-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SGciXQ9lrUgy0Mg0a0rWN78d3HfeX3iOv8YfNonxQJZxqG41oot0EaPoepI74zXM kkxL1vMorQWdTZZGV+EPfg== 0001021408-01-501208.txt : 20010521 0001021408-01-501208.hdr.sgml : 20010521 ACCESSION NUMBER: 0001021408-01-501208 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20010518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHARTER FINANCIAL CORP/GA CENTRAL INDEX KEY: 0001136796 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-57684 FILM NUMBER: 1643601 BUSINESS ADDRESS: STREET 1: 600 THIRD AVENUE CITY: WEST POINT STATE: GA ZIP: 31833 BUSINESS PHONE: 7066451391 MAIL ADDRESS: STREET 1: 600 THIRD AVENUE CITY: WEST POINT STATE: GA ZIP: 31833 S-1/A 1 ds1a.txt AMENDMENT NO. 1 TO FORM S-1 As filed with the Securities and Exchange Commission on May 18, 2001 Registration No. 333-57684 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CHARTER FINANCIAL CORP. (exact name of registrant as specified in its charter) United States 6035 Application Pending (state or other jurisdiction of (Primary Standard (IRS Employer incorporation or organization) Classification Code Number) Identification No.) Identification No.) c/o CharterBank 600 Third Avenue West Point, GA 31833 (706) 645-1391 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ____________ Robert L. Johnson President and Chief Executive Officer CharterBank 600 Third Avenue West Point, Georgia 31833 (706) 645-1391 (Name, address, including zip code, and telephone number, including area code, of agent for service) ____________ Copies to: V. Gerard Comizio, Esq. John J. Spidi, Esq. Thacher Proffitt & Wood Malizia and Spidi, P.C. 1700 Pennsylvania Ave, N.W., Ste. 800 1100 New York Avenue, N.W. Washington, D.C. 20006 Suite 340 West (202) 347-8400 Washington, DC 20005 (202) 434-4660 ____________ Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box / X / ---
CALCULATION OF REGISTRATION FEE =================================================================================================================================== Title of each Class of Amount to be Proposed Maximum Proposed Maximum Amount of Registration Securities to be Registered Registered(1) Offering Price Per Share(2) Aggregate Offering Price (2) Fee(3) - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock, 5,157,750 $10.00 $51,577,500 $12,895 $.01 par value ===================================================================================================================================
(1) Includes the maximum number of shares that may be issued in connection with this offering. (2) Estimated solely for the purpose of calculating the registration fee. (3) Previously Paid. The Registrant hereby amends this Registration on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. Charter Financial Corp. Cross Reference Sheet showing location in the Prospectus of information required by Items of Form S-1:
Registration Statement Item and Caption Location or Headings in Prospectus - --------------------------------------- ---------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages Prospectus 3. Summary Information and Risk Factors Summary; Risk Factors 4. Use of Proceeds Summary--How We Intend to Use the Proceeds We Raise from the Offering; How We Intend to Use the Proceeds from the Offering 5. Determination of Offering Price Summary---How We Determined the Offering Range and the $10.00 Price Per Share; The Reorganization and the Offering--How We Determined the Offering Range and the $10.00 Price Per Share 6. Dilution Not Applicable 7. Selling Security Holders Not Applicable 8. Plan of Distribution Summary--Persons Who May Order Stock in the Offering; The Reorganization and the Offering--Subscription Offering and Subscription Rights, Direct Community Offering and Syndicated Community Offering 9. Description of Securities to be Registered Description of Capital Stock of Charter Financial Corp. 10. Interests of Named Experts and Counsel Not Applicable 11. Information with Respect to the Registrant Outside Front Cover Page; Summary--The Companies; Summary--Our Directors, Officers and Employees Will Have Additional Compensation and Benefit Programs After the Reorganization; Selected Consolidated Financial and Other Data; CharterBank; Charter Financial Corp.; First Charter, MHC; Our Policy Regarding Dividends; Market for the Common Stock; Regulatory Capital Compliance; Capitalization; Pro Forma Data; CharterBank Consolidated Statements of Operations; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business of CharterBank; Business of First Charter, MHC; Business of Charter Financial Corp.; Regulation of CharterBank and Charter Financial Corp; Federal Banking Regulation; Management; Executive Officers; The Reorganization and the Offering; Restrictions on Acquisition of Charter Financial Corp. and CharterBank; Description of Capital Stock of Charter Financial Corp.; Financial Statements 12. Disclosure of Commission Position on Not Applicable Indemnification for Securities Act Liabilities
[LOGO] Charter Financial Corp. Proposed Holding Company for CharterBank Up to 5,157,750 Shares of Common Stock Charter Financial Corp. is a federally-chartered corporation that is offering shares of its common stock in connection with the reorganization of CharterBank into a mutual holding company. The shares we are offering represent 20% of the outstanding common stock of Charter Financial. CharterBank formed Charter Financial to own CharterBank as part of the reorganization of its structure. First Charter, MHC, a federally-chartered mutual holding company, will own 80% of the outstanding common stock of Charter Financial. We have applied to have the common stock of Charter Financial quoted on the Nasdaq National Market under the symbol "[_]." __________________________________________ TERMS OF THE OFFERING Price: $10.00 per share Minimum Maximum ----------- ----------- Number of shares............................. 3,315,000 4,485,000 Underwriting commissions and other expenses.. $ 1,430,000 $ 1,559,000 Net proceeds to Charter Financial............ $31,720,000 $43,291,000 Net proceeds per share to Charter Financial.. $ 9.57 $ 9.65 We may sell up to 5,157,750 shares because of regulatory considerations or changes in market or economic conditions without the resolicitation of subscribers. __________________________________________ This investment involves a degree of risk, including the possible loss of principal. Please read the Risk Factors beginning on page [_]. These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Neither of the Securities and Exchange Commission, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. We are offering the common stock on a best efforts basis, subject to certain conditions. The minimum number of shares that you may purchase is 25 shares. Funds received prior to the completion of the offering will be held in an account at CharterBank which will bear interest at our savings passbook rate. This offering is expected to terminate on [_], 2001. We may extend this expiration date without notice to you, until [_], 2001, unless the Office of Thrift Supervision approves a later date. Sandler O'Neill & Partners, L.P. _______, 2001 - -------------------------------------------------------------------------------- [MAP OF CHARTERBANK BRANCH OFFICES] - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- Summary........................................................... 1 Risk Factors...................................................... 11 Forward Looking Statements........................................ 18 Selected Consolidated Financial and Other Data.................... 19 CharterBank....................................................... 21 Charter Financial................................................. 22 First Charter, MHC................................................ 22 Charter Insurance Company......................................... 22 How We Intend to Use The Proceeds From The Offering............... 23 Our Policy Regarding Dividends.................................... 24 Market For The Common Stock....................................... 25 Regulatory Capital Compliance..................................... 26 Capitalization.................................................... 27 Pro Forma Data.................................................... 28 CharterBank Condensed Consolidated Statements of Income and Comprehensive Income.................................. 34 Management's Discussion And Analysis of Financial Condition And Results of Operations.................... 35 Business of CharterBank........................................... 69 Business of Charter Financial..................................... 103 Regulation of CharterBank And Charter Financial................... 104 Taxation.......................................................... 113 Management........................................................ 114 The Reorganization and the Offering............................... 127 Restrictions on Acquisition of Charter Financial And CharterBank.. 146 Description of Capital Stock of Charter Financial................. 149 Legal And Tax Opinions............................................ 151 Experts........................................................... 151 Registration Requirements......................................... 151 Where You Can Find Additional Information......................... 152 Index to Financial Statements..................................... F-1
iii - -------------------------------------------------------------------------------- SUMMARY You should read this entire document carefully, including the consolidated financial statements and the notes to the consolidated financial statements. Our Reorganization and Stock Offering CharterBank is currently a federally-chartered mutual savings and loan association headquartered in West Point, Georgia. CharterBank is reorganizing into the mutual holding company structure. As part of the reorganization, Charter Financial is offering up to 5,157,750 shares to the public, representing 20% of its outstanding common stock. After the reorganization, Charter Financial will own 100% of CharterBank. This chart shows our new structure after the reorganization:
Public First Charter, MHC Stockholders 80% of Charter 20% of Charter Financial's Financial's common stock common stock Charter Financial Corp. 100% Ownership 100% Ownership Charter Insurance CharterBank Company
First Charter, MHC will own a majority of Charter Financial's common stock after the reorganization. The same directors and officers who manage CharterBank will manage Charter Financial and First Charter, MHC. - -------------------------------------------------------------------------------- 1 - -------------------------------------------------------------------------------- The Companies CharterBank We are a federally-chartered mutual savings and loan association, headquartered in West Point, Georgia. We were formed in 1954 and operate four full-service branch offices and three loan production offices in west-central Georgia and east-central Alabama. We are a community-oriented financial institution serving consumer households and small businesses. At March 31, 2001, we had total assets of $934.8 million, including 5,055,000 shares of Freddie Mac stock with a market value of $327.7 million, equity of $249.2 million and total deposits of $185.2 million, respectively. We are the only locally-owned and operated financial institution in the Valley area, which is comprised of West Point, Georgia and Lanett and Valley, Alabama. Our address is 600 Third Avenue, West Point, Georgia 31833, and our telephone number is (706) 645-1391. Our assets have grown over the past three years from $729.3 million at September 1998 to $934.8 million at March 31, 2001, an increase of over 28%. Charter Financial Corp. Charter Financial will be the stock holding company for CharterBank after the reorganization. Charter Financial has not engaged in any business to date. After the reorganization, Charter Financial will hold 1.7 million shares of Freddie Mac stock, currently held in CharterBank's investment portfolio and will own Charter Insurance Company which will own an additional 400,000 shares of Freddie Mac stock. See "Business of Charter Financial." First Charter, MHC First Charter, MHC will own at least a majority of the outstanding common stock of Charter Financial after the reorganization. We do not expect that First Charter, MHC will engage in any business activity other than owning a majority of the common stock of Charter Financial and holding 400,000 shares of Freddie Mac stock, currently held in CharterBank's investment portfolio. First Charter, MHC has not engaged in any business to date. Charter Insurance Company Charter Insurance Company is a Hawaiian corporation which commenced operations in December 2000. Charter Insurance Company is a wholly-owned subsidiary of Charter Holdings, Inc., a wholly-owned subsidiary of CharterBank. Charter Insurance Company generates fee income by reinsuring a portion of CharterBank's loan originations which carry private mortgage insurance. CharterBank has capitalized Charter Insurance Company with $450,000. As part of the reorganization, 400,000 shares of Freddie Mac stock will be contributed to Charter Insurance Company and Charter Insurance Company will become a subsidiary of Charter Financial. Charter Insurance Company's revenues are expected to be less than 1% of Charter Financial's total revenues. - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- The following are highlights of CharterBank's operations: . Ownership of Freddie Mac Stock Our balance sheet is unique in comparison to our peers in that we own 5,055,000 shares of Freddie Mac stock with a market value of approximately $327.7 million at March 31, 2001, which represents approximately 35.1% of our total assets. The $197.0 million in after-tax unrealized gain on our Freddie Mac stock represents 79.9% of our equity at March 31, 2001. The Freddie Mac stock is held in our investment portfolio as available-for-sale under generally accepted accounting principles. Our investment in Freddie Mac stock in the 1980s has significantly increased our capital and earnings. Because we believe that our ownership of Freddie Mac stock continues to present attractive earnings growth potential and because the sale of Freddie Mac stock would result in substantial tax liability for us, we have no current plans to liquidate our investment. However, we are reallocating the stock so as to more effectively manage our Freddie Mac stock investment and CharterBank's retail operations. In this regard, as part of the reorganization, 2.5 million shares of the Freddie Mac stock will be transferred out of CharterBank's portfolio to Charter Financial, First Charter, MHC and Charter Insurance Company, leaving 50.5% of our Freddie Mac stock in CharterBank's portfolio. Following the reorganization, we will continue to monitor our Freddie Mac stock investment. . Community Banking and Customer Service We are a service-oriented bank providing retail and small business customers with products and services designed to create long term, profitable relationships. We strive to offer high quality services to customers, not only through personal service, but also by offering a competitive array of financial products which address customer needs. In this regard, we offer numerous loan products, including residential mortgage loans, commercial real estate loans, commercial loans, home equity loans, second mortgages and other loan products. We also offer deposit products including consumer and commercial checking accounts, savings accounts, money market accounts and certificates of deposit, as well as other services to our customers. In addition, we have funded The Charter Foundation, a non-profit charitable foundation, which makes charitable contributions to our community. . Residential Lending We are the leading residential mortgage lender in the Valley area. As of March 31, 2001, our residential mortgage loans totaled $153.3 million, equal to 60.8% of our total loans. Our strategy is to offer customers a broad range of mortgage products including adjustable and fixed rate loans and "jumbo" loan products, which are loans with balances that exceed Fannie Mae guidelines. For the six months ended March 31, 2001, we originated $38.0 million in residential loans. For the years ended September 30, 2000 and 1999, we originated $92.5 million and $139.5 million, respectively, in residential loans. - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- . Branch Expansion We plan to expand our targeted market area to include higher income areas within the I-85 corridor in west-central Georgia and east-central Alabama. In this regard, we plan to establish additional branch offices and upgrade existing facilities over the next three to four years. As part of this strategy, we acquired Citizens National Bank, Valley, Alabama in August 1999 and are currently constructing a new branch in Auburn, Alabama, which is scheduled to open in the fourth quarter of this year. . Expanded Delivery Channels To serve our existing customers better and to complement our planned branch expansion, we will increase the channels through which we deliver products and services. In this regard, we will expand our use of ATMs by placing additional ATMs at strategic locations within our primary market area. We also plan to introduce Internet banking products which will give our customers on-line access to their accounts and the ability to conduct account transactions such as online bill payment and electronic funds transfers. . Capital Strength Our policy has been to maintain the financial strength of CharterBank through conservative risk management, sound financial condition, stable earnings and an efficient operation. Our strong capital position is bolstered by our Freddie Mac Stock investment. At March 31, 2001, we had $197.0 million in after- tax unrealized gain from the investment in the Freddie Mac stock. . Interest Rate Strategy We seek to maintain an acceptable balance between maximizing potential yield and limiting exposure to changing interest rates. To reduce the risk that our earnings will be impacted if interest rates change, we: . sell most of our conforming fixed rate one- to four-family mortgage loans that we currently originate rather than retain them in our loan portfolio; . emphasize investments with adjustable rates and/or short and intermediate-term average lives of less than ten years; and . structure most of our commercial real estate loans with adjustable rates or as balloon loans, which require a large, lump sum payment at maturity. - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- Reasons for the Reorganization The reorganization of CharterBank to a mutual holding company will permit Charter Financial to issue common stock, which is a source of capital not available to mutual savings banks. The proceeds from the sale of common stock of Charter Financial will provide CharterBank with new capital, which will support our planned branch expansion, future deposit growth and expanded operations. CharterBank's mutual form of ownership will be preserved in First Charter, MHC. First Charter, MHC, as a mutual holding company, will own at least a majority of the common stock of Charter Financial as long as First Charter, MHC remains in existence. The reorganization will allow CharterBank to achieve certain benefits of a stock company, while allowing us to raise capital incrementally. The reorganization is also intended to provide an additional source of capital to Charter Financial in order to allow it to: . finance its planned branch expansion through acquisitions of other financial institutions as well as through de novo branching; . finance acquisitions of other businesses related to banking; . pay dividends to stockholders; and . repurchase shares of our common stock. As part of the reorganization, CharterBank will transfer 2.5 million shares of its Freddie Mac stock holdings with an approximate market value of $162.1 million as of March 31, 2001 to Charter Financial, Charter Insurance Company and First Charter, MHC. We believe that the transfer of Freddie Mac stock to Charter Financial, Charter Insurance Company and First Charter, MHC will allow CharterBank's management to focus on improving returns on our core banking activities. Additionally, after the reorganization, Charter Financial will have the ability to issue additional shares of common stock to raise capital or to support mergers or acquisitions without assuming the risks of raising capital through the sale of Freddie Mac stock, although no additional capital issuance and no mergers or acquisitions are planned or contemplated at the present time. In addition, the reorganization will allow Charter Financial to establish stock benefit plans for management and employees, including incentive stock option plans, stock award plans and an employee stock ownership plan, in order to allow us to attract and retain qualified personnel. We also believe that the reorganization will provide local customers and other residents with an opportunity to become equity owners of Charter Financial, and thereby participate in possible stock price appreciation and cash dividends. This is consistent with our objective of being a locally-owned financial institution. - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- After considering the advantages and risks of the reorganization, as well as applicable fiduciary duties, the Board of Directors of CharterBank unanimously approved the reorganization as being in the best interests of CharterBank, our depositors and the communities that we serve. Terms of the Offering We are offering between 3,315,000 and 4,485,000 shares of common stock of Charter Financial to qualifying depositors, tax-qualified employee plans and possibly to the public. The maximum number of shares that we sell in the offering may increase by up to 15% to 5,157,750 shares as a result of regulatory considerations or changes in financial markets. Unless the number of shares to be issued is increased to more than 5,157,750 or decreased below 3,315,000, you will not have the opportunity to change or cancel your stock order. The offering price is $10.00 per share. Sandler O'Neill & Partners, L.P., our financial and marketing advisor in connection with the reorganization, will use its best efforts to assist us in selling our stock. Persons Who May Order Stock in the Offering We are offering the shares of common stock of Charter Financial in what we call a "subscription offering" in the order of priority listed below: (1) Depositors with accounts at CharterBank with aggregate balances of at least $50 on September 30, 1999; (2) The tax-qualified employee plans of CharterBank (including the ESOP), which will provide retirement benefits to our employees; (3) Depositors with accounts at CharterBank with aggregate balances of at least $50 on March 31, 2001; and (4) Other depositors and borrowers of CharterBank on the voting record date who do not already have subscription rights in the above priorities. The shares of common stock not purchased in the subscription offering will be offered, in what we call a "direct community offering," on a priority basis, with preference to the natural persons residing within our Community Reinvestment Act assessment area which consists of the entirety of Troup and Harris Counties, Georgia, as well as the entirety of Chambers and Lee Counties, Alabama. Shares may also be offered to the general public. The direct community offering, if any, will commence concurrently with, during or promptly after the subscription offering. We also may offer shares of common stock not purchased in the subscription offering or the direct community offering to the public through a syndicate of broker-dealers managed by Sandler O'Neill & Partners, L.P. (referred to as a "syndicated community offering.") We have the right to accept or reject orders received in the direct community offering and the syndicated community offering at our sole discretion. - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- How We Determined the Offering Range and the $10.00 Price Per Share The offering range is based on an independent appraisal of the common stock to be offered. RP Financial, LC., an appraisal firm experienced in appraisals of savings banks and financial institutions, has estimated as of March 2, 2001 the market value of the common stock to be between $33,150,000 and $44,850,000. This results in an offering of between 3,315,000 and 4,485,000 shares of common stock at an offering price of $10.00 per share. RP Financial's estimate of our market value was based in part upon our financial condition and results of operations and the effect of the additional capital raised in this offering. RP Financial's independent appraisal will be updated before we complete our reorganization. The $10.00 price per share was selected primarily because $10.00 is the price per share most commonly used in stock offerings involving reorganizations of federal savings banks. See "Pro Forma Data." Limits on Your Purchase of the Common Stock Your orders for common stock will be limited in the following ways: (1) the minimum order is 25 shares or $250; (2) in the subscription offering, the maximum amount that an individual may purchase is $1,000,000; (3) in the direct community offering and in the syndicated community offering, the maximum amount that an individual may purchase is $1,000,000; (4) in all categories of the offering combined, the total amount that an individual may purchase, acting together with others, is $1,650,000; and (5) if we receive orders for a greater number of shares than we are offering, then we will allocate the available shares that we issue. This may result in your receiving a smaller number of shares than you ordered. See "The Reorganization and The Offering." We may increase the purchase limitations at any time. In addition, in any direct community offering or syndicated community offering, we must first fill orders for our common stock up to a maximum of 2% of the shares issued in the reorganization on a basis that will promote a widespread distribution of stock. Thereafter, we must allocate any remaining shares on an equal number of shares per order basis, until we fill all orders. The ESOP is authorized to purchase up to 8% of the shares sold in the offering to persons other than First Charter, MHC without regard to these purchase limitations. For example, the ESOP may purchase up to 265,200 and 358,800 shares of common stock, respectively, at the minimum and maximum of the offering range. The Office of Thrift Supervision has proposed regulations which would permit the ESOP to purchase up to 8% of 49.9% of the outstanding shares of Charter Financial common stock, including those shares issued to First Charter, MHC. These proposed regulations have not yet been adopted and may not - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- be adopted for the foreseeable future or at all. However, if the Office of Thrift Supervision adopts these proposed regulations, the ESOP may purchase up to 8% of 49.9% of the outstanding shares of Charter Financial common stock, including those shares issued to First Charter, MHC, or up to 661,674 and 895,206 shares of common stock, respectively, at the minimum and maximum of the offering range. For additional information on these purchase limitations see "The Reorganization and The Offering -- Limitations on Common Stock Purchases." How You May Pay for Your Shares In the subscription offering and the direct community offering you may pay for your shares only by: (1) personal check, bank check or money order; or (2) authorizing us to withdraw money from your deposit accounts maintained with CharterBank. We may also, but are not required, to permit wire transfers as payment for shares ordered for purchase. CharterBank cannot lend funds to anyone for the purpose of purchasing shares. You May Not Sell or Transfer Your Subscription Rights If you order stock in the subscription offering, you will be required to state that you are purchasing the stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or state regulatory agencies, against anyone who we believe sells or gives away their subscription rights. We will not accept your order if we have reason to believe that you sold or transferred your subscription rights. Deadline for Orders of Common Stock If you wish to purchase shares, a properly completed stock order form, together with payment for the shares must be received by CharterBank no later than 4:00 p.m., Eastern time, on [], 2001, unless we extend this deadline. You may submit your order form by mail using the return envelope provided, by overnight courier to the indicated address on the order form, or by bringing your order forms to one of our full-service branch offices. Termination of the Offering The subscription offering will terminate at 5:00 p.m., Eastern time, on [_], 2001. We expect that the direct and/or syndicated community offerings would terminate at the same time. We may extend this expiration date without notice to you, until [_], 2001, unless regulators approve a later date. If the subscription offering and/or community offerings are extended - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- beyond [_], 2001, we will be required to resolicit subscriptions before proceeding with the offerings. All further extensions, in the aggregate, may not last beyond [_]. Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares If we do not receive orders for at least 3,315,000 shares of common stock, we may take several steps in order to sell the minimum number of shares in the offering range. Specifically, we may increase the $1,000,000 and $1,650,000 purchase limitations to a maximum of $2,242,500, which is 5% of the maximum of the offering range. In addition, we may seek regulatory approval to extend the offering beyond the [_] expiration date, provided that any such extension will require us to resolicit subscriptions received in the offering. See "The Reorganization and The Offering - Limitations on Common Stock Purchases." Market for the Common Stock We have applied to have the common stock of Charter Financial quoted on the Nasdaq National Market under the symbol ["."] Sandler, O'Neill & Partners, L.P. currently intends to make a market in the common stock but it is under no obligation to do so. See "Market for Common Stock." How We Intend to Use the Proceeds We Raise from the Offering Assuming we sell 4,485,000 shares in the offering, we intend to distribute the net proceeds from the offering as follows: . $21,645,500 will be contributed to CharterBank; . $3,120,000 will be loaned to the ESOP to fund its purchase of common stock; and . $18,525,500 will be retained by Charter Financial. Charter Financial intends to use the net proceeds retained from the offering to invest in securities, to finance the possible acquisition of other financial institutions and other businesses that are financial in nature, to pay dividends, to repurchase common stock or for other general corporate purposes. CharterBank may use the proceeds it receives to repay certain borrowings, expand its lending activities and its branch network, to purchase mortgaged-backed securities and investment securities and for general corporate purposes. See "How We Intend To Use the Proceeds from the Offering." - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- Our Policy Regarding Dividends Although no decision has been made regarding the payment of dividends, we will consider a policy of paying quarterly cash dividends on the common stock starting the first quarter after we complete the reorganization. We cannot guarantee, however, that we will pay dividends, or that we will not reduce or eliminate dividends in future periods. Our Directors, Officers and Employees Will Have Additional Compensation and Benefit Programs After the Reorganization In order to tie our officers', directors' and employees' interests closer to our stockholders' interests, we intend to establish certain benefit plans that use our stock as compensation. Accordingly, we are adding new benefit plans for our officers and employees at no cost to them, including an employee stock ownership plan (ESOP) and a benefit restoration plan. We also plan to adopt a stock option plan and management recognition plan in connection with the reorganization and to enter into an employment agreement with Robert L. Johnson, our President and Chief Executive Officer. In addition, we also plan to enter into change in control agreements with certain of our executive officers. These new benefit plans and employment agreements will increase our future costs of compensating our directors and employees, thereby reducing our earnings. Additionally, stockholders will experience a reduction in ownership interest if newly issued shares are used to fund stock options and the management recognition plan. See "Risk Factors- The implementation of stock-based benefits will increase our future compensation expense, reduce our earning and cause dilution" and "Management- Employment Agreements, -Change of Control Agreements, - -Benefit Plans and -Future Stock Benefit Plans." Possible Conversion of First Charter, MHC to Stock Form In the future, First Charter, MHC may convert from the mutual to capital stock form, in a transaction commonly known as a "second-step conversion." In a second-step conversion, depositors of First Charter, MHC would have subscription rights to purchase shares of Charter Financial and the stockholders of Charter Financial would be entitled to exchange their shares of common stock for shares of the converted First Charter, MHC in a manner that is fair and reasonable to the shareholders. This percentage may be adjusted to reflect the assets owned by First Charter, MHC. Charter Financial's public stockholders would own approximately the same percentage of the resulting entity as they owned prior to the second-step conversion. The board of directors has no current plan to undertake a "second-step conversion" transaction. How You May Obtain Additional Information Regarding the Reorganization and Offering If you have any questions regarding the offering or the reorganization, please call the Conversion Center at [ ], Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern time. - -------------------------------------------------------------------------------- 10 RISK FACTORS - -------------------------------------------------------------------------------- You should consider carefully the following risk factors before deciding whether to invest in our common stock. - -------------------------------------------------------------------------------- A decrease in the market value of our Freddie Mac stock investment may reduce our earnings and capital. CharterBank currently owns 5,055,000 shares of Freddie Mac stock which, as of March 31, 2001, had an estimated fair market value of $327.7 million including an after tax unrealized gain of $197.0 million, and represented approximately 35.1% of its outstanding total assets. Our current revenue and strong capital structure are due, in part, to dividend income from the Freddie Mac stock and the appreciation of the stock investment. Because First Charter, MHC will retain 400,000 shares of Freddie Mac stock in the reorganization, Charter Financial's earnings will be reduced by the amount of dividends and appreciation that we would have realized on the shares of Freddie Mac stock retained by First Charter, MHC. Therefore, we will be more dependent on income from our loan and investment portfolio to increase our future earnings. If we cannot increase income from our loan and investment portfolio and the market value of our Freddie Mac stock investment declines, our capital and profitability may be adversely impacted. In addition, the price of Freddie Mac stock tends to move inversely to long term interest rates. Accordingly, recent declines in interest rates have caused Freddie Mac stock to trade near its all time high. The following table shows the per share high, low, ending and average daily trading price of Freddie Mac stock for the period from March 31, 2001 to May [], 2001, for the six months ended March 31, 2001 and for each of the three years ended September 30, 2000.
Price Per Share($) ----------------------------- Period Ended High Low End Average - ---------------------------------------- ------- ------ ----- -------- May [_], 2001........................... March 31, 2001.......................... 69.00 50.75 64.83 61.33 September 30, 2000...................... 55.75 37.69 54.06 45.99 September 30, 1999...................... 51.38 35.13 49.63 57.34 September 30, 1998...................... 65.13 45.31 52.00 44.59
Because the price of Freddie Mac stock may fluctuate significantly, management believes that the recent trading prices of Freddie Mac stock may not accurately reflect the value of the asset. If the market value of our Freddie Mac stock investment declines, our capital will be reduced proportionately. 11 We have a significant deferred tax liability on our Freddie Mac stock investment. If it became payable, this tax liability would significantly adversely affect our liquidity, ability to hold Freddie Mac stock and earnings. At March 31, 2001 we had deferred taxes of $127.5 million which relate primarily to the unrealized gain on our Freddie Mac stock. The unrealized gain, net of tax, has been recorded as other comprehensive income and has been included in the equity section of the statement of financial condition as Accumulated Other Comprehensive Income and the related deferred taxes have been included in the liability section as Deferred Income Taxes. We have designated our Freddie Mac stock investment as held for investment, as opposed to trading, for tax purposes. If, because of frequent sales or for other reasons, the Internal Revenue Service designates our Freddie Mac stock investment as trading, the investment would be marked to market for tax purposes each year. As of March 31, 2001, this would add $320.8 million to taxable income which, assuming a 38.6% effective tax rate, would require a combined tax payment of $123.8 million. The payment of this deferred tax liability would adversely affect our liquidity, ability to hold Freddie Mac stock and earnings. If our dividend income exceeds our taxable income for any given year, we will lose potential tax benefits associated with the dividends received deduction. We receive a dividends received deduction on dividend income from our investment in Freddie Mac stock. This deduction is the lesser of 70% of dividends received or 70% of taxable income before the dividend received deduction. Therefore, if taxable income exceeds 70% of dividend income or if we incur a net loss for any given year, the full deduction of 70% of dividends is allowed, creating significant tax savings for us. However, if 70% of dividend income exceeds taxable income for any given year, we will not be able to take full advantage of the dividends received deduction and we would lose potential tax benefits. The table below shows the tax benefit of the dividends received deduction at different levels of taxable income assuming constant dividend income of $3,500,000 and an effective tax rate of 37.72%.
Taxable Income (Loss) ----------------------------------------- 1. Taxable income (loss) $4,000,000 $ 100,000 $ (100,000) before dividend exclusion.... ---------- ---------- ---------- 2. Dividend income................. $3,500,000 $3,500,000 $3,500,000 3. Dividends received deduction - lesser of line 1 or 2........ $2,450,000 $ 70,000 $2,450,000 4. Tax benefit of deduction........ $ 924,140 $ 26,404 $ 924,140
Our earnings may be reduced if we are required to take our bad debt reserve into income. The reorganization will be effected using the "purchase and assumption" method, under which assets and liabilities of the present CharterBank will be successively transferred to Charter Financial and to the new CharterBank, in each case in exchange for at least 80% of the stock of the transferee. Although such transactions are generally tax-free, it is not clear whether or not the use of this method would require the present CharterBank to "recapture" (i.e., take into income) 12 its bad debt reserve, and the IRS will not issue private letter rulings in that regard. Accordingly, although we may take the position that, under available authority, such recapture is not required, there is a possibility that the use of the purchase and assumption method will cause the present CharterBank to recapture the balance of its bad debt reserve, which would result in a federal tax liability of approximately $800,000. A decrease in our sources of funds may affect our ability to fund loans. This would reduce our earnings. CharterBank funds its operations with a combination of retail and wholesale deposits, and with borrowings from the Federal Home Loan Bank of Atlanta and securities sold under agreements to repurchase. Credit union certificates of deposits comprised approximately 22% of our total deposit base at March 31, 2001. The balances of our credit union deposits are more volatile than our retail deposits. Wholesale deposits of approximately $40.9 million are scheduled to mature during the next several quarters. As these deposits mature, they are less likely to remain with CharterBank, as compared to the relatively stable balance of our core retail deposit base. As a result, these maturities will most likely outpace the growth of our retail deposit base. Accordingly, we plan to continue to utilize either borrowed funds or wholesale deposits to fund asset growth and maturing liabilities. Our capacity to borrow is impacted by the amount of available collateral. This collateral is impacted by interest rates, delinquencies and other factors related to the underlying loans and securities. In a rising interest rate environment or a weak economy, the value of our collateral may decrease thereby reducing our capacity to borrow. Further, the Federal Home Loan Bank may have higher priority than other lenders from whom we have borrowed in times of financial distress and demand significant collateral. At March 31, 2001, CharterBank had available lines of credit commitments with the FHLB totaling $280.5 million, of which $236.8 million was advanced and $43.7 million was available at March 31, 2001. Although we have secured a line of credit based on the value of our Freddie Mac stock, we believe that the significant negative tax implications associated with borrowing against our Freddie Mac stock makes this option a last resort. If sufficient deposits or borrowings are not available to effectively fund loans, our future earnings may be negatively impacted. Our local economy may affect our future growth possibilities. Our current market area is principally located in the Valley region consisting of West Point, Georgia and Lanett and Valley, Alabama. Our future growth opportunities depend on the growth and stability of our regional economy and our ability to expand our market area. While we expect our local economy to moderately grow over the next several years, a downturn in our local economy may limit funds available for deposit and may negatively affect our borrowers' ability to repay their loans on a timely basis, both of which could have an impact on our profitability. 13 Our market area has traditionally depended on the textile industry as a source of employment, and while our local economy has expanded to include other trade sectors in recent years, our local economy has not experienced the same growth as other nearby regions. In addition, a local provider of wireless telephone service, Powertel Inc., which is headquartered in West Point, Georgia has recently been sold to VoiceStream (Deutsche Telekom). While we will seek to address this economic risk through expansion of our retail delivery systems into other nearby markets, we cannot guarantee that a downturn in our local economy will not have a negative impact on our earnings. Our high market share in the Valley area may limit further growth and lower our profitability. Our already strong market share in the Valley area may limit further growth in this area which could limit the amount of funds available to originate loans. Therefore, our profitability will depend, in part, on our ability to expand our retail market area beyond the Valley region. If this growth strategy is not successful, our earnings may be negatively impacted. Our return on average equity will be low compared to other companies. This could hurt the trading price of our common stock. We will not be able to deploy the increased capital from this offering into high-yielding earning assets immediately. Our ability to profitably deploy our new capital will be significantly affected by industry competition for loans and deposits. Initially, we intend to invest the net proceeds in short-term investments and mortgage-backed securities, which generally have lower yields than loans. Freddie Mac stock, based on the price and dividend at March 31, 2001 had a dividend yield of approximately 1.20%. These factors will reduce our return on average equity to a level that will be lower than our peers. For the six months ended March 31, 2001, our return on average equity was 2.25%. As long as we own Freddie Mac stock and until we can invest profitably our increased capital and increase portfolio loans and retail deposits, we expect our return on equity to be below the industry average, which may negatively impact the value of our stock. There is no guarantee that an active trading market for your stock will develop. [**2] Because Charter Financial has never issued stock, there is no current trading market for the common stock. Consequently, Charter Financial cannot assure or guarantee that an active trading market for the common stock will develop or that, if developed, will continue. An active and orderly trading market will depend on the existence and individual decisions of willing buyers and sellers at any given time over which neither Charter Financial nor any market maker will have any control. Further, Charter Financial will only be issuing 20% of its outstanding common stock to the public. If an active trading market does not develop or is sporadic, this may hurt the market value of the common stock and make it difficult to buy or sell shares on short notice. 14 The price of your stock may be negatively affected by many factors, including the price of Freddie Mac stock. The purchase price of our common stock in the offering is based on the independent appraisal by RP Financial. After our shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including the price of Freddie Mac stock, prevailing interest rates, investor perceptions of Charter Financial and general industry and economic conditions. Therefore, we cannot assure you that, following the reorganization, the trading price of our common stock will be at or above the $10.00 per share initial offering price. Because we intend to pursue conservative and locally-based business goals, our earnings may not increase significantly, which could negatively affect the price of your stock. On a post-reorganization basis, CharterBank intends to continue to serve the financial needs of the local community and to remain an independent, community-based institution pursuing our lending and investment strategies. We will continue to lend primarily within our targeted market area within the I-85 corridor in Georgia and Alabama after our reorganization. We also will not lower credit standards even though our capital base will be larger. For these reasons, our future earnings may not increase significantly. If your investment goals are to invest in companies with high earnings growth, you may find that we may not suit your investment objectives. A decrease in demand for mortgage, commercial and consumer loans may lower our earnings. Making loans is a major component of our business and a primary source of revenues. If customer demand for loans decreases, our earnings may decrease because our alternative investments earn less revenue for us than real estate, commercial and consumer loans. Customer demand for loans could be reduced by a weaker economy, an increase in unemployment, a decrease in real estate values, an increase in interest rates or increased competition from other institutions. Because we intend to increase our commercial real estate lending, our lending risk will increase and downturns in the real estate market or local economy could adversely impact our earnings. Loans secured by commercial real estate properties generally involve a higher degree of risk than residential mortgages. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties or a related business, repayment of such loans may be subject to a greater extent, to adverse conditions in the real estate market or the local economy. Commercial real estate loans may also involve relatively large loan balances to single borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely impact the value of properties secured by the loan or the revenues from the business thereby increasing the risk of 15 nonperforming loans. As the volume of commercial real estate loans in our loan portfolio increases, the corresponding risks and potential for losses from these activities may also increase. Because our loans are concentrated in the states of Georgia and Alabama, downturns in the economy or real estate market in our market area will adversely impact our earnings. Our loan portfolio is secured primarily by real estate located in Georgia and Alabama. Accordingly, the asset quality of our loan portfolio depends upon the economy and unemployment rate in this area. A downturn in the economy or the real estate market in our primary lending area would likely adversely affect our operations and earnings. Because we plan to expand our traditional and nontraditional delivery channels, our expense base will increase. This will reduce our earnings in the short term. We plan to expand by adding traditional branches and other delivery channels including additional ATMs, a voice response unit, and Internet banking in order to be more competitive and have the capacity to deepen our relationships with our existing customers as we attract new customers. As these investments are made, our expense base will grow. Until our new branches become profitable through loan and deposit growth, our earnings will be negatively impacted. In addition, costs will outpace revenue on our alternative delivery channels referred to above unless and until customer acceptance and usage generates sufficient fee income to cover costs. The implementation of stock-based benefit plans will increase our future compensation expense and reduce our earnings. We intend to adopt a stock option plan that will provide for granting to our eligible officers, employees, and directors options to purchase common stock; a management recognition plan that will provide for awards of common stock to eligible employees, officers and directors; and an ESOP which intends to purchase up to 8% of the shares issued in the offering to persons other than First Charter, MHC, for allocation to employees as a retirement benefit. The expense of the ESOP and management recognition plan may be volatile because such expenses must reflect the market value of the underlying Charter Financial common stock awarded to participants. These plans will increase our future costs of compensating our directors and employees, thereby reducing our earnings. Our compensation expenses will increase and our earnings will decrease further if the Office of Thrift Supervision adopts proposed regulations that would permit the ESOP and management recognition plan to purchase additional stock. The implementation of stock-based benefit plans may dilute your ownership interest in Charter Financial. We intend to adopt a stock option plan and management recognition plan as part of the reorganization. These stock benefit plans will be funded through either open market purchases, if permitted, or from the issuance of authorized but unissued shares. Stockholders will 16 experience a reduction in ownership interest in the event newly issued shares are used to fund stock options and awards made under the management recognition plan. Because First Charter, MHC will own a majority of Charter Financial's common stock, First Charter, MHC will be able to prevent transactions you might be in favor of, including a sale or merger of Charter Financial. Provisions of our federal charter and bylaws and applicable provisions of federal law and regulations may delay, inhibit or prevent an organization or person from gaining control of Charter Financial through a tender offer, business combination, proxy contest or some other method even though some of our stockholders might believe a change in control is desirable. In addition, First Charter, MHC will own at least a majority of Charter Financial's common stock after the reorganization. The same directors and officers who manage CharterBank will manage First Charter, MHC. The board of directors of First Charter, MHC will control the outcome of most matters put to a vote of stockholders of Charter Financial. We cannot assure you that the votes cast by First Charter, MHC will be in your personal best interests as a stockholder. 17 FORWARD LOOKING STATEMENTS This prospectus 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, results of operations 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 prospectus 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 by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. 18 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The summary information presented below at or for each of the years presented is derived in part from the consolidated financial statements of CharterBank. The following information is only a summary, and you should read it in conjunction with our consolidated financial statements and notes beginning on page F-1.
