in net interest income reflecting asset yields declining faster than the cost of interest-bearing liabilities.

Table of Contents

         The following table depicts 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 table shows 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 64.9% at December 31, 2002. However, the dividend yield on the market value of the Freddie Mac common stock is only 1.51%. The appreciation in the market value of the Freddie Mac common stock has created our strong accumulated comprehensive income that is a component of stockholders’ equity.

         In the table following, 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. The table also shows the actual balances of interest-earning assets and interest-bearing liabilities as of December 31, 2002.

Table of Contents