At March 31, At September 30, ----------------------------------------------- 2001 2000(1) 1999 1998 1997 1996 ---- ------ ---- ---- ---- ---- (Unaudited) (Restated) (In Thousands) Selected Financial Data: Total assets....................... $934,828 $942,687 $904,586 $729,286 $498,011 $352,082 Loans receivable, net(2)........... 246,999 253,467 208,456 166,360 135,256 98,105 Investment securities available for 309,524 381,590 388,429 252,830 136,838 96,592 sale(3)........................ Freddie Mac common stock........... 327,716 273,286 262,860 280,877 199,515 139,566 Retail deposits.................... 144,289 144,546 153,731 100,808 89,889 84,778 Total deposits..................... 185,187 274,371 282,965 135,611 89,889 84,778 Deferred income taxes.............. 121,626 100,247 96,678 101,123 71,894 49,213 Total borrowings................... 352,305 352,219 312,867 288,638 186,925 109,000 Total retained earnings............ 54,347 51,699 50,826 23,797 23,322 20,267 Accumulated other comprehensive income(4)........ 194,865 152,828 147,663 171,394 119,790 81,748 Total equity....................... 249,212 204,527 198,489 195,191 143,112 102,015 Allowance for loan losses.......... 5,375 6,346 5,710 2,054 1,846 1,627 Non-performing assets 2,429 3,461 2,211 436 1,443 1,709
For The Six Months For The Years Ended Ended March 31, September 30, ------------------ ------------------------------------------------- 2001 2000 2000(1) 1999 1998 1997 1996 ---- ---- ------- ---- ----- ---- ---- (Unaudited) (Restated) (In Thousands) Selected Operating Data: Interest and dividend income............................. $26,167 $ 26,033 $54,213 $ 36,969 $29,175 $21,200 $15,387 Interest expense......................................... 17,884 16,939 36,647 23,341 19,409 12,757 8,989 ------- -------- ------- -------- ------- ------- ------- Net interest income...................................... 8,283 9,094 17,566 13,628 9,766 8,443 6,398 Provision for loan losses................................ 300 180 1,410 240 180 300 171 ------- -------- ------- -------- ------- ------- ------- Net interest and dividend income 7,983 8,914 16,156 13,388 9,586 8,143 6,227 after provision for loan losses......................... ------- -------- ------- -------- ------- ------- ------- Total noninterest income (loss).......................... 1,295 834 1,949 8,749(4) (3,307) 3,606 1,118 Total noninterest expenses............................... 5,774 6,120 15,943 10,749 6,622 8,326 6,324 ------- -------- ------- -------- ------- ------- ------- Income (loss) before provision for 3,504 3,628 2,162 41,388 (343) 3,423 1,021 income taxes........................................... ------- -------- ------- -------- ------- ------- ------- Income tax expense (benefit)............................. 855 942 1,290 14,359 (818) 368 (136) ------- -------- ------- -------- ------- ------- ------- Net income............................................... $ 2,649 $ 2,686 $ 872 $ 27,029 $ 475 $ 3,055 $ 1,157 ======= ======== ======= ======== ======= ======= ======= Other comprehensive income (loss), net of tax(5).. $42,037 $(26,828) $ 5,165 $(23,731) $51,604 $38,042 $25,081 ======= ======== ======= ======== ======= ======= ======= Comprehensive income loss(6)............................. $44,686 $(24,142) $ 6,037 $ 3,298 $52,079 $41,097 $26,238 ======= ======== ======= ======== ======= ======= =======
_______________________________ (1) Certain balance sheet and income statement items for the year ended September 30, 2000 have been restated. See note 22 on page F-44 of the prospectus for a discussion of the restatement. (2) Loans are shown net of deferred loan fees and allowance for loan losses and excludes loans held for sale. (3) Includes all CharterBank investment securities available for sale excluding Freddie Mac common stock. (4) Consists of unrealized holding gains and losses on Freddie Mac common stock, investments, mortgage-backed securities and collateralized mortgage obligations classified as available for sale, net of income taxes. (5) Consists of the change in unrealized holding gains or losses on Freddie Mac common stock, investments, mortgage-backed securities, and collateralized mortgage obligations classified as available for sale, net of income taxes. (6) Consists of net income for the period plus other comprehensive income (loss). 19
At or for the Six Months Ended March 31, At or for the Years Ended September 30, ----------------- ------------------------------------------ 2001 2000 2000(1) 1999 1998 1997 1996 ---- ---- ------ ---- ---- ---- ---- (Unaudited) (Restated) Selected Financial Ratios and Other Data(7): Performance: Return on average assets........................ 0.55% 0.59% 0.10% 3.39% 0.08% 0.71% 0.37% Comprehensive return on average assets(8)....... 9.33 (5.30) 0.66 0.41 8.39 9.58 8.46 Return on average equity........................ 2.25 2.83 0.48 11.98 0.27 2.32 1.30 Comprehensive return on average equity(9)....... 38.04 (25.45) 3.34 1.46 29.85 31.17 29.52 Average equity to average assets................ 24.52 20.81 19.84 28.26 28.11 30.73 28.68 Equity to total assets at end of period......... 26.66 20.19 21.70 21.94 26.76 28.74 28.97 Average interest rate spread.................... (0.54) 0.35 0.27 (0.53) (0.76) (0.33) 0.86 Net interest margin(10)......................... 1.76% 2.05% 1.98% 1.73% 1.61% 2.03% 2.51% Average interest-earning assets to average interest-bearing liabilities.................. 1.60x 1.44x 1.41x 1.76x 1.74x 1.77x 1.47x Total noninterest expense to average assets........................................ 1.21% 1.34% 1.74% 1.34% 1.06% 1.94% 2.04% Efficiency ratio(11)............................ 60.28 61.64 81.17 54.72 116.32 87.32 86.58 Regulatory Capital Ratios: Tangible capital................................ 8.80 6.89 7.49 7.02 5.20 7.24 9.18 Core capital.................................... 8.80 6.89 7.49 7.02 5.20 7.24 9.18 Risk-based capital.............................. 28.37 26.71 26.45 36.66 11.86 15.42 23.15 Asset Quality Ratios: Non-performing loans as a percent of total loans.............................. 0.66 0.99 1.09 0.93 0.18 0.85 1.61 Non-performing assets as a percent of total assets............................. 0.26 0.37 0.37 0.24 0.06 0.29 0.49 Allowance for loan losses as a percent of total loans.............................. 2.13% 2.22% 2.44% 2.67% 1.22% 1.34% 1.63% Allowance for loan losses as a ratio of non-performing loans..................... 3.24x 2.12x 2.24x 2.87x 6.71x 1.57x 1.01Ax Number of: Full-time equivalent employees.................. 124 128 126 129 92 82 82
____________________________ (7) Asset quality ratios and regulatory capital ratios are end of period ratios. Ratios for the period at or for the six months ended March 31, 2001 and 2000 are annualized. (8) Comprehensive return on average assets represents annualized comprehensive income divided by average assets. This is included because in contrast to other financial institutions, a vast majority of CharterBank's comprehensive income is in the form of other comprehensive income instead of net income, comprehensive return on average assets provides useful information. This information is relevant because of CharterBank's significant investment in Freddie Mac common stock. (9) Comprehensive return on average equity represents annualized comprehensive income divided by average equity. This is included because in contrast to other financial institutions, a vast majority of CharterBank's comprehensive income is in the form of other comprehensive income instead of net income, comprehensive return on average equity provides useful information. This information is relevant because of CharterBank's significant investment in Freddie Mac common stock. (10) Net interest margin represents net interest income including dividend income from Freddie Mac stock as a percentage of average interest-earning assets including Freddie Mac stock. (11) The efficiency ratio represents the ratio of operating expenses divided by the sum of net interest income and noninterest income less gain on sales of investments. 20 CHARTERBANK CharterBank is a federally-chartered savings and loan association, established in 1954. We are headquartered in West Point, Georgia, which is located in west-central Georgia on the Alabama border. Our deposits are insured by the FDIC and we are examined and regulated by the Office of Thrift Supervision and the FDIC. Our executive offices are located at 600 Third Avenue, West Point, Georgia and our telephone number is (706) 645-1391. We are a community-oriented bank providing retail and small business customers with value driven products and services to meet customer needs. We provide a wide variety of deposit products, residential mortgage loans, commercial real estate loans, commercial loans and consumer loans to our customers in the cities and towns around the "Valley" area of Georgia, which includes West Point, Georgia and Valley and Lanett, Alabama, and LaGrange, Georgia. We currently operate four full-service branch offices and three loan production offices. We also plan to open an additional branch in Auburn, Alabama in October, 2001 and additional branch offices during the next three or four years. In addition, we operate a service corporation subsidiary, Charter Insurance Company. As of June 30, 2000, CharterBank maintained the largest deposit market share in the Valley area. Based on asset size, we are also the largest federal mutual savings and loan association in the State of Georgia with total assets of $934.8 million, total deposits of $185.2 million and total equity of $249.2 million at March 31, 2001. We also currently own 5,055,000 shares of Freddie Mac stock which, as of March 31, 2001, had an estimated fair market value of $327.7 million including an after tax unrealized gain of $197.0 million, and represented approximately 35.1% of our total assets. As part of our business plan, we will seek to expand our targeted market area to include the I-85 corridor in east-central Alabama and west-central Georgia. We believe that our expansion into more profitable markets will address the economic risks and limited growth potential in our current market area. As part of this planned branch expansion, on August 18, 1999, we acquired all of the issued and outstanding shares of Citizens Bancgroup, Inc. and its wholly-owned subsidiary Citizens National Bank, a national bank headquartered in Valley, Alabama for a purchase price of approximately $2.25 million in cash (the "Citizens acquisition"). As part of the Citizens acquisition we acquired approximately $24.7 million in loans, net and $42.0 million in deposits. The acquisition was accounted for using the purchase method of accounting and, therefore, the results of operations of Citizens National have been included in our operations since the effective date of the acquisition. At March 31, 2001, we had total loans of $252.3 million, of which $153.3 million were residential mortgage loans. We generally sell the conforming residential mortgage loans that we originate and retain nonconforming residential mortgage loans for our loan portfolio. We originate commercial and multi-family mortgage loans, commercial loans and consumer installment loans. We also invest in mortgage-backed and other investment securities, including our investment in Freddie Mac stock. For further information on our operations and financial condition, see "Business of CharterBank." 21 CHARTER FINANCIAL Charter Financial will be a federally-chartered stock holding company. Charter Financial has not engaged in any business to date and will serve as a holding company of CharterBank and Charter Insurance Company following the reorganization. Charter Financial will be a savings and loan association holding company registered with the Office of Thrift Supervision. Following the reorganization, 1,700,000 shares of Freddie Mac stock currently owned by CharterBank will be transferred to Charter Financial. As part of the reorganization, Charter Insurance Company will become a subsidiary of Charter Financial and will also receive 400,000 shares of Freddie Mac stock. CharterBank will retain 2,555,000 shares of Freddie Mac stock. First Charter, MHC will own approximately 80% of Charter Financial's outstanding common stock. Charter Financial's executive offices are located at 600 Third Avenue, West Point, Georgia and our telephone number is (706) 645-1391. FIRST CHARTER, MHC As part of our reorganization, CharterBank will organize First Charter, MHC as a federally-chartered mutual savings and loan holding company which will be registered with the Office of Thrift Supervision. Persons who had liquidation rights with respect to CharterBank as of the date of the reorganization will continue to have liquidation rights solely with respect to First Charter, MHC. Their liquidation rights in First Charter, MHC will exist as long as they maintain a deposit account of CharterBank. See "The Reorganization and the Offering - Effects of the Reorganization - Liquidation Rights." First Charter, MHC's executive offices are located at 600 Third Avenue, West Point, Georgia and our telephone number is (706) 645-1391. First Charter, MHC's principal assets will be the common stock of Charter Financial it receives in the reorganization, $100,000 in cash it receives as its initial capitalization, and 400,000 shares of Freddie Mac stock currently owned by CharterBank. At the present time, we expect that First Charter, MHC will not engage in any business activity other than its investment in a majority of the common stock of Charter Financial and the management of any cash dividends received from shares of its Freddie Mac stock. Federal law and regulations require that as long as First Charter, MHC is in existence it must own a majority of Charter Financial's common stock. Federal law, regulations, and the plan of reorganization, permit First Charter, MHC to convert to the stock form of organization. For additional information regarding a stock conversion of First Charter, MHC, see "Regulation of CharterBank and Charter Financial -- Possible Conversion of First Charter, MHC to Stock Form." CHARTER INSURANCE COMPANY Charter Insurance Company, a Hawaiian corporation, is a second-tier service corporation of CharterBank and began operations in December 2000. Charter Insurance Company generates fee income by reinsuring a portion of CharterBank's loan originations which carry private mortgage insurance. Following the reorganization, Charter Insurance Company will become a subsidiary of Charter Financial and will receive 400,000 shares of Freddie Mac stock, currently owned by CharterBank. Charter Insurance Company's revenues are expected to be less than 1% of Charter Financial's total revenues. 22 HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING The net proceeds will depend on the total number of shares of common stock sold in the offering, which in turn will depend on RP Financial's appraisal, regulatory and market considerations, and the expenses incurred in connection with the offering. Although we will not be able to determine the actual net proceeds from the sale of the common stock until we complete the offering, we estimate the net proceeds to be between $31.7 million and $43.3 million, or $49.9 million if the offering is increased by 15%. Charter Financial intends to distribute the net proceeds from the offering as follows:
Number of Shares Sold --------------------------------- Minimum Maximum Super-maximum ------- ------- ------------- (In thousands) Offering proceeds.............................. $33,150 $44,850 $51,578 Less: offering expenses........................ 1,430 1,559 1,633 Net offering proceeds.......................... 31,720 43,291 49,945 Less: Proceeds contributed to CharterBank......... 15,860 21,645 24,973 Proceeds used for loan to ESOP.............. 2,652 3,120 3,588 ------- ------- ------- Proceeds retained by Charter Financial......... $13,208 $18,526 $21,384 ======= ======= =======
The net proceeds may vary because total expenses relating to the reorganization may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering is used to sell shares not purchased in the subscription offering and community offering. The net proceeds will also vary if the number of shares to be sold in the offering are adjusted to reflect a change in the estimated pro forma market value of Charter Financial and CharterBank or if our ESOP purchases shares in the open market at an average cost that is higher or lower than $10.00 per share. Payments for shares made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment by CharterBank but will result in a reduction of CharterBank's deposits and interest expense as funds are transferred from interest bearing certificates of deposit or other deposit accounts. Charter Financial may use the proceeds it retains from the offering: . to finance possible acquisitions of financial institutions or other financially-related businesses, although we have no current plans to do so; . to pay dividends to stockholders; . to invest in securities; and . for general corporate purposes. 23 Following the reorganization, we may also implement stock repurchase programs. Our ability to repurchase our common stock may be subject to regulatory restrictions. CharterBank may use the proceeds it receives from the offering: . to fund new loans; . to establish or acquire new branches in our targeted market areas within the I-85 corridor; . to diversify products that we offer; . to increase delivery systems, including the expanded use of ATMs and the introduction of Internet banking; . to repay debt; . to invest in securities; and . for general corporate purposes. OUR POLICY REGARDING DIVIDENDS Although no decision has been made regarding the payment of dividends, we will consider a policy of paying quarterly cash dividends on our common stock beginning the first full quarter after the reorganization. The payment of dividends will be subject to determination by our board of directors, which will take into account, among other factors, our financial condition, results of operations, tax considerations, industry standards, economic conditions and regulatory restrictions that affect the payment of dividends by CharterBank to Charter Financial. We cannot guarantee that we will pay dividends or that, if paid, that we will not reduce or eliminate dividends in the future. If Charter Financial pays dividends to its stockholders, it will be required to pay dividends to First Charter, MHC, unless First Charter, MHC elects to waive dividends. We currently anticipate that First Charter, MHC will waive dividends paid by Charter Financial. Any decision to waive dividends will be subject to regulatory approval. See "Regulation of CharterBank and Charter Financial -- Dividend Waivers by First Charter, MHC." Charter Financial will not be subject to Office of Thrift Supervision regulatory restrictions on the payment of dividends. The source of payment of any dividends paid will initially come from Charter Financial's proceeds retained in the offering and dividend income on Charter Financial's 1,700,000 shares of Freddie Mac stock. Our ability to pay dividends will also depend on how much of our common stock we may repurchase and upon the amount of funds available from CharterBank, which must provide the Office of Thrift Supervision with 30 days notice of its intention to make a capital distribution to Charter Financial. Office of Thrift Supervision regulations may also limit, in certain circumstances, CharterBank's ability to make capital distributions. 24 MARKET FOR THE COMMON STOCK We have not previously issued common stock, so there is currently no established market for the common stock. We have applied to have our common stock quoted on the Nasdaq National Market under the symbol "[]" after completion of the offering. One of the conditions for Nasdaq quotation is that at least three market makers make, or agree to make, a market in our common stock. We will seek to encourage at least three market makers to make a market in our stock. Sandler O'Neill & Partners, L.P. has advised us that it intends to make a market in the common stock following the reorganization, but is under no obligation to do so. While we anticipate that before completion of the offering we will obtain a commitment from at least two other broker-dealers to make a market in our common stock, there can be no assurance that this will occur. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares on short notice, and, therefore, you should not view the common stock as a short-term investment. We cannot assure you that an active trading market for the common stock will develop or that, if it develops, it will continue. Nor can we assure you that, if you purchase shares, you will be able to sell them at or above $10.00 per share. 25 REGULATORY CAPITAL COMPLIANCE At March 31, 2001, CharterBank exceeded all regulatory capital requirements. Set forth below is a summary of our capital computed under accounting principles generally accepted in the United States of America ("GAAP") and our compliance with regulatory capital standards at March 31, 2001, on a historical and pro forma basis. We have assumed that the indicated number of shares were sold as of March 31, 2001 and that CharterBank received 50% of the net proceeds from the offering. For purposes of the table below, the amount expected to be loaned to the employee stock ownership plan and the cost of the shares expected to be acquired by the management recognition plan are deducted from pro forma regulatory capital. For a discussion of the capital requirements applicable to CharterBank, see "Regulation of CharterBank and Charter Financial - - Federal Banking Regulation - Capital Requirements."
Pro Forma at March 31, 2001 Based Upon the Sale at $10.00 Per Share ------------------------------------------------------------------- 5,157,750 Shares 3,315,000 Shares 3,900,000 Shares 4,485,000 Shares (15% Above Historical at (Minimum of (Midpoint of (Maximum of Maximum of March 31, 2001 Range) Range) Range) Range)(1) ---------------- ------------------ ----------------- ----------------- ---------------------- Percent Percent Percent Percent Percent of of of of of Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) ------- ---------- ------- --------- -------- --------- ------- ---------- -------- ----------- (In thousands) Equity under Generally Accepted Accounting Principles................ $249,212 26.66% $159,679 18.83% $161,870 19.03% $164,060 19.23% $166,580 19.45% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Tangible capital(3)........ 54,347 8.80 62,179 9.90 64,370 10.21 66,561 10.51 69,080 10.86 Requirement(4)............. 9,262 1.50 9,419 1.50 9,459 1.50 9,499 1.50 9,545 1.50 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Excess..................... 45,085 7.30 52,760 8.40 54,911 8.71 57,061 9.01 59,535 9.36 ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Core capital(3)............ 54,347 8.80 62,179 9.90 64,370 10.21 66,561 10.51 69,080 10.86 Requirement(4)............. 18,524 3.00 18,839 3.00 18,918 3.00 18,998 3.00 19,090 3.00 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Excess..................... 135,823 5.80 43,340 6.90 45,452 7.21 47,562 7.51 49,990 7.86 ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Risk-Based capital(3)(5)... 108,694 28.37 124,358 31.52 128,740 32.39 133,121 33.24 138,160 34.20 Requirement(4)............. 30,651 8.00 31,560 8.00 31,801 8.00 32,042 8.00 32,318 8.00 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Excess..................... $ 78,043 20.37% $ 92,798 23.52% $ 96,939 24.39% $101,079 25.24% $105,841 26.20% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
______________________________ (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the estimated price range of up to 15% as a result of changes in market conditions or general financial and economic conditions following the commencement of the offering. (2) Tangible capital levels are shown as a percentage of tangible assets. Core capital levels are shown as a percentage of total adjusted assets. Risk- based capital levels are shown as a percentage of risk-weighted assets. (3) Pro forma capital levels assume receipt by CharterBank of 50% of the net proceeds from the shares of common stock sold at the minimum, midpoint and maximum of the offering range. These levels assume funding by Charter Financial of the management recognition plan equal to 4% of the shares issued to persons other than First Charter, MHC, and the purchase by the employee stock ownership plan of 8% of the shares issued to persons other than First Charter, MHC. If CharterBank's post-reorganization tangible capital does not exceed 10.0%, the management recognition plan will be funded with 3% of the shares issued to persons other than First Charter, MHC, and the employee stock ownership plan will be able to purchase up to 7% of the shares issued to persons other than First Charter, MHC. (4) The current minimum core/leverage capital requirement for savings associations under FIRREA is 3% of total adjusted assets. The current core/leverage capital ratio applicable to savings associations under FDICIA is 4%. Well capitalized financial institutions, as defined, must maintain a 5% core capital ratio. (5) Assumes net proceeds are invested in assets that carry a risk-weighting equal to the average risk-weighting of CharterBank's risk-weighted assets as of March 31, 2001. 26 CAPITALIZATION The following table presents the historical deposits and consolidated capitalization of CharterBank at March 31, 2001, and the pro forma capitalization of Charter Financial and subsidiaries after giving effect to the reorganization, based upon the sale of the number of shares shown below and the other assumptions set forth under "Pro Forma Data." A change in the number of shares to be sold in the offering may materially affect the capitalization.
Pro Forma Based Upon Sale at $10.00 Per Share ----------------------------------------------------------------------------- Historical 5,175,750 Shares as of 3,315,000 Shares 3,900,000 Shares 4,485,000 Shares (15% Above March 31, (Minimum (Midpoint (Maximum Maximum of 2001 of Range) of Range) of Range) Range)(1) ------------ ----------------- ----------------- ------------------ ------------------- (In thousands) Deposits(2)......................... $185,187 $185,187 $185,187 $185,187 $185,187 Borrowings.......................... 352,305 352,305 352,305 352,305 352,305 -------- -------- -------- -------- -------- Total deposits and borrowed funds... $537,492 $537,492 $537,492 $537,492 $537,492 ======== ======== ======== ======== ======== Stockholders' equity: Common stock, $0.01 par.......... - 166 195 224 258 value, 60,000,000 shares authorized; shares to be issued as reflected(3) Preferred stock, $.01 par........ - - - - - value, 10,000,000 shares authorized; no shares to be issued Additional paid-in capital(3).... - 31,554 37,311 43,067 49,687 Retained earnings(4)............. 54,347 53,687 53,687 53,687 53,687 Accumulated other comprehensive income (5)........................ 194,865 179,287 179,287 179,287 179,287 Less: Common stock acquired by ESOP(6)... - (2,652) (3,120) (3,588) (4,126) Common stock acquired by........... - (1,326) (1,560) (1,794) (2,063) management recognition plan(7).... -------- -------- -------- -------- -------- Total stockholders' equity.......... $249,212 $260,716 $265,800 $270,883 $276,729 ======== ======== ======== ======== ========
____________________________________ (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the offering of up to 15% as a result of regulatory considerations or changes in market or general financial and economic conditions following the commencement of the offering. (2) Does not reflect withdrawals from deposit accounts for the purchase of common stock in the offering. Such withdrawals would reduce pro forma deposits by the amount of such withdrawals. (3) Reflects the issuance of shares sold in the offering at a value of $10.00 per share of up to 20% of the outstanding shares of Charter Financial's common stock to qualifying depositors of CharterBank, tax qualified employee plans and other members of Charter Bank in a subscription offering and to certain other persons in a direct community offering and/or syndicated community offering. No effect has been given to the issuance of additional shares of common stock pursuant to Charter Financial's proposed stock option plan intended to be adopted by Charter Financial at the time of the reorganization. (4) The retained earnings of CharterBank will be substantially restricted after the offering. The pro forma retained earnings is reduced by $100,000 cash and the historical cost of Freddie Mac stock retained by First Charter, MHC ($560,000, which equals 400,000 shares) retained by First Charter, MHC with a cost basis of $1.40 per share. (5) Pro forma accumulated other comprehensive income excludes the net after tax unrealized gain on the 400,000 shares of Freddie Mac stock retained by First Charter, MHC, equal to $16.572 million. (6) Assumes that 8.0% of the shares issued to persons other than First Charter, MHC will be purchased by the employee stock ownership plan at an average cost of $10 per share and that the funds used to acquire such shares will be borrowed from Charter Financial. If CharterBank's post-reorganization tangible capital does not exceed 10.0%, the employee stock ownership plan will be able to purchase up to 7% of the shares issued to persons other than First Charter, MHC. The common stock acquired by the employee stock ownership plan is reflected as a reduction of stockholders' equity. (7) Assumes that, subsequent to the offering, an amount equal to 4.0% of the shares issued to persons other than First Charter, MHC, is purchased by a management recognition plan through open market purchases. If CharterBank's post-reorganization tangible capital does not exceed 10.0%, the management recognition plan will be funded with 3% of the shares issued to persons other than First Charter, MHC. The proposed management recognition plan is intended to be adopted by Charter Financial at the time of the reorganization. The common stock purchased by the management recognition plan is reflected as a reduction of stockholders' equity. 27 PRO FORMA DATA We cannot determine the actual net proceeds from the sale of the common stock until the offering is completed. However, we estimate that net proceeds will be between $31.7 million and $43.3 million, or $49.9 million if the offering range is increased by 15%, based upon the following assumptions: . we will sell all shares of common stock in the subscription offering; . we will pay Sandler O'Neill & Partners, L.P. fees and expenses of approximately $525,000. No fee will be paid with respect to shares of common stock purchased by the ESOP, the management recognition plan, and officers, directors and employees of CharterBank and their immediate families. See "Marketing Arrangements" on page; . 278,000 shares of common stock will be purchased by executive officers, directors and employees of CharterBank; and . total expenses, excluding fees and expenses paid to Sandler O'Neill & Partners, L.P. will be approximately $1.0 million. We calculated the pro forma consolidated net income and stockholders' equity of Charter Financial for the six months ended March 31, 2001 and the year ended September 30, 2000, as if the common stock had been sold at the beginning of the year and the net proceeds had been invested at 4.09% for both periods. We chose this yield because it represents the yield on one-year U.S. Government securities for the corresponding periods. In light of changes in interest rates in recent periods, we believe this rate more accurately reflects pro forma reinvestment rates than the arithmetic average method which assumes reinvestment of the net proceeds at a rate equal to the average of yield on interest-earning assets and cost of deposits for these periods. We assumed a tax rate of 38% for both periods. This results in an annualized after-tax yield of 3.17% for both periods. We assumed that $2.0 million of net proceeds would not be invested as it will be expended for the proposed Auburn branch. We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders' equity by the indicated number of shares of common stock. We adjusted these figures to give effect to the shares purchased by the employee stock ownership plan. We computed per share amounts for each period as if the common stock was outstanding at the beginning of the periods, but we did not adjust per share historical or pro forma stockholders' equity to reflect the earnings on the estimated net proceeds. As discussed under "How We Intend to Use the Proceeds from the Offering," Charter Financial intends to infuse CharterBank with 50% of the net proceeds from the offering, make a loan to the employee stock ownership plan to fund the plan's purchase of up to 8.0% of the shares issued to persons other than First Charter, MHC, and retain all of the rest of the proceeds at the holding company for capital needs that arise in the future. The following tables give effect to the restricted stock program or "management recognition plan", which we expect to adopt following the reorganization and present to stockholders for approval at an annual or special meeting of stockholders to be held at least six 28 months following the completion of the reorganization. If the management recognition plan is approved by stockholders, the management recognition plan will acquire an amount of common stock equal to 4% of the shares of common stock sold in the offering to persons other than First Charter, MHC, either through open market purchases or from authorized but unissued shares of common stock. In preparing the following tables we assumed that stockholder approval has been obtained and that the shares acquired by the management recognition plan are purchased in the open market at $10.00 per share. An increase in the number of shares of common stock outstanding as a result of an increase in the estimated pro forma market value of the common stock would decrease both the percentage of outstanding shares owned by a subscriber and the pro forma net income and stockholders' equity on a per share basis while increasing pro forma net income and stockholders' equity on an aggregate basis. A decrease in the number of shares of common stock outstanding would increase both a subscriber's ownership interest and the pro forma net income and stockholders' equity on a per share basis while decreasing pro forma net income and stockholders' equity on an aggregate basis. The following tables do not give effect to: . the shares to be reserved for issuance under the stock option plan, which requires the approval of subscribers on the stock order form; . withdrawals from deposit accounts to purchase common stock in the reorganization; . Charter Financial's results of operations after the reorganization; or . changes in the market price of the common stock after the reorganization. The following pro forma information may not represent the financial effects of the reorganization at the date on which the reorganization actually occurs and you should not use the table to indicate future results of operations. Pro forma stockholders' equity represents the difference between the stated amount of assets and liabilities of Charter Financial computed in accordance with generally accepted accounting principles. We did not increase or decrease stockholders' equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders' equity is not intended to represent the fair market value of the common stock and may be different than amounts that would be available for distribution to stockholders if we liquidated. Finally, the pro forma stockholders' equity per share does not give effect to CharterBank's bad debt reserve in the event of liquidation. 29
At or for the Six Months Ended March 31, 2001 --------------------------------------------------- Maximum Minimum Midpoint Maximum As Adjusted 3,315,000 3,900,000 4,485,000 5,157,750 Shares Shares Shares Shares AT $10.00 AT $10.00 AT $10.00 at $10.00 Per Share Per Share Per Share Per Share(1) ----------- ----------- ----------- ------------ (Dollars in thousands, except per share amounts) Gross proceeds................................ $ 33,150 $ 39,000 $ 44,850 $ 51,578 Less expenses................................. 1,430 1,494 1,559 1,633 ---------- ---------- ---------- ---------- Estimated net proceeds........................ 31,720 37,506 43,291 49,945 Less: Common stock purchased by ESOP(2)(4).... (2,652) (3,120) (3,588) (4,126) Less: Common stock purchased by MRP(3)........ (1,326) (1,560) (1,794) (2,063) ---------- ---------- ---------- ---------- Estimated net proceeds, as adjusted......... $ 27,742 $ 32,826 $ 37,909 $ 43,755 ========== ========== ========== ========== For the 6 months ended March 31, 2001: - -------------------------------------- Consolidated net income: Historical................................... $ 2,649 $ 2,649 $ 2,649 $ 2,649 Adjustment for mutual holding company formation(5)................................ (143) (143) (143) (143) Pro forma income on net proceeds............. 326 391 455 529 Pro forma ESOP adjustment(2)(4).............. (69) (81) (93) (107) Pro forma MRP adjustment(3).................. (82) (97) (111) (128) ---------- ---------- ---------- ---------- Pro forma net income....................... $ 2,681 $ 2,719 $ 2,757 $ 2,800 ========== ========== ========== ========== Per share net income (reflects SOP 93-6)(6): Historical................................... $ 0.16 $ 0.14 $ 0.12 $ 0.10 Adjustment for mutual holding company formation(5)................................ (0.01) (0.01) (0.01) (0.01) Pro forma income on net proceeds............. 0.02 0.02 0.02 0.02 Pro forma ESOP adjustment(2)(4).............. (0.01) (0.01) (0.01) (0.01) Pro forma MRP adjustment(3).................. (0.01) (0.01) (0.01) (0.01) ---------- ---------- ---------- ---------- Pro forma net income per share(7)........... $ 0.16 $ 0.14 $ 0.12 $ 0.10 ========== ========== ========== ========== Offering price as a ratio of pro forma net annualized income per share.................. 31.25x 35.71x 41.67x 50.00x At March 31, 2001 - ----------------- Stockholders' equity: Historical................................... $ 249,212 $ 249,212 $ 249,212 $ 249,212 Adjustment for mutual holding company formation................................... (16,238) (16,238) (16,238) (16,238) Estimated net proceeds....................... 31,720 37,506 43,291 49,945 Less: Common Stock acquired by ESOP(2)(4).... (2,652) (3,120) (3,588) (4,126) Less: Common Stock acquired by MRP(3)........ (1,326) (1,560) (1,794) (2,063) ---------- ---------- ---------- ---------- Pro forma stockholders' equity.............. $ 260,716 $ 265,800 $ 270,883 $ 276,729 ========== ========== ========== ========== Stockholders' equity per share(6): Historical................................... $ 15.04 $ 12.78 $ 11.11 $ 9.66 Adjustment for mutual holding company formation................................... (0.98) (0.83) (0.72) (0.63) Estimated net proceeds....................... 1.91 1.92 1.93 1.94 Less: Common Stock acquired by ESOP(2)(4).... (0.16) (0.16) (0.16) (0.16) Less: Common stock acquired by MRP(3)........ (0.08) (0.08) (0.08) (0.08) ---------- ---------- ---------- ---------- Pro forma stockholders' equity per share... $ 15.73 $ 13.63 $ 12.08 $ 10.73 ========== ========== ========== ========== Offering price as a percentage of pro forma stockholders' equity per share............... 63.57% 73.37% 82.78% 93.20% ========== ========== ========== ==========
30 _____________________ (1) We reserve the right to issue up to a total of 5,157,750 shares at $10.00 per share, or 15% above the maximum of the offering range. Unless otherwise required by the regulators, subscribers will not be given the right to modify their subscriptions unless the aggregate purchase price of the common stock is increased to exceed $51.6 million (15% above the maximum of the offering range.) (2) Assumes 8% of the shares sold to persons other than First Charter, MHC, are purchased by the employee stock ownership plan under all circumstances, and that the funds used to purchase such shares are borrowed from Charter Financial. The approximate amount expected to be borrowed by the ESOP is reflected in this table as a reduction of capital. Although repayment of such debt will be secured solely by the shares purchased by the employee stock ownership plan, we expect to make discretionary contributions to the employee stock ownership plan in an amount at least equal to the principal and interest payments on the employee stock ownership plan debt. CharterBank's total annual payment of the employee stock ownership plan debt is based on 12 equal installments of principal. Pro forma net income has been adjusted to give effect to such contributions, based upon a fully amortizing debt with a twelve-year term. The provisions of SOP 93-6 have been applied for shares to be acquired by the employee stock ownership plan and for purposes of computing earnings per share. (3) Assumes a number of issued and outstanding shares of common stock equal to 4% of the shares sold to persons other than First Charter, MHC, will be purchased by the management recognition plan. Before the management recognition plan is implemented, it must be approved by Charter Financial's stockholders. The dollar amount of the common stock possibly to be purchased by the management recognition plan is based on $10.00 per share and represents unearned compensation and is reflected as a reduction of capital. Such amount does not reflect possible increases or decreases in the price per share after the offering. As we accrue compensation expenses to reflect the vesting of such shares over 5 years pursuant to the management recognition plan, the charge against capital will be reduced accordingly. In the event the shares issued under the management recognition plan consist of newly issued shares of common stock at the price per share in the offering, the per share financial condition and result of operations of Charter Financial would be proportionately reduced and the interest of existing stockholders would be diluted by approximately 1.96% . For purposes of the preceding table, it was assumed that the number of unvested management recognition plan shares at March 31, 2001 was 132,600, 156,000, 179,400 and 206,310 for the minimum, midpoint, maximum, and 15% above the maximum of the offering range, respectively. (4) CharterBank intends to record compensation expense related to the employee stock ownership plan in accordance with SOP 93-6. As a result, to the extent the value of the common stock appreciates over time, compensation expense related to the employee stock ownership plan will increase. SOP 93- 6 also changes the earnings per share computations for leveraged employee stock ownership plans to include as outstanding only shares that have been committed to be released to participants. For purposes of the preceding table, it was assumed that the number of employee stock ownership plan shares that were committed to be released at March 31, 2001 was 11,050, 13,000, 14,950 and 17,193 for the minimum, midpoint, maximum and 15% above the maximum of the offering range, respectively. (5) Includes adjustments for assets retained by First Charter, MHC and the income received from those assets. These assets include $100,000 cash and 400,000 shares of Freddie Mac stock retained by First Charter, MHC. The adjustment to consolidated net income includes income received from the reinvestment of the $100,000 cash and the after-tax dividend income received on the 400,000 shares of Freddie Mac stock. The adjustment for the stockholders equity includes the $100,000 cash and the tax-adjusted value of the 400,000 shares of Freddie Mac stock. (6) Per share data for earnings per share is based upon 16,320,850, 19,201,000, 22,081,150 and 25,393,323 shares outstanding, representing shares sold in the offering, shares purchased by the ESOP and management recognition plan and shares issued to First Charter, MHC at the minimum midpoint, maximum and 15% above the maximum of the offering range. Per share data for pro forma stockholders' equity per share is based on 16,575,000, 19,500,000, 22,425,000 and 25,788,750 total shares outstanding at the minimum, midpoint, maximum and 15% above the maximum of the offering range, respectively. (7) As part of the reorganization, CharterBank intends on implementing a stock option plan under which 10% of the shares sold to persons other than First Charter, MHC, will be reserved for the grant of options. Before the stock option plan is implemented, it must be approved by the purchasers of a majority of the shares sold in the stock offering. In the event the shares issued, as a result of the exercise of stock options, under the stock option plan consist of newly issued shares of common stock at the price per share in the offering, the per share financial condition and result of operations of Charter Financial would be proportionately reduced and the interest of existing stockholders would be diluted. The effect on pro forma earnings per share of Charter Financial if all stock options reserved for issuance had been exercised at $10.00 and issued from authorized but unissued shares of common stock is shown below:
Minimum Midpoint Maximum Maximum as Adjusted Pro forma net income per share, including stock options $0.06 $0.05 $0.05 $0.04
31
At or for the Year Ended September 30, 2000 ---------------------------------------------------- Maximum As Minimum Midpoint Maximum Adjusted 3,315,000 3,900,000 4,485,000 5,157,750 Shares Shares Shares Shares At $10.00 At $10.00 At $10.00 At $10.00 Per Share Per Share Per Share Per Share(1) ---------- ---------- ---------- ------------ (Dollars In Thousands, Except Per Share Amounts) Gross proceeds................................... $ 33,150 $ 39,000 $ 44,850 $ 51,578 Less expenses.................................... 1,430 1,494 1,559 1,633 ---------- ---------- ---------- ---------- Estimated net proceeds.......................... 31,270 37,506 43,291 49,945 Less: Common stock purchased by ESOP(2)(4)...... (2,652) (3,120) (3,588) (4,126) Less: Common stock purchased by MRP(3).......... (1,326) (1,560) (1,794) (2,063) ---------- ---------- ---------- ---------- $ 27,742 $ 32,826 $ 37,909 $ 43,755 ========== ========== ========== ========== For the 12 months ended September 30, 2000 - ------------------------------------------ Consolidated net income Historical...................................... $ 872 $ 872 $ 872 $ 872 Adjustment for mutual holding company formation(5)................................. (286) (286) (286) (286) Pro forma income on net proceeds................ 653 782 911 1,059 Pro forma ESOP adjustment(2)(4)................. (137) (161) (185) (213) Pro forma MRP adjustment(3)..................... (164) (193) (222) (256) ---------- ---------- ---------- ---------- Pro forma net income........................... $ 938 $ 1,014 $ 1,090 $ 1,176 ========== ========== ========== ========== Per share net income (reflects SOP 93-6)(6): Historical...................................... $ 0.05 $ 0.05 $ 0.04 $ 0.03 Adjustment for mutual holding company formation(5)................................. (0.02) (0.01) (0.01) (0.01) Pro forma income on net proceeds................ 0.04 0.04 0.04 0.04 Pro forma ESOP adjustment(2)(4)................. (0.01) (0.01) (0.01) (0.01) Pro forma MRP adjustment(3)..................... (0.01) (0.01) (0.01) (0.01) ---------- ---------- ---------- ---------- Pro forma net income per share(7)............. $ 0.05 $ 0.06 $ 0.05 $ 0.04 ========== ========== ========== ========== Offering price as a percentage of pro forma net earnings per share.............................. 200.00 166.67 200.00 250.00 At September 30, 2000 - --------------------- Stockholders' equity: Historical...................................... $ 204,527 $ 204,527 $ 204,527 (S) $ 204,527 Adjustment for mutual holding company formation..................................... (13,594) (13,594) (13,594) (13,594) Estimated net proceeds.......................... 31,720 37,506 43,291 49,945 Less: Common Stock acquired by ESOP(2)(4)....... (2,652) (3,120) (3,588) (4,126) Less: Common Stock acquired by MRP(3)......... (1,326) (1,560) (1,794) (2,063) ---------- ---------- ---------- ---------- Pro forma stockholders' equity.............. $ 218,675 $ 223,759 $ 228,842 $ 234,688 ========== ========== ========== ========== Stockholders' equity per share:(6) Historical...................................... $ 12.34 $ 10.49 $ 9.12 $ 7.93 Adjustment for mutual holding company formation.................................... (0.82) (0.70) (0.61) (0.53) Estimated net proceeds.......................... 1.91 1.92 1.93 1.94 Less: Common Stock acquired by ESOP(2)(4)....... (0.16) (0.16) (0.16) (0.16) Less: Common Stock acquired by MRP(3)......... (0.08) (0.08) (0.08) (0.08) ---------- ---------- ---------- ---------- Pro forma stockholders' equity per share.... $ 13.19 $ 11.47 $ 10.20 $ 9.10 ========== ========== ========== ========== Offering price as a percentage of pro forma stockholders' equity per share.................. 75.82% 87.18% 98.04% 109.89% ========== ========== ========== ==========
32 __________________ (1) We reserve the right to issue up to a total of 5,157,750 shares at $10.00 per share, or 15% above the maximum of the Independent Valuation. Unless otherwise required by the regulators, subscribers will not be given the right to modify their subscriptions unless the aggregate purchase price of the common stock is increased to exceed $51.6 million (15% above the maximum of the Independent Valuation.) (2) Assumes 8% of the shares sold to persons other than First Charter, MHC, are purchased by the employee stock ownership plan under all circumstances, and that the funds used to purchase such shares are borrowed from Charter Financial. The approximate amount expected to be borrowed by the ESOP is reflected in this table as a reduction of capital. Although repayment of such debt will be secured solely by the shares purchased by the employee stock ownership plan, we expect to make discretionary contributions to the employee stock ownership plan in an amount at least equal to the principal and interest payments on the employee stock ownership plan debt. CharterBank's total annual payment of the employee stock ownership plan debt is based on 12 equal installments of principal. Pro forma net income has been adjusted to give effect to such contributions, based upon a fully amortizing debt with a twelve-year term. The provisions of SOP 93-6 have been applied for shares to be acquired by the employee stock ownership plan and for purposes of computing earnings per share. (3) Assumes a number of issued and outstanding shares of common stock equal to 4% of the shares sold to persons other than First Charter, MHC, will be purchased by the management recognition plan. Before the management recognition plan is implemented, it must be approved by Charter Financial's stockholders. The dollar amount of the common stock possibly to be purchased by the management recognition plan is based on $10.00 per share and represents unearned compensation and is reflected as a reduction of capital. Such amount does not reflect possible increases or decreases in the price per share after the offering. As we accrue compensation expenses to reflect the vesting of such shares over 5 years pursuant to the management recognition plan, the charge against capital will be reduced accordingly. In the event the shares issued under the management recognition plan consist of newly issued shares of common stock at the price per share in the offering, the per share financial condition and result of operations of Charter Financial would be proportionately reduced and the interest of existing stockholders would be diluted by approximately 1.96%. For purposes of the preceding table, it was assumed that the number of unvested management recognition plan shares at September 30, 2000 was 132,600, 156,000, 179,400 and 206,310 for the minimum, midpoint, maximum and 15% above the maximum of the offering range, respectively. (4) CharterBank intends to record compensation expense related to the employee stock ownership plan in accordance with SOP 93-6. As a result, to the extent the value of the common stock appreciates over time, compensation expense related to the employee stock ownership plan will increase. SOP 93- 6 also changes the earnings per share computations for leveraged employee stock ownership plans to include as outstanding only shares that have been committed to be released to participants. For purposes of the preceding table, it was assumed that the number of employee stock ownership plan shares that were committed to be released at September 30, 2000 was 22,100, 26,000, 29,900 and 34,385 for the minimum, midpoint, maximum and 15% above the maximum of the offering range, respectively. (5) Includes adjustments for assets retained by First Charter, MHC and the income received from those assets. These assets include $100,000 cash and 400,000 shares of Freddie Mac stock retained by First Charter, MHC. The adjustment to consolidated net income includes income received from the reinvestment of the $100,000 cash and the after-tax dividend income received on the 400,000 shares of Freddie Mac stock. The adjustment for the stockholders equity includes the $100,000 cash and the tax-adjusted value of the 400,000 shares of Freddie Mac stock. (6) Per share data for earnings per share is based upon 16,331,900, 19,214,000, 22,096,100 and 25,410,515 shares outstanding, representing shares sold in the offering, shares purchased by the ESOP and management recognition plan and shares issued to First Charter, MHC at the minimum midpoint, maximum and 15% above the maximum of the offering range. Per share data for pro forma stockholders' equity per share is based on 16,575,000, 19,500,000, 22,425,000 and 25,788,750 total shares outstanding at the minimum, midpoint, maximum and 15% above the maximum of the offering range, respectively. (7) As part of the reorganization, CharterBank intends on implementing a stock option plan under which 10% of the shares sold to persons other than First Charter, MHC, will be reserved for the grant of options. Before the stock option plan is implemented, it must be approved by the purchasers of a majority of the shares sold in the stock offering. In the event the shares issued, as a result of the exercise of stock options, under the stock option plan consist of newly issued shares of common stock at the price per share in the offering, the per share financial condition and result of operations of Charter Financial would be proportionately reduced and the interest of existing stockholders would be diluted. The effect on pro forma earnings per share of Charter Financial if all stock options reserved for issuance had been exercised at $10.00 and issued from authorized but unissued shares of common stock is shown below:
Minimum Midpoint Maximum Maximum as Adjusted Pro forma net income per share, including stock options $0.03 $0.02 $0.02 $0.02
33 CHARTERBANK CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME The Consolidated Statements of Income and Comprehensive Income of CharterBank for the years ended September 30, 2000, 1999 and 1998 have been audited by KPMG LLP, independent certified public accountants, and are included in this prospectus, along with their Auditors' Report on page F-45. The following condensed consolidated statements of income and comprehensive income have been derived from the audited consolidated statements of income and comprehensive income and should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements in this prospectus and "Management's Discussion and Analysis of the Financial Condition and Results of Operations" beginning on page F-1 of this prospectus. The consolidated statements of income for the six month periods ended March 31, 2001 and 2000 are unaudited, but in the opinion of management, reflect all adjustments consisting of normal recurring adjustments that are necessary for a fair presentation of the results for such periods and are in accordance with accounting principles generally accepted in the United States of America. The results for the six month period ended March 31, 2001 are not necessarily indicative of the results of CharterBank for the entire year or any other period.
For the Six Months For the Years Ended Ended March 31, September 30, ----------------------- -------------------------------------- 2001 2000 2000(1) 1999 1998 ------ ------ ---------- -------- --------- (Unaudited) (Restated) (In thousands) Interest and dividend income........ $ 26,167 $ 26,033 $ 54,213 $ 36,969 $ 29,175 -------- -------- -------- -------- -------- Interest expense.................... 17,884 16,939 36,647 23,341 19,409 -------- -------- -------- -------- -------- Net interest income................. 8,283 9,094 17,566 13,628 9,766 Provision for loan losses........... 300 180 1,410 240 180 -------- --------- -------- --------- -------- Net interest income after provision for loan losses........ 7,983 8,914 16,156 13,388 9,586 -------- --------- -------- --------- -------- Noninterest income (loss)........... 1,295 834 1,949 38,749 (3,307) Noninterest expenses................ 5,774 6,120 15,943 10,749 6,622 -------- --------- -------- --------- -------- Income (loss) before provision for income taxes................. 3,504 3,628 2,162 41,388 (343) Income tax expense (benefit)........ 855 942 1,290 14,359 (818) -------- --------- -------- --------- -------- Net income.......................... $ 2,649 $ 2,686 $ 872 $ 27,029 $ 475 ======== ========= ======== ========= ======== Other comprehensive income (loss), net of tax....................... $ 42,037 $ (26,828) $ 5,165 $ (23,731) $ 51,604 ======== ========= ======== ========= ======== Comprehensive income (loss)......... $ 44,686 $ (24,142) $ 6,037 $ 3,298 $52,079 ======== ========= ======== ========= ========
_________________________ (1) Certain balance sheet and income statement items for the year ended September 30, 2000 have been restated. See note 22 on page F-44 of prospectus for a discussion of the restatement. 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- This discussion and analysis reflects CharterBank's financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. You should read the information in this section in conjunction with CharterBank's Financial Statements and accompanying Notes to Financial Statements beginning on page F-1 of this prospectus, and the other statistical data provided in this prospectus. Unless otherwise indicated, the financial information presented in this section reflects the financial condition and operations of CharterBank. - -------------------------------------------------------------------------------- General CharterBank'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 mortgage loans, consumer loans, mortgage-backed securities and investment securities, such as our Freddie Mac stock investment. Interest-bearing liabilities consist primarily of retail and wholesale deposits, repurchase agreements and borrowings from the Federal Home Loan Bank of Atlanta. Our balance sheet also contains non-interest bearing liabilities of approximately $131.7 million of deferred taxes on the unrealized gain on our Freddie Mac stock. Our results of operations also depend on our provision for loan losses, non-interest income and our non- interest expense. Non-interest expense includes salaries and employee benefits, occupancy expenses and other general and administrative expenses. Non-interest income includes 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. Management Strategy In recent years, we have adopted a growth-oriented strategy that has focused on expanding our retail banking operations, using our strong capital position to increase net income by funding the purchase of mortgage related securities with borrowings, and continuing to hold our Freddie Mac stock investment. Our retail banking strategy is to operate as a well-capitalized community bank dedicated to providing quality services at competitive prices. We have sought to implement this strategy by maintaining our core product offerings, including residential and commercial mortgage loans and a variety of checking and savings deposit products, while at the same time broadening our 35 product lines and services, expanding delivery systems for our customers and extending our branch network. More specifically, we seek to: . continue to focus on expanding our residential lending and retail banking franchise, and increasing the number of households served within our market area; . expand our commercial loan and deposit banking products and services for businesses, as a means to increase the yield on our loan portfolio, to attract lower cost deposit accounts and increase non- interest income; . increase convenience to customers as a means to compete for an increased share of our customers' financial service business; and . increase the use of our existing alternative delivery channels, such as ATMs and telephone banking, and implement new alternative delivery channels, such as Internet banking. In addition, we offer competitive interest rates to attract new deposits and attempt to cross sell additional services to our customers as a way of expanding these relationships. We train our employees not only in the technical aspects of their jobs, but also in how to provide outstanding quality service to customers. We also continue our dedication to our community through continual support of, and donations to, the Charter Foundation. We believe that this growth-oriented strategy is best for our long term success and viability, and complements our existing commitment to high quality customer service. CharterBank's GAAP capital position has allowed us to engage in a second strategy of maximizing net interest income through investment in mortgage related securities funded with advances from the Federal Home Loan Bank and repurchase agreements. The margins involved in this type of wholesale investment strategy are narrower than those of a traditional retail bank due to lower yields on mortgage securities than other retail investments and the higher cost of borrowed funds than traditional retail deposits. While this wholesale strategy has helped to increase net interest income, it also has a negative effect on our interest rate spread and net interest margin. We have recently embarked on a strategy of investing more of the borrowed funds in higher- yielding commercial real estate loans in order to improve our interest rate spread and net interest margin thereby increasing the profitability of our core banking operations. Our third strategy is to hold our large position of Freddie Mac common stock. This strategy has worked well for us with the total return on Freddie Mac stock averaging better than 20% for the past ten years. Following the reorganization, we intend to utilize proceeds from the offering to further the objectives of our growth-oriented strategy. We may also use the offering proceeds to acquire branches from other banks or to make other acquisitions, although we have no current plans to do so. See "How We Intend to Use the Proceeds from the Offering." 36 Management of Interest Rate Risk As a financial institution, we face risk from interest rate volatility. Fluctuations in interest rates impact both our level of income and expense on a large portion of our assets and liabilities. Fluctuations in interest rates also affect the market value of all interest-earning assets. The primary goal of our interest rate management strategy is to limit fluctuations in net interest income as interest rates vary up or down. We seek to coordinate asset and liability decisions so that, under changing interest rate scenarios, portfolio equity will remain within an acceptable range. Our lending activities have emphasized one- to four-family and commercial mortgage loans. Our sources of funds includes retail deposits, consisting primarily of certificates of deposit, which have shorter terms to maturity than the loan portfolio, and transaction accounts, Federal Home Loan Bank advances, repurchase agreements and wholesale deposits. Recently, we have employed several strategies to manage the interest rate risk inherent in the asset/liability mix, including but not limited to: . Selling a majority of the 30 and 15 year fixed-rate mortgages we originate to the secondary market, generally on a servicing released basis; . Maintaining the diversity of our existing loan portfolio through the origination of commercial real estate and consumer loans which typically have variable rates and shorter terms than residential mortgages; and . Emphasizing investments with adjustable interest rates. The actual amount of time before loans are repaid can be significantly impacted by changes in market interest rates. Prepayment rates also vary due to a number of other factors, including the regional economy in the area where the loans were originated, seasonal factors, demographic variables, the assumability of the loans, related refinancing opportunities and competition. We monitor interest rate sensitivity so that we can attempt to adjust our asset and liability mix in a timely manner and thereby minimize the negative effects of changing rates. We believe that our high level of capital historically has allowed us to support a high level of interest rate risk to enhance long term income at the cost of increased volatility in the income stream. Our reliance on borrowings rather than deposits presents an interest rate challenge for us. As part of our efforts to address our interest rate risk, during the six months ended March 31, 2001, CharterBank extended its interest rate reset on $102.0 million of Federal Home Loan Bank borrowings from one month to seven or more years and reduced its mortgage related investment securities by $62.3 million. The risk profile after these actions is shown in the Net Portfolio Value table in the next section of the prospectus. Net Interest Income Simulation. We use a simulation model to monitor interest rate risk. This model reports the net interest income at risk primarily under two different interest rate environments. Specifically, an analysis is performed of changes in net interest income assuming changes in interest rates, both up and down 100, 200 and 300 basis points from current rates over the one year time period following the current financial statement. 37 The table below sets forth, as of March 31, 2001, the estimated changes in net interest portfolio value that would result from a 300 basis point change in interest rates over the applicable twelve-month period.
Change Net Portfolio Value Post Shock In Rates $ Amount $ Change % Change Capital Ratio - -------------- ----------- ----------- ------------ ---------------- (Dollars in thousands) +300 bp $ 216,403 $ (36,270) (14.35)% 24.77% +200 bp 228,139 (24,534) (9.71)% 25.55% +100 bp 239,586 (13,087) (5.18)% 26.26% 0 bp 252,673 - - % 27.08% -100 bp 254,499 1,826 0.72% 26.84% -200 bp 244,617 (8,056) (3.19)% 25.66% -300 bp 235,366 (17,307) (6.85)% 24.51%
The net portfolio value is the capital, the excess of assets over liabilities, after all assets and liabilities are marked to market. The net portfolio value decreases as interest rates increase because our fixed rate assets with long maturities decline in value while our liabilities generally have adjustable rates and therefore do not increase in value with the combined result of a reduction of net portfolio value. At March 31, 2001, fixed rate investment and mortgage securities comprised of $148.7 million or 48.03% of our total portfolio of investment and mortgage securities of $313.0 million. We do not have a parallel gain in portfolio value when rates go down 200 or 300 basis points because most of our fixed rate assets, whether in loan or security form, have a borrower option to prepay and so the assets do not gain value with the reduced rates. The disparate results on net portfolio value of interest rate increases versus interest rate decreases is sometimes referred to as negative convexity. The post shock capital ratio is the post shock net portfolio value as a percent of total assets. The effects of interest rates on net portfolio value and net interest income are not predictable. Nevertheless, CharterBank's management does not expect current interest rates to have a material adverse effect on CharterBank's net portfolio value or net interest income in the near future. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments, and deposit run-offs, and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in these computations. Although some assets and liabilities may have similar maturity or periods of repricing, they may react at different times and in different degrees to changes in the market interest rates. Rates on other types of assets and liabilities may lag behind changes in market interest rates. Assets, such as adjustable rate mortgages, generally have features which restrict changes in interest rates on a short-term basis and over the life of the asset. After a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making calculations set forth above. Additionally, an increased credit risk may result if our borrowers are unable to meet their repayment obligations as interest rates increase. 38 Average Balance Sheet and Analysis of Net Interest Income. The following tables depict the significant effect of the Freddie Mac 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 stock, which had a dividend return on cost basis of approximately 52.8% at March 31, 2001. However, the appreciation on the market value of the Freddie Mac stock results in only 1.11% dividend return on market value. The appreciation in the market value of the Freddie Mac stock has been the cause of our strong comprehensive income. Overall, ratios have weakened for the six months ended March 31, 2001, as compared to the six months ended March 31, 2000, due to the effects of the rising interest rate environment during this time period on our wholesale investment strategy. We hold a significant amount of short-term, variable rate borrowings whose costs increased 47 basis points during this time period, while long-term fixed rate mortgage securities decreased 9 basis points in yield. The yield on loans receivable increased 15 basis points during the six months ended March 31, 2001 compared to the six months ended March 31, 2000; yet, the costs of deposits increased 61 basis points from 5.08% to 5.69% in comparing the similar 2000 period to the six months ended March 31, 2001. The combination of these rate changes reduced the overall net interest margin by 29 basis points from 2.05% for the six months ended March 31, 2000 to 1.76% for the six months ended March 31, 2001. 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 fees we earned from making changes in loan rates or terms, and fees we earned when commercial real estate loans were prepaid or refinanced. 39
At March 31, For the Six Months Ended March 31, ------------------ --------------------------------------------------------------- 2001 2001 2000 ------------------ ------------------------------ ------------------------------ Average Average Actual Yield/ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost Balance Interest Cost ------- ------ ------- -------- ------- ------- -------- ------- Assets: (Dollars in thousands) Interest-earning assets: Interest-bearing deposits in other financial institutions....................... $ 17,465 4.80% $ 8,993 $ 233 5.18% $ 2,213 $ 61 5.51% FHLB common stock and other equity............ 12,700 7.25 12,689 474 7.47 12,161 468 7.70 Mortgage-backed securities and collateralized mortgage obligations available for sale..... 300,738 6.54 339,352 11,861 6.99 376,713 13,345 7.08 Other investment securities available for sale 8,786 6.42 14,110 481 6.82 22,390 708 6.32 Loans receivable.............................. 247,409 8.70 252,793 11,248 8.90 224,809 9,834 8.75 -------- -------- ------- -------- ------- Total interest-earning assets excluding Freddie Mac common stock.................... 587,098 6.26 627,937 24,297 7.74 638,286 24,416 7.65 Freddie Mac common stock...................... 327,716 1.11 312,760 1,870 1.20 248,134 1,617 1.30 -------- -------- ------- -------- ------- Total interest-earning assets including Freddie Mac common stock.................... 914,814 4.41 940,697 26,167 5.56 886,420 26,033 5.87 Total non-interest earning assets............ 20,014 - 17,391 - - 25,265 - - -------- -------- ------- -------- ------- Total assets................................. $934,828 $958,088 $26,167 $911,685 $26,033 ======== ======== ======= ======== ======= Liabilities and Equity: Interest-Bearing Liabilities: NOW accounts.................................. 14,449 1.79 15,026 142 1.89 13,810 143 2.07 Savings accounts.............................. 8,328 1.99 8,098 79 1.95 8,647 178 4.12 Money market deposit accounts................. 15,015 4.45 11,999 295 4.92 9,667 215 4.45 Certificates of deposit accounts.............. 138,680 6.20 181,463 5,648 6.22 238,622 6,344 5.32 -------- -------- ------- -------- ------- Total interest-bearing deposits.............. 176,472 5.17 216,586 6,164 5.69 270,746 6,880 5.08 Borrowed funds................................ 352,305 5.71 369,798 11,720 6.34 342,978 10,059 5.87 -------- -------- ------- -------- ------- Total interest-bearing liabilities........... 528,777 5.06 586,384 17,884 6.10 613,724 16,939 5.52 Noninterest-bearing deposits.................. 8,712 - 8,351 - - 8,221 - - Other noninterest-bearing liabilities......... 148,124 - 128,402 - - 100,026 - - -------- -------- ------- -------- ------- Total noninterest-bearing liabilities........ 156,839 - 136,753 - - 108,247 - - -------- -------- ------- -------- ------- Total liabilities............................ 685,616 3.91 723,137 17,884 4.95 721,971 16,939 4.69 Total equity................................. 249,212 234,951 - 189,714 - -------- -------- ------- -------- ------- Total liabilities and equity................. $934,828 $958,088 $17,884 $911,685 $16,939 ======== ======== ======= ======== ======= Net interest income, including Freddie Mac common stock................................. $ 8,283 $ 9,094 ======= ======= Net interest rate spread, including Freddie Mac common stock(1).............................. (0.54)% 0.35% Net interest margin, including Freddie Mac common stock(2)............................... 1.76% 2.05% Ratio of interest-earning assets to average interest-bearing liabilities, including Freddie Mac common stock..................... 160.44% 144.46% Net interest income excluding Freddie Mac common stock dividends........... $ 6,413 $ 7,477 ======= ======= Net interest rate spread excluding Freddie Mac common stock(3).................. 1.64% 2.13% Net interest rate margin excluding Freddie Mac common stock(4).................. 2.04% 2.34% Ratio of interest-earning assets to average interest-bearing liabilities, excluding Freddie Mac common stock..................... 107.10% 104.02%
(footnotes on following page) 40
For The Years Ended September 30, ------------------------------------------------------------------------------- 2000 1999 1998 ------------------------- ------------------------- ------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ------- ------- -------- ------- ------- -------- ------- (Dollars in thousands) Assets: Interest-earning assets: Interest-bearing deposits in other financial institutions......................... $ 2,625 $ 159 6.06% $ 3,053 $ 148 4.85% $ 1,710 $ 103 6.02% FHLB common stock and other equity.............. 12,660 971 7.67 10,059 736 7.32 9,348 672 7.19 Mortgage-backed securities and collateralized mortgage obligations available for sale....... 381,924 27,477 7.19 261,272 16,592 6.35 187,883 12,163 6.47 Other investment securities available for sale.. 18,152 1,194 6.58 26,218 1,524 5.81 7,244 480 6.63 Loans receivable................................ 240,401 21,076 8.77 180,772 15,015 8.31 153,031 13,153 8.59 -------- ------- -------- ------- -------- ------- Total interest-earning assets excluding Freddie Mac common stock...................... 655,762 50,877 7.76 481,374 34,015 7.07 359,216 26,571 7.40 Freddie Mac common stock........................ 232,471 3,336 1.44 306,379 2,954 0.96 246,136 2,604 1.06 -------- ------- -------- ------- -------- ------- Total interest-earning assets including Freddie Mac common stock...................... 888,233 54,213 6.10 787,753 36,969 4.69 605,352 29,175 4.82 Total non-interest earning assets.............. 22,756 - - 10,682 - - 15,393 - - -------- ------- -------- ------- -------- ------- Total assets................................... $910,989 $54,213 $798,435 $36,969 $620,745 $29,175 ======== ======= ======== ======= ======== ======= Liabilities and Equity: Interest-Bearing Liabilities: NOW accounts.................................... 13,717 282 2.06 6,601 128 1.94 5,104 123 2.41 Savings accounts................................ 8,585 275 3.20 6,503 292 4.49 6,357 168 2.64 Money market deposit accounts................... 10,063 483 4.80 8,189 321 3.92 6,538 277 4.24 Certificates of deposit accounts................ 230,482 12,892 5.59 177,416 9,682 5.46 94,416 5,410 5.73 -------- ------- -------- ------- -------- ------- Total interest-bearing deposits................ 262,847 13,932 5.30 198,709 10,423 5.25 112,415 5,978 5.32 Borrowed funds.................................. 365,745 22,715 6.21 247,914 12,918 5.21 235,542 13,431 5.70 -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities............. 628,592 36,647 5.83 446,623 23,341 5.23 347,957 19,409 5.58 Noninterest-bearing deposits.................... 8,472 - - 3,411 - - 2,496 - - Other noninterest-bearing liabilities........... 93,187 - - 122,751 - - 95,815 - - -------- ------- -------- ------- -------- ------- Total noninterest-bearing liabilities.......... 101,659 - - 126,162 - - 98,311 - - -------- ------- -------- ------- -------- ------- Total liabilities.............................. 730,251 36,647 5.02 572,785 23,341 4.08 446,268 19,409 4.35 Total equity................................... 180,738 - 225,650 - 174,477 - -------- ------- -------- ------- -------- ------- Total liabilities and equity................... $910,989 $36,647 $798,435 $23,341 620,745 $19,409 ======== ======= ======== ======= ======== ======= Net interest income, including Freddie Mac common stock................................... $17,566 $13,628 $ 9,766 ======= ======= ======= Net interest rate spread, including Freddie Mac common stock(1)................................ 0.27% (0.54)% (0.76)% Net interest margin, including Freddie Mac common stock(2)................................ 1.98% 1.73% 1.61% Ratio of interest-earning assets to average interest-bearing liabilities, including Freddie Mac common stock...................... 141.31% 176.38% 173.97% Net interest income excluding Freddie Mac common stock dividends............. $14,230 $10,674 $ 7,162 ======= ======= ======= Net interest rate spread excluding Freddie Mac common stock(3).................... 1.93% 1.84% 1.82% Net interest rate margin excluding Freddie Mac common stock (4)................... 2.17% 2.22% 1.99% Ratio of interest-earning assets to average interest-bearing liabilities, excluding Freddie mac common stock....................... 104.32% 107.78% 103.24%
(footnotes on following page) 41 ________________________________ (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. 42 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 changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change. 43
Six Months Ended March 31, 2001 Year Ended September 30, 2000 Compared To Six Months Ended Compared To Year Ended March 31, 2000 September 30, 1999 Increase/(Decrease) Increase/(Decrease) ------------------------------------------- ------------------------------------------ Due To Due To -------------------------------- ------------------------------- Volume Rate Combined Net Volume Rate Combined Net -------- -------- ---------- -------- -------- ------- ---------- -------- (In Thousands) Interest-earning assets: Interest-bearing deposits in other financial institutions.................. $ 368 $ (8) $ (188) $ 172 $ (21) $ 37 $ (5) $ 11 FHLB common stock and other equity securities....................... 41 (29) (6) 6 190 35 10 235 Mortgage-backed securities and collateralized mortgage obligations available for sale...................... (2,645) (339) 1,500 (1,484) 7,661 2,195 1,029 10,885 Other investment securities available for sale...................... (523) 112 184 (227) (468) 202 (64) (330) Loans Receivable......................... 2,449 337 (1,372) 1,414 5,238 616 207 6,061 -------- -------- -------- -------- -------- ------- ------- -------- Total interest-earning assets........... (310) 73 118 (119) 12,600 3,085 1,177 16,862 Freddie Mac common stock................. 840 (248) (339) 253 (710) 1,471 (379) 382 -------- -------- -------- -------- -------- ------- ------- -------- Total interest-earning assets........... $ 530 $ (175) $ (221) $ 134 $ 11,890 $ 4,556 $ 798 $ 17,244 -------- -------- -------- -------- -------- ------- ------- -------- Interest-bearing liabilities: NOW accounts............................. $ 33 $ (25) $ (9) $ (1) $ 138 $ 8 $ 8 $ 154 Savings accounts......................... (23) (188) 112 (99) 93 (84) (26) (17) Money market deposit accounts............ 104 45 (69) 80 73 72 17 162 Certificates of deposit.................. (3,039) 2,171 172 (696) 2,897 231 82 3,210 -------- -------- -------- -------- -------- ------- ------- -------- Total interest-bearing deposits......... (2,925) 2,003 206 (716) 3,201 227 81 3,509 Borrowed funds........................... 1,574 1,612 (1,525) 1,661 6,139 2,479 1,179 9,797 -------- -------- -------- -------- -------- ------- ------- -------- Total interest-bearing liabilities...... $ (1,351) $ 3,615 $ (1,319) $ 945 $ 9,340 $ 2,706 $ 1,260 $ 13,306 -------- -------- -------- -------- -------- ------- ------- -------- Change in net interest income............. $ 1,881 $ (3,790) $ 1,098 $ (811) $ 2,550 $ 1,850 $ (462) $ 3,938 ======== ======== ======== ======== ======== ======= ======= ======== Year Ended September 30, 1999 Compared To Year Ended September 30, 1998 Increase/(Decrease) -------------------------------------------- Due To --------------------------------- Volume Rate Combined Net ------- -------- ---------- -------- (In Thousands) Interest-earning assets: Interest-bearing deposits in other financial institutions.................. $ 81 $ (20) $ (16) $ 45 FHLB common stock and other equity securities....................... 51 12 1 64 Mortgage-backed securities and collateralized mortgage obligations available for sale.......... 4,748 (225) (94) 4,429 Other investment securities available for sale...................... 1,258 (59) (155) 1,044 Loans Receivable......................... 2,235 (316) (57) 1,862 -------- -------- -------- -------- Total interest-earning assets........... 8,373 (608) (321) 7,444 Freddie Mac common stock................. 639 (246) (43) 350 -------- -------- -------- -------- Total interest-earning assets........... $ 9,012 $ (854) $ (364) $ 7,794 -------- -------- -------- -------- Interest-bearing liabilities: NOW accounts............................. $ 36 $ (24) $ (7) $ 5 Savings accounts......................... 4 118 2 124 Money market deposit accounts............ 70 (21) (5) 44 Certificates of deposit.................. 4,756 (255) (229) 4,272 -------- -------- -------- -------- Total interest-bearing deposits......... 4,866 (182) (239) 4,445 Borrowed funds........................... 705 (1,154) (64) (513) -------- -------- -------- -------- Total interest bearing liabilities...... $ 5,571 $ (1,336) $ (303) $ 3,932 -------- -------- -------- -------- Change in net interest income............. $ 3,441 $ 482 $ (61) $ 3,862 ======== ======== ======== ========
44 Comparison of Financial Condition at March 31, 2001 and September 30, 2000 Our consolidated total assets decreased $7.8 million, or 0.83%, to $934.8 million at March 31, 2001 from $942.7 million at September 30, 2000. The decrease was primarily due to a $67.0 million, or 18.2%, decrease in mortgage securities which was partially offset by a $54.5 million, or 19.1%, increase in the market value of Freddie Mac stock. Total mortgage securities available for sale decreased $67.0 million, or 18.2%, to $300.7 million. This reduction was part of our strategy to increase the interest rate spread and net interest margin by shifting assets from lower- yielding, fixed rate mortgage securities to higher-yielding loans and reduce interest rate risk by selling long-term fixed rate securities and either reducing asset size or replacing securities with floating rate securities. Whereas CharterBank held fixed rate U.S. Government agencies, mortgage-baked securities, and collateralized mortgage obligations aggregating approximately $237.1 million at September 30, 2000, these fixed rate investments were $148.7 million at March 31, 2001, representing an $88.4 million reduction during this six-month period. Variable rate investments and mortgage securities increased from $144.5 million at September 30, 2000 to $160.9 million at March 31, 2001. Deposits decreased $89.2 million, or 32.5%, to $185.2 million at March 31, 2001 from $274.4 million at September 30, 2000. The primary cause of the decrease was the maturing of approximately $89.4 million of brokered certificates of deposit which were redeemed primarily with the proceeds from sales of mortgage securities. We also experienced a decline of $257,000 in retail deposits between September 30, 2000 and March 31, 2001. Borrowings, including Federal Home Loan Bank advances and repurchase agreements, totaled $352.3 million at March 31, 2001, an increase of $86,000 over $352.2 million at September 30, 2000. Total equity increased $44.7 million, or 21.8%, to $249.2 million at March 31, 2001 from $204.5 million at September 30, 2000. The increase was primarily due to a $42.0 million increase in accumulated other comprehensive income driven by after tax unrealized gains on securities, primarily Freddie Mac stock, and $2.6 million in net income for the six months ended March 31, 2001. Comparison of Operating Results for the Six Months Ended March 31, 2001 and 2000 General Net income was $2.6 million for the six months ended March 31, 2001, a decrease of $38,000, or 1.4%, compared to the six months ended March 31, 2000. Operations were adversely affected by a $811,000 decrease in net interest income primarily related to the increased cost of borrowed funds. In addition, we had a $120,000 increase in the provision for loan losses due to a softening economic environment. These reductions in earnings were offset by a $461,000 increase in total non-interest income, a decrease of $345,000 in total non-interest expense and a $87,000 decrease in income tax expense. 45 Other comprehensive income was $42.0 million for the six months ended March 31, 2001, which represented a $68.8 million increase as compared to the other comprehensive loss of $26.8 million for the six months ended March 31, 2000. This increase in other comprehensive income relates to an increase in the value of our investment in Freddie Mac stock and the recovery in the fair value of other, largely fixed rate, investments in mortgage securities. Given the composition of our investment portfolio, the recovery in fair value of mortgage securities was due to the lower interest rate environment at March 31, 2001 compared to March 31, 2000. Comprehensive Income Other comprehensive income was $42.0 million for the six months ended March 31, 2001 compared to a loss of $26.8 million for the same period in the prior year. The major component of this increase was the appreciation in the price of Freddie Mac stock from $54.0625 per share at September 30, 2000 to $64.83 at March 31, 2001, resulting in an after tax increase of $33.4 million. The mortgage securities portion of the balance sheet provided the remaining $8.6 million of other comprehensive income for the 2001 period. The per share price of Freddie Mac stock declined from $52.00 to $44.188 during the six months ended March 31, 2000, resulting in an after tax total decrease of $24.2 million. The mortgage securities portion of the balance sheet provided the remaining $2.6 million of other comprehensive loss for the 2000 period. The impact of appreciation (depreciation) in the price of Freddie Mac stock on our total comprehensive income (loss) is shown in the table below.
Six Months Ended March 31, 2001 ----------------------------------------------------------- Market Price Total Market Unrealized Gain Shares Per Share Value Net of Tax --------- -------------- -------------- ----------------- September 30, 2000 5,055,000 $54.0625 $273,285,938 $163,569,490 March 31, 2001 5,055,000 64.830 327,715,650 196,989,334 -------- ------------ ------------ Change in Freddie Mac stock....... - $10.7675 $ 54,429,712 33,419,844 Other comprehensive income related to mortgage securities and other investments........... 8,616,893 Total other comprehensive income.. $ 42,036,737 ============
46
Six Months Ended March 31, 2000 ----------------------------------------------------------- Market Price Total Market Unrealized Gain Shares Per Share Value Net of Tax ---------- -------------- ------------ ---------------- September 30, 1999 5,055,000 $52.0000 $262,860,000 $164,054,081 March 31, 2000 5,055,000 44.188 223,367,813 139,805,878 -------- ------------ ------------ Change in Freddie Mac stock....... - $ (7.812) $(39,492,187) (24,248,203) Other comprehensive loss related to mortgage securities and other investments........... (2,579,978) Total other comprehensive loss.... $(26,828,181) ============
Interest Income Total interest and dividend income for the six months ended March 31, 2001 was $26.2 million, up $135,000 or 0.5% from $26.0 million for the six months ended March 31, 2000. Total interest and dividend income, excluding Freddie Mac stock dividends, was $24.3 million for the six months ended March 31, 2001, a $125,000 or 0.59% decrease, compared with $24.4 million for the same period in 2000. Increases in interest income on loans, interest income on interest bearing deposits and dividend income were almost fully offset with decreases in interest income on mortgage securities and interest income on investment securities. This decrease related primarily to a decrease in interest income on mortgage securities of $1.5 million, or 11.1%, to $11.9 million from $13.3 million for the six months ended March 31, 2000. The decrease in interest income on mortgage securities was primarily related to our sale of certain securities consistent with our strategy to reduce interest rate risk. Interest income on investment debt securities available for sale decreased $227,000 to $481,000 from $708,000 for the six months ended March 31, 2000. Interest income on loans increased by 14.3% to $11.2 million for the six months ended March 31, 2001 from $9.8 million for the six months ended March 31, 2000. The growth in interest income on loans was due in part to a $28.0 million or 12.4% increase in the average balance of total loans, which rose to $252.8 million for the six months ended March 31, 2001 compared to $224.8 million for the six months ended March 31, 2000. This increase reflects our continued emphasis on the origination of residential one-to-four-family mortgage and commercial real estate loans. The average balance of our other investment securities, mortgage-backed securities, and collateralized mortgage obligations available for sale decreased $45.6 million from $399.1 million for the six months ended March 31, 2000 to $353.5 million for the six months ended March 31, 2001. The decrease in the average balance of these securities reflects our ongoing strategy of using proceeds from sales of securities to fund growth in higher yielding residential and commercial real estate loans, thereby reducing our interest rate risk. We expect this strategy of replacing securities with loans to have a positive affect on our performance ratios, including interest rate spread and net interest margin, because our average yield on loans is 191 basis points greater than the average yields on our mortgage-backed securities and collateralized mortgage obligations. 47 The yield on interest-earning assets, excluding Freddie Mac stock, increased 9 basis points for the six months ended March 31, 2001 when compared to the same period in 2000. Total interest-earning assets averaged $627.9 million for the six months ended March 31, 2001, down from $638.3 million for the comparable 2000 period, representing a 1.62% decrease. The average yield on loans, net, increased 15 basis points to 8.90% due to the increase in higher- yielding commercial real estate loans in our portfolio. The yield on mortgage- related securities decreased from 7.08% to 6.99%. Dividend income on Freddie Mac stock increased by $253,000 to $1.9 million for the six months ended March 31, 2001 from $1.6 million for the six months ended March 31, 2000 due to an increase in Freddie Mac's quarterly dividend from $0.17 to $0.20 per share. Interest Expense Total interest expense for the six months ended March 31, 2001 was $17.9 million, a $0.9 million, or 5.6%, increase from the six months ended March 31, 2000. This increase in interest expense was due to a 58 basis point increase in average cost of funds. The average balance of interest-bearing liabilities was reduced from $613.6 million to $586.3 million for the six months ended March 31, 2001. The increase in average cost was spread across borrowed funds (47 basis points), certificates of deposit (91 basis points), and money market accounts (47 basis points). The increase reflects the higher interest rate environment that prevailed during the 2001 period as compared to the 2000 period. The drop in rates starting in January 2001 was not in effect long enough to reduce the average rates for the 2001 period down to the levels of the prior period. In addition, it is indicative of the rate-sensitive nature of our liabilities including our significant exposure to variable rate debt and short term, highly competitive wholesale certificates of deposit which typically carry rates of 50 to 100 basis points higher than similarly termed retail certificates of deposit. Interest expense on deposits decreased $716,000, or 10.4%, to $6.2 million for the six months ended March 31, 2001 compared with $6.9 million for the same period in 2000. The average balance of certificates of deposit decreased to $181.4 million in 2001 from $238.5 million in 2000 due primarily to the replacement of certain wholesale certificates of deposit with borrowings and the redemption of other wholesale certificates of deposit with the proceeds from the sales of mortgage securities. Interest expense on certificates of deposit decreased $696,000 for the six months ended March 31, 2001 compared with 2000 with a $57.1 million drop in average balances more than offsetting a 91 basis point increase in rate. Interest expense on money market balances increased $80,000, reflecting a $2.3 million rise in average money market account balances and a 47 basis point increase in average cost. We continue to seek to increase our core retail deposits as the cost of such funds are generally lower than wholesale deposits cost. Interest expense on borrowings increased $1.7 million for the six months ended March 31, 2001 compared to the same period in 2000 as a result of the $26.8 million rise in the average balance of borrowings resulting from redemption of wholesale certificates of deposit and a 47 basis point increase in average cost. 48 Net Interest Income Net interest income for the six months ended March 31, 2001 decreased $811,000 or 8.9% to $8.3 million compared to $9.1 million for the six months ended March 31, 2000. The net interest rate spread - the difference between the average yield on average total interest-earning assets and the average cost of average total interest-bearing liabilities - decreased by 89 basis points to negative 54 basis points. The yield on interest-earning assets was 5.56% for the six months ended March 31, 2001 which is down from 5.87% for the six months ended March 31, 2000. Our net interest rate spread is negative because our largest asset, Freddie Mac stock, which accounts for $312.8 million or 33.2% of average interest-earning assets for the six months ended March 31, 2001, has a yield of 1.2%. If we exclude the Freddie Mac stock from average earning assets and the dividend on Freddie Mac stock from interest and dividend income, the yield on assets increases from 5.56% to 7.74%. The net interest rate spread excluding Freddie Mac stock dividends - the difference between the average yield on average total interest-earning assets and the average cost of average total interest-bearing liabilities - decreased 49 basis points to 1.64% for the six months ended March 31, 2001 from 2.13% for the comparable period in 2000. Net interest margin, which is net interest income divided by average total interest- earning assets, decreased 30 basis points to 2.04% for the six months ended March 31, 2001 as compared to 2.34% for the six months ended March 31, 2000. These decreases are due to the rising interest rate environment between the two periods and its significant effect on our short-term variable rate liabilities. The asset side of our balance sheet is much less sensitive to changes in interest rates resulting in a reduction of interest rate spread and margin in an increasing rate environment. We believe that our current strategy of reducing floating rate borrowings, reinvesting the proceeds of mortgage security sales in higher-yielding adjustable rate loans and floating rate securities will lower, but not eliminate, the risk of changing interest rates on our net interest income. A substantial portion of our earning assets are invested in mortgage related securities that had a yield of 6.99% for the six months ended March 31, 2001 and over half of our interest-bearing liabilities were borrowings which had a cost of 6.34% for the same period. Accordingly, our balance sheet, excluding our Freddie Mac stock, reflects a wholesale or marginal investment strategy that yielded a modest 65 basis point spread during the six months ended March 31, 2001. In addition, this portion of our balance sheet tends to be the most sensitive to changes in interest rates resulting in a significant narrowing of spread when compared to the same period in 2000. Conversely, the spread between loans receivable and deposits, including wholesale deposits, was 321 basis points for the six months ended March 31, 2001 which compares more favorably to the thrift industry as a whole. Our net interest margin and net interest spread are low when compared to industry standards primarily due to two factors. First, the dividend rate of our Freddie Mac stock investment, as compared to its market value, is low. However, when compared to our cost basis in the investment, the dividend rate is almost 60%. Second, under our wholesale investment strategy, our assets include a high proportion of securities with rates lower than those that would typically be earned on loans and our liabilities include a high proportion of borrowings and wholesale deposits with higher costs than those typically paid on retail deposits. This lowers our net interest margin and net interest spread. However, our wholesale investment strategy has historically increased annual interest income. Our Freddie Mac stock had a dividend yield of 49 1.20% which lowered the yield on earning assets from 7.74% to 5.56% for the six months ended March 31, 2001. Provision for Loan Losses and Asset Quality During the six months ended March 31, 2001, we provided $300,000 for loan losses, compared to $180,000 for the 2000 period. The provision for the six months ended March 31, 2001 reflected higher loan delinquency levels, higher losses as the economy showed signs of slowing, and consideration of larger balance commercial real estate loans in the loan portfolio. Net charge-offs for the six months ended March 31, 2001 were $1.3 million and consisted primarily of loans acquired in the Citizens acquisition for which loan loss reserves were provided in a prior period. Future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and its underlying collateral, the mix of loans within the portfolio, delinquency trends, economic conditions, current and prospective trends in real estate values, and other relevant factors. We estimate our allowance for loan losses based on a methodology which assigns a credit grade to each loan in the portfolio. Underperforming loans are balloon loans that are 90 days or more 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:
At March 31, 2001 At September 30, 2000 ----------------- --------------------- (In thousands) Underperforming loans $ 574 $ 159 Total non-performing loans 1,661 2,831 Foreclosed real estate, net 768 630 Total non-performing assets 2,429 3,461 Non-performing loans to total loans 0.66% 1.09% Non-performing assets to total assets 0.26% 0.37%
In addition to the underperforming loans of $574,000 at March 31, 2001, other disbursed loans of approximately $2.3 million and a committed line of credit with an undisbursed amount of $584,000 are potential problem loan relationships. This 2.3 million is composed of the following two items. First, we have a $981,000 loan relationship which is secured by a retail building and certain low income residential rental properties. While this loan is correct and has only been 30 days past due once, the cash flows from the borrower's financial statements indicate weak debt service coverage. Second, we have a $1,900,000 line of credit with $1,316,000 drawn as of March 31, 2001 secured by high risk receivables with another borrower. This loan has never been delinquent but is of concern because of difficulty in valuing the collateral and the high risk nature of the collateral. Management is not aware of any loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed above which (i) represent or result 50 from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. At March 31, 2001, the allowance for loan losses as a percentage of total loans was 2.13% compared with 2.22% at March 31, 2000. Net charge-offs for the eighteen months ended March 31, 2001 totaled $2.0 million and were 38.0% of the allowance for loan losses as of March 31, 2001. While delinquencies and non- performing loan levels are similar at September 30, 2000 and March 31, 2001, both delinquencies and non-performing loans were significantly higher at interim periods between these two dates. 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. Doubtful, substandard and special mention loans are reserved at 60%, 17.5% and 5% respectively. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency. Unclassified loans are reserved at different percentages based on our perception of the inherent losses in the loan portfolio. Unclassified loans are reserved at percentages as listed in the table below:
HIGH LOW 1-4 family 2.00% 0.25% Commercial real estate 2.25 2.00 Commercial 5.00 1.00 Consumer 10.00 0.25 Construction 2.25 1.00
One of the higher percentages on the 1-4 family loans is for a loan plan that provides low to moderate income borrowers with limited credit histories loans for up to 100% of the purchase price of the house. The conforming 1-4 family loans in the portfolio are at lower percentages. The above percentages are based on each individual lending program and its loss history and underwriting characteristics including loan to value, credit score, debt coverage, collateral, and capacity to service debt. We obtain updated credit scores on our portfolio approximately every eighteen months and reevaluate based on loan plan, loan to value, and credit score. This analysis is used to validate the loan loss reserve matrix as well as assist in establishing overall lending direction. The 10% percentage on consumer loans is applied to our overdraft protection loans. These loans have a maximum credit line of $1,000 and are unsecured. The overdraft protection loan is a relatively new product to CharterBank and has an unproven loss experience. CharterBank's initial loss experience on this loan product was high. As a result, CharterBank recently tightened its credit standards on its overdraft protection loans. The 5% reserve percentage on commercial loans is for workout loans that have high inherent losses due to the nature of workouts. The largest change in the allocation of the allowance for loan losses is the drop in the consumer allocation from $2.3 million at September 30, 2000 to $1.0 million at March 31, 2001. During this period there was a decline in consumer loan balances of $3.2 million including gross charge-offs of consumer loans of $1.2 million. Auto loans with balloon payments in excess of $500, were specifically reserved at 50% of the estimated balloon payment, for specific reserves of $176,000 at March 31, 2001. CharterBank acquired these loans in the Citizens acquisition and 51 such loan terms are not in accordance with CharterBank's lending policy and, hence, such risk has been specifically allocated. The basis for the CharterBank's unallocated reserves of approximately $450,000 at March 31, 2000 is (1) the increase in the number of large balance loans in the portfolio relative to the loan loss reserve, (2) recent growth in commercial and commercial real estate loans for which CharterBank has limited loss history information, yet increased inherent credit risks, (3) local economic concerns, (4) overall softening economic environment in the nation and the states of Georgia and Alabama and (5) volatility including higher levels of delinquency and nonperforming loans from month to month. Noninterest Income Noninterest income includes service fees on deposit accounts, servicing released loan fees, other service charges and net gains on sales of securities. Total noninterest income increased $461,000, or 55.3%, to $1.3 million for the six months ended March 31, 2001 compared with $834,000 for the 2000 period. This partially resulted from a $236,000 increase in gain on sale of loans, net and servicing released loan fees from $300,000 for the six months ended March 31, 2000 to $536,000 for the six months ended March 31, 2001. This $236,000 increase was caused by management's decision to sell loans servicing released (as opposed to selling a portion of loans servicing retained) and a more favorable mortgage origination environment in 2001. The six months ended March 31, 2000 included a loss on sale of securities of $182,000 compared to a gain of $219,000 for the six months ended March 31, 2001. The gains on sale of securities resulted as CharterBank restructured its portfolio of investment securities, mortgage-backed securities, and collateralized mortgage obligations to reduce its investment in fixed rate investments. Such fixed rate investments decreased by approximately $88.4 million during the six months ended March 31, 2001 from $237.1 million at September 30, 2000 to $148.7 million at March 31, 2001. Fees on deposits were relatively stable with $355,000 in the six months ended March 31, 2001, which represented a $22,000 increase from the $333,000 for the six months ended March 31, 2000. Other income for the six months ended March 31, 2001 was $39,000, a decrease of $141,000 from the total of $180,000 for the six months ended March 31, 2000. This decrease was caused by our decision to terminate an arrangement that provided fee income with a company that originated loans through a call center. Noninterest Expense Total noninterest expense decreased $345,000, or 5.6%, to $5.8 million during the six months ended March 31, 2001 compared with $6.1 million for the six months ended March 31, 2000. The 2000 non interest expense included $475,000 of goodwill amortization associated with the Citizens acquisition. There was no comparable expense during the six months ended March 31, 2001 since management had assessed the goodwill as impaired and, accordingly, wrote it off during the quarter ended September 30, 2000. Noninterest expense included $670,000 for professional services for the six months ended March 31, 2000 compared to $340,000 for the same period in 2001. The six months ended March 31, 2000 included professional fees and services related to the expense of formation of Charter Insurance Company and our subsequently withdrawn application to form a non-stock mutual holding company. 52 Salaries and employee benefits combined with occupancy and equipment expense comprised 55.6% of total noninterest expense for the six months ended March 31, 2001. Salaries and employee benefits increased $698,000, or 27.8%, to $3.2 million for the six months ended March 31, 2001 compared with $2.5 million for 2000, reflecting salary increases and staff increases particularly related to geographic expansion and our increased emphasis on commercial real estate lending. Our efficiency ratio, determined by dividing noninterest expense by the sum of net interest income and noninterest income, excluding gains(losses) on securities transactions, was 60.28% for the six months ended March 31, 2001 compared with 61.64% for the comparable 2000 period. The ratio of noninterest expense to average assets was 1.21% for 2001 and 1.34% for 2000 with the largest factor in the increase being the charge for impairment of goodwill. Annual operating expenses are expected to increase in the near term due to the planned expansion of our facilities, products and services and the increased costs of operating as a public company. The efficiency ratio and ratio of noninterest expense to average assets are lower than they would be if the balance sheet had more retail assets and liabilities instead of the high proportion of wholesale assets and liabilities. Income Taxes Income tax expense decreased $86,000, or 9.2%, to $855,000 for the six months ended March 31, 2001 compared with $941,000 for the comparable 2000 period, resulting in an effective tax rate of 24.4% for the six months ended March 31, 2001 and 25.9% for the comparable 2000 period. The effective tax rate also reflects the dividend exclusion for 70% of the Freddie Mac stock dividends. The lower effective tax rate for the six months ended March 31, 2001 reflects a higher proportion of income that qualified for that tax exclusion and the elimination of nondeductible goodwill amortization. Comparison of Financial Condition at September 30, 2000 and 1999 Our total assets increased $38.1 million, or 4.2%, to $942.7 million at September 30, 2000 from $904.6 million at September 30, 1999. The increase was primarily due to growth in the commercial loan portfolio and an increase in the market price of our Freddie Mac stock. Total loans increased $45.5 million, or 21.2%, to $259.7 million at September 30, 2000 compared to $214.2 million at September 30, 1999 as management grew the commercial real estate portfolio by $14.3 million and the residential real estate portfolio by $20.8 million. Mortgage-backed securities and collateralized mortgage obligations increased from $356.5 million to $367.7 million for an increase of $11.2 million or 3.1%. Other investment securities were reduced from $31.9 million to $13.9 million for a decrease of $18.0 million or 56.4%. Proceeds from the sales of these securities were used to purchase collateralized mortgage obligations or to fund loan growth. The market value of Freddie Mac stock and other equity securities increased $12.4 million, or 4.5%, from $274.3 million to $285.9 million. Management recorded an impairment loss of $3.6 million in addition to the scheduled amortization of $930,000 for intangible assets associated with the Citizens acquisition. The impairment was determined based on an analysis that indicated that the undiscounted future cash flows associated 53 with the purchase of assets and the assumption of liabilities would be negative, and therefore insufficient to recover the carrying amount of the related intangible assets. Asset growth was funded primarily by a $39.4 million increase in borrowings, which grew from $312.9 million at September 30, 1999 to $352.2 million at September 30, 2000, a 12.6% increase. Management placed increased reliance on borrowings, especially Federal Home Loan Bank advances, in light of the limited capacity to raise significant new retail deposits. Accordingly, total deposits fell from $283.0 million to $274.4 million. Our total equity, which is comprised of retained earnings and accumulated other comprehensive income, increased $5.3 million, or 2.7%, to $204.5 million at September 30, 2000. Accumulated other comprehensive income at CharterBank is comprised of net unrealized holding gains on securities available for sale. The balance of accumulated other comprehensive income at September 30, 2000 was $152.8 million, a $5.2 million increase from the balance at September 30, 1999 of $147.7 million. Comparison of Operating Results for the Years Ended September 30, 2000 and 1999 General Net income of $872,000 for the year ended September 30, 2000 represents a $26.2 million decrease from net income of $27.0 million for the year ended September 30, 1999. This decrease was due primarily to the unusually high level of income in the year ended September 30, 1999 attributed to a $35.9 million pre-tax gain on the sale of Freddie Mac stock. Net interest income during the year ended September 30, 2000 increased significantly due to internal growth in loans, earnings on additional mortgage- related securities, and the earnings stream associated with the assets and core deposits from the Citizens acquisition being included for the entire year. Noninterest expenses for the year ended September 30, 2000 were increased by a charge of $4.5 million for amortization and impairment of intangible assets resulting from the Citizens acquisition, a $1.2 million increase in the loan loss provision attributed to increased charge-offs and non-performing loans and growth in commercial/commercial real estate loans, and a $763,000 increase in compensation due to additional talent hired to help grow the commercial and mortgage loan portfolios and the additional expense of having employees added in the Citizens acquisition for an entire year. Comprehensive Income Other comprehensive income for the year ended September 30, 2000 was $5.2 million compared to a loss of $23.7 million for the year ended September 30, 1999. The per share price of Freddie Mac stock increased from $52.00 at September 30, 1999 to $54.063 at September 30, 2000, resulting in an after tax increase in our Freddie Mac investment of $6.4 million. Other comprehensive loss relating to mortgage securities and other investments decreased by $1.2 million as a result of high interest rates. Other comprehensive loss for the year ended September 30, 1999 was $23.7 million which was a result of comprehensive income relating to mortgage and other securities of $10.7 million and net unrealized gains on Freddie Mac stock which decreased during fiscal year 1999 because of the sale and donation of 605,000 shares. There was also a comprehensive loss relating to mortgage securities and other investments because of increasing interest rates on the fair market value of fixed rate securities in our portfolio. 54
Year Ended September 30, 2000 ----------------------------------------------------------- Market Price Total Market Unrealized Gain Shares Per Share Value Net of Tax ------------ ------------ ------------- --------------- September 30, 1999 5,055,000 $52.0000 $262,860,000 $157,167,965 September 30, 2000 5,055,000 54.0625 273,285,938 163,569,490 -------- ------------ ------------ Change in Freddie Mac stock....... - $ 2.0625 $ 10,425,938 6,401,525 Other comprehensive loss related to mortgage securities and other investments.......... (1,236,353) Total other comprehensive income.. $ 5,165,172 ============ Year Ended September 30, 1999 --------------------------------------------------------- Market Price Total Market Unrealized Gain Shares Per Share Value Net of Tax --------- ------------ ------------ --------------- September 30, 1998 5,660,000 $ 49.625 $280,877,500 $170,171,359 September 30, 1999 5,055,000 52.000 262,860,000 157,167,965 -------- ------------ ------------ Change in Freddie Mac stock....... (605,000) $ 2.375 $(18,017,500) (13,003,394) Other comprehensive loss related to mortgage securities and other investments.......... (10,727,875) Total other comprehensive loss.... $(23,731,269) ============
Interest Income The total interest and dividend income excluding Freddie Mac stock was $50.9 million for the year ended September 30, 2000, a 49.6% increase over interest and dividend income excluding Freddie Mac stock of $34.0 million for the year ended September 30, 1999. Interest on loans rose $6.1 million, or 40.4%, to $21.1 million from $15.0 million for the year ended September 30, 1999. This increase is due to growth in CharterBank's higher-yielding commercial real estate loan portfolio and growth in the residential mortgage portfolio between these periods. Interest on investment debt securities available for sale decreased $330,000 to $1.2 million for the year ended September 30, 2000 from $1.5 million for the year ended September 30, 1999. Dividend income on Freddie Mac stock increased by $382,000 to $3.3 million for the year ended September 31, 2000 from $2.9 million for the year ended September 30, 1999 due to the increase in quarterly dividends of Freddie Mac stock from $0.15 per share to $0.17 per share. Interest on mortgage-backed securities and collateralized mortgage obligations increased by $10.9 million to $27.4 million for the year ended September 30, 2000 from $16.6 million for the year ended September 30, 1999. The increase was primarily due to the $119.8 million increase in the average balance of mortgage related securities from $261.2 million for the year ended September 30, 1999 to $381.9 million for the year ended September 30, 2000. The growth in interest income on loans was due in part to a $45.0 million, or 21.6%, increase in the balance of total loans, which rose to $259.5 million at September 30, 2000. Average loans 55 for the year ended September 30, 2000 were $237.4 million compared to $176.0 million for the year ended September 30, 1999. This increase reflects our continued emphasis on residential one-to-four-family mortgage and commercial loan originations as well as the effects of the Citizens acquisition. The average balance of investment securities available for sale and mortgage related securities increased $112.6 million from $287.5 million for the year ended September 30, 1999 to $400.1 million for the year ended September 30, 2000. This increase reflected our strategy of using borrowings to fund the purchase of investment securities. The yield on interest-earning assets excluding Freddie Mac stock increased 65 basis points and total interest-earning assets excluding Freddie Mac stock averaged $652.8 million for the year ended September 30, 2000, up from $476.6 million from the comparable 1999 period, a 37.0% increase. The average yield on loans, net, increased 35 basis points to 8.88%, while the yield on mortgage- related securities increased from 6.35% for the year ended September 30, 1999 to 7.19% for the year ended September 30, 2000 reflecting the rising interest rate environment during this time period. In addition, the average yield on our loans was positively impacted by the increase in higher-yielding commercial real estate loans. Interest Expense Total interest expense for the year ended September 30, 2000 was $36.6 million, a $13.3 million, or 57.0%, increase from the year ended September 30, 1999. The increase is attributable to a 60 basis point increase in the average cost and a $182.0 million increase in the average balance of interest-bearing liabilities from $446.6 million for the year ended September 30, 1999 to $628.6 million for the year ended September 30, 2000. The majority of the growth was in wholesale certificates of deposit and borrowings, as we relied on these sources of funds to match the growth of the securities and loan portfolios. The increase in average cost was primarily due to the cost of borrowed funds (up 100 basis points as compared to the year ended September 30, 1999). The increase reflects the higher interest rate environment that prevailed during 2000 compared to the 1999 period and the rate-sensitive nature of our liabilities. Interest expense on deposits increased $3.5 million, or 33.7%, to $13.9 million for the year ended September 30, 2000 compared with $10.4 million for the year ended September 30, 1999. The average balance of certificates of deposit increased $53.1 million to $230.5 million for the year ended September 30, 2000 from $177.4 million for the year ended September 30, 1999 because of our wholesale deposit strategy coupled with the Citizens acquisition. Despite the rising interest rate environment during this period, the average cost of interest-bearing deposits increased only 5 basis points during the year ended September 30, 2000 because of growth in NOW, savings, and money market accounts combined with disciplined time deposit pricing. Interest expense on money market balances increased $162,000 from the year ended September 30, 1999 to the year ended September 30, 2000, as the average balance of these accounts increased $1.9 million and the cost increased 88 basis points as we more aggressively competed with rates offered by brokerage competition due to relatively low transaction volume and strong average balances for these accounts. Interest expense on borrowed funds increased $9.8 million as a result of the $117.8 million rise in the average balance of borrowed funds and the 100 basis point increase in average cost. The increase in the average balance of borrowed funds is attributable to our use of borrowed 56 funds to purchase mortgage related securities and fund loan growth during the year. The increase in the average costs was attributed to the rising interest rate environment during this time period on these short-term, rate sensitive liabilities. Net Interest Income Net interest income excluding the effects of Freddie Mac stock increased $3.6 million, or 33.3%, to $14.2 million for the year ended September 30, 2000 compared with $10.7 million for the year ended September 30, 1999. The net interest rate spread - the difference between the average yield on average total interest-earning assets and the average cost of average total interest-bearing liabilities - was relatively flat as increases in yields on loans receivable and mortgage related securities were offset by a large increase in the average cost of borrowings. The net interest margin - net interest income divided by average total interest-earning assets -decreased 6 basis points, primarily because of increased borrowings cost. As the interest spread and interest margin were flat, the increase in net interest income is attributable to the $176.2 million increase in average earning assets. The annual dividend yield on Freddie Mac stock was 1.44% for the year ended September 30, 2000 and 0.96% for the prior year. Our net interest margin and net interest spread are low when compared to industry standards primarily due to two factors. First, the dividend rate as compared to the market value of our Freddie Mac stock is low. However, when compared to our cost basis in the investment, the dividend rate exceeds 50%. Second, under our wholesale investment strategy, our assets include a high proportion of securities with rates lower than those that would typically be earned on loans and our liabilities include a high proportion of borrowings and wholesale deposits with higher costs than those typically paid on retail deposits. This lowers our net interest margin and net interest spread. However, our wholesale investment strategy has historically increased annual interest income. Net interest income including Freddie Mac stock dividends for the year ended September 30, 2000 increased $4.0 million, or 28.9%, to $17.6 million compared with $13.6 million for the year ended September 30, 1999. The net interest rate spread including Freddie Mac stock increased 79 basis points to 0.29% for the year ended September 30, 2000 from negative 0.50% for the prior year. The increase was attributable to the lower market value of the Freddie Mac stock during the year and an increase on the dividend per share of Freddie Mac stock during the year from $0.15 per share to $0.17 per share. Traditional bank measures such as the net interest rate spread and the net interest rate margin should improve as the market value of the Freddie Mac stock becomes a smaller portion of our earning assets. The average balance of the Freddie Mac stock was $232.4 million for the year ended September 30, 2000 as compared to $306.4 million for the year ended September 30, 1999. The net interest margin, which is net interest income including dividends on Freddie Mac stock divided by average total interest-earning assets, increased 24 basis points to 1.98% for the year ended September 30, 2000. Provision for Loan Losses and Asset Quality For the year ended September 30, 2000, we provided $1.4 million for loan losses, compared to $240,000 for the year ended September 30, 1999. Gross charge-offs totaled $1.1 million for the year ended September 30, 2000 as compared to the prior year total of $420,000, primarily 57 relating to this auto loan portfolio and other loans acquired in the Citizens acquisition. The higher provision in 2000 reflects higher levels of charge-offs and non-performing loans, a weakening economic environment, growth in the commercial and commercial real estate loan portfolios of $20.0 million and growth of $5.6 million in consumer loans. Non-performing loans at September 30, 2000 were $2.8 million compared to $2.0 million at September 30, 1999. The allowance for loan losses as of September 30, 2000 was 2.44% of total loans compared with 2.67% at the end of the comparable 1999 period. The decrease in the coverage ratio reflects the fiscal 2000 charge-offs of the portfolio acquired in the Citizens acquisition. The relatively high coverage ratio for both years as compared to other community banks and CharterBank's historical level reflects the additional losses inherent in the portfolio acquired in the Citizens acquisition, the growth in the commercial real estate portfolio, and signs of a slowdown in the local economy. Future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and its underlying collateral, the mix of loans within the portfolio, delinquency trends, economic conditions, current and prospective trends in real estate values, and other relevant factors. The table below shows under-performing and non-performing assets:
September 30, 2000 September 30, 1999 ------------------ ------------------ (In thousands) Underperforming loans.................. $ 159 $ - Total non-performing loans............. 2,831 1,989 Foreclosed real estate, net............ 630 222 Total non-performing assets............ 3,461 2,211 Non-performing loans to total loans.... 1.09% 0.93% Non-performing assets to total assets.. 0.37% 0.24%
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. Doubtful, substandard and special mention loans are reserved at 60.0%, 17.5% and 5.0% respectively. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency, no longer than 90 days delinquent. Unclassified loans are reserved at different percentages based on our perception of the inherent losses in the type of loan. The conforming 1-4 family loans in the portfolio are reserved at lower percentages. Reserve percentages are based on each individual lending program and its loss history and underwriting characteristics including loan to value, credit score, debt coverage, collateral, and capacity to service debt. We update credit scores on our portfolio approximately every eighteen months and analyze based on loan plan, loan to value, and credit score. This analysis is used to validate the loan loss reserve matrix as well as assist in establishing overall lending direction. 58 Noninterest Income Noninterest income decreased to $1.9 million for the year ended September 30, 2000 compared with $38.7 million in the prior year. The primary cause of the decrease was that non-interest income for the year ended September 30, 1999 included a $35.9 million gain on the sale of Freddie Mac stock. Excluding the gain on disposition of Freddie Mac stock, non-interest income decreased $1.0 million from $2.9 million to $1.9 million. Noninterest income for the year ended September 30, 1999 included $448,000 of equity in earnings of limited partnerships for which there was a $29,000 loss recognized in 2000. The limited partnerships are involved in mortgage loan servicing. Accordingly, income substantially fluctuates based on the underlying market value of related mortgage servicing rights. This market value is impacted by loan prepayment activity and the future expectation of such activity. As rates fall, the level of prepayment and expectation for future prepayments increase which results in lower market values for the underlying servicing rights. Loan prepayments and a decline in interest rates in the last six months of fiscal 2000 adversely affected our equity in earnings of limited partnerships. Noninterest income for the year ended September 30, 1999 as compared to the same period in 2000 was also higher due to comparative gains on the sale of loans and servicing released loan fees. Despite an increased volume of sales, gains in fiscal 2000 declined as a result of declining margins in the secondary market and an overall rising interest rate environment during the year ended September 30, 2000. Loss on sale of mortgage-backed securities was $128,000 for the year ended September 30, 2000 as compared to a gain of $396,000 for the same period in 1999, a difference of $524,000 in income for the year ended September 30, 2000. The losses resulted on these sales during 2000 as CharterBank sought to decrease its investment in fixed rate mortgage related securities. Deposit fees increased to $701,000 from $377,000 due to the additional transaction deposits acquired in the Citizens acquisition and a reevaluation of the fee structure on deposit accounts. Noninterest Expense Total noninterest expense increased $5.2 million, or 48.3%, to $15.9 million for the year ended September 30, 2000 compared with $10.7 million for the prior year. The primary causes of the increase were the $4.5 million amortization and impairment of intangible assets recorded in fiscal 2000 versus $67,000 of amortization in fiscal 1999 and increases in salaries and benefits due to additional employees. Salaries and employee benefits expense increased $763,000 from $4.2 million for the year ended September 30, 1999 compared to $5.0 million for the same time period in 2000. Major causes include the addition of employees through the Citizens acquisition and new personnel employed in both the residential and commercial real estate portions of CharterBank. Occupancy and equipment expenses increased $729,000, or 44.7%, for the year ended September 30, 2000 as compared to the same period in 1999 due to the expense of properties acquired in the Citizens acquisition for the entire fiscal year in 2000. 59 Amortization and impairment of intangible assets increased to $4.5 million for the year ended September 30, 2000 from $67,000 for the year ended September 30, 1999. CharterBank recorded its normal amortization expense relating to intangible assets acquired in the Citizens acquisition of $930,000 and $67,000 for the years ended September 30, 2000 and 1999, respectively. Additionally, CharterBank recorded an impairment loss of $3.6 million for the year ended September 30, 2000 based on an analysis of expected cash flows associated with the assets purchased and liabilities assumed in the Citizens acquisition. This analysis indicated that undiscounted future cash flows associated with these assets and liabilities would be negative and therefore insufficient to recover the carrying amount of the related intangible assets. The anticipated benefit from these intangible assets was originally considered marginal as evidenced by the five year amortization period. After the first year, it became evident that even these marginal benefits would not be realized as loans were being charged- off sooner than anticipated, high yield loans were paying off sooner than anticipated and the anticipated cost savings were not materializing. Legal and professional increased to $1.5 million for the year ended September 30, 2000 from $753,000 for the year ended September 30, 1999. The high level of professional fees and expenses in fiscal 2000 was attributable to expenses related to regulatory applications for Charter Insurance Company and the withdrawn application to reorganize CharterBank into a non-stock mutual holding company. Charitable contributions dropped from $2.2 million for the year ended September 30, 1999 to $62,000 for the same time period in 2000. The 1999 charitable contribution was primarily a donation of Freddie Mac stock to The Charter Foundation. The donation was made pursuant to CharterBank's desire to support The Charter Foundation and its community efforts and to the extent that contributions to The Charter Foundation provide tax benefits. Income Taxes Income taxes decreased from $14.4 million for the year ended September 30, 1999 to $1.3 million for the year ended September 30, 2000. The 1999 income tax expense included $12.5 million attributable to the gain on the sale of Freddie Mac stock. The effective tax rate was 59.7% in 2000 and 34.7% in 1999. The 2000 effective tax rate was exorbitantly high because of the high level of goodwill amortization, which is not deductible, compared to taxable income. In both fiscal 2000 and fiscal 1999, the dividends received deduction relating to 70% of the Freddie Mac cash dividends received has reduced federal income tax. There can be no assurance that future periods will result in similar benefits. Comparison of Operating Results for the Years Ended September 30, 1999 and 1998 General Net income for the year ended September 30, 1999 increased $26.6 million to $27.0 million from $475,000 for the year ended September 30, 1998. The most significant factor affecting net income for the year ended September 30, 1999 was a $35.9 million gain on the sale of Freddie Mac stock. No Freddie Mac stock was sold during 1998. Equity in earnings of limited partnerships was $448,000 for the year ended September 30, 1999 compared with a loss 60 of $5.8 million for the year ended September 30, 1998. The equity loss of limited partnerships in 1998 was primarily due to the decline in value of mortgage servicing rights assets owned by the partnerships due to declining interest rates leading to significant refinancing activity. During 1999, the interest rate environment led to a small recovery in the mortgage servicing rights. The Citizens acquisition did not have a significant impact on operating results for the year ended September 30, 1999 as only one month of income and expense was included in net income. Other comprehensive loss for the year ended September 30, 1999 was $23.7 million compared to other comprehensive income of $51.6 million in the prior year. The decline in comprehensive income was primarily due to a decline in market value of our securities portfolio due to increasing interest rates and the decrease in unrealized gains attributable to the sale of Freddie Mac stock. Comprehensive Income Other comprehensive loss for the year ended September 30, 1999 was $23.7 million compared to other comprehensive income of $51.6 million in the prior year. The price of a share of Freddie Mac stock increased from $49.625 at September 30, 1998 to $52.00 at September 30, 1999. However, during the period, CharterBank sold or made charitable contributions of 605,000 shares which caused an overall reduction in unrealized gains on Freddie Mac stock. The other comprehensive income of $51.6 million for the year ended September 30, 1998 primarily resulted from an increase in the per share market price of Freddie Mac common stock from $35.25 at September 30, 1997 to $49.625 at September 30, 1998. The impact of appreciation in the price of Freddie Mac stock on our total comprehensive income in shown in the tables below.
Year Ended September 30, 1999 -------------------------------------------------------------- Market Price Total Market Unrealized Gain Shares Per Share Value Net of Tax --------- ------------ ------------- --------------- September 30, 1998 5,660,000 $49.625 $280,877,500 $170,171,359 September 30, 1999 5,055,000 52.000 262,860,000 157,167,965 ------- ------------ ------------ Change in Freddie Mac stock....... (605,000) $ 2.375 $(18,017,500) (13,003,394) Other comprehensive loss related to mortgage securities and other investments.......... (10,727,875) Total other comprehensive loss.... $(23,731,269) ============
61
Year Ended September 30, 1998 -------------------------------------------------------------- Market Price Total Market Unrealized Gain Shares Per Share Value Net of Tax --------- ------------ ------------- --------------- September 30, 1997 5,660,000 $35.250 $199,515,000 $119,498,794 September 30, 1998 5,660,000 49.625 280,877,500 170,171,359 ------- ------------ ------------ Change in Freddie Mac stock....... - $14.375 $ 81,362,500 50,672,565 Other comprehensive income related to mortgage securities and other investments.......... 931,912 Total other comprehensive income.. $ 51,604,477 ============
Interest Income Total interest and dividend income increased $7.8 million to $37.0 million for the year ended September 30, 1999 compared to $29.2 million for the same period in 1998. The primary causes of the increase were additional investments in mortgage related securities and additional income derived from growth within the residential and commercial real estate lending portfolios. The average balance of interest-earning assets excluding Freddie Mac stock increased $120.0 million to $476.6 million for the year ended September 30, 1999 as compared to $356.6 million for the year ended September 30, 1998. The average yield on interest-earning assets excluding Freddie Mac stock decreased 31 basis points for the year ended September 30, 1999 as compared to the prior year due to the growth in lower-yielding mortgage securities and U.S. Government Treasuries, as well as a slight decrease in yield on loans. Interest income on mortgage related securities increased by $4.4 million from the year ended September 30, 1998 to the year ended September 30, 1999, a 36.4% increase. As mentioned above, this increase was primarily caused by an increase in the average balance of these securities, which increased $73.4 million over the time period, a 39.0% increase. This increase was indicative of our strategy during 1999 to grow our balance sheet and leverage equity with wholesale investments funded primarily with borrowings. Interest income on investment debt securities increased $1.0 million, or 217.5%, to $1.5 million for the year ended September 30, 1999 from $480,000 for the year ended September 30, 1998 due to the U.S. Treasury investments held as part of our Year 2000 liquidity planning. Interest on loans increased $1.9 million, or 14.2%, to $15.0 million for the year ended September 30, 1999 as compared to $13.1 million for the same period in 1998. The average balance of loans increased $25.5 million to $176.0 million for the year ended September 30, 1999 as compared to $150.5 million for the year ended September 30, 1998. The bulk of the increase was due to growth in the residential mortgage loan portfolio resulting from success in marketing our 5-1 adjustable rate mortgage product in fiscal 1999. The average yield on loans decreased from 8.74% for the year ended September 30, 1998 to 8.53% for the same period in 1999 due to the lower interest rates that prevailed in the mortgage market during the majority of 1999. Dividends on Freddie Mac common stock increased from $2.6 million for the year ended September 30, 1998 to $2.9 million for the same period in 1999, a $350,000 increase. The 62 increase was primarily due to an increase in the quarterly dividend on Freddie Mac stock from $0.12 per share to $0.15 per share during the time period. Interest Expense Interest expense on deposits increased $4.4 million or 74.4%, to $10.4 million for the year ended September 30, 1999 compared with $6.0 million for year ended September 30, 1998. The increase in interest expense on deposits is almost entirely due to an increase in the average balance of deposits from $112.4 million for the year ended September 30, 1998 to $198.7 million over the same time period in 1999. The increases in balances were primarily the result of a build-up of wholesale deposits, brokered and credit union certificates of deposit, used to fund the increase in our investment portfolio and as a precaution for possible Year 2000 liquidity issues. The weighted average cost of total deposits decreased by a modest 7 basis points from 5.32% for the year ended September 30, 1998 to 5.25% for the same period in 1999 with the higher cost of brokered and credit union deposits offset by reduced rates on retail deposits in a lower interest rate environment. Interest expense on borrowed funds decreased $513,000 from $13.4 million for the year ended September 30, 1998 to $12.9 million for the year ended September 30, 1999 while the average balance of borrowings increased by $12.4 million from $235.5 million for the year ended September 30, 1998 to $247.9 million for the same time period in 1999. The decrease in interest expense was due to a 49 basis point decrease in the average cost of borrowed funds from 5.70% for the year ended September 30, 1998 to 5.21% for the 1999 period and resulted from lower wholesale short term interest rates. Net Interest Income Net interest income for the year ended September 30, 1999 increased $3.9 million or 39.5%, to $13.77 million compared with $9.8 million for the year ended September 30, 1998. The net interest rate spread - the difference between the average yield on average total interest-earning assets, excluding Freddie Mac stock, and the average cost of average total interest-bearing liabilities - increased 4 basis points from the 1998 period to the 1999 period. The net interest margin increased 23 basis points. Modest increases in net interest margin and interest rate spread were expected in the declining rate environment present during most of 1999 since our interest-bearing liabilities adjusted more quickly to market conditions than our interest-earning assets. This decrease was moderated by the increased leverage of lower spread on mortgage related securities and borrowings. CharterBank's net interest margin and net interest spread are low when compared to industry standards primarily due to two factors. First, the dividend rate as compared to the market value of our Freddie Mac stock is low. However, when compared to our cost basis in the investment, the dividend rate was almost 50%. Second, under our wholesale investment strategy, our assets include a high proportion of securities with rates lower than those that would typically be earned on loans and our liabilities include a high proportion of borrowings and wholesale deposits with higher costs than those typically paid on retail deposits. This lowers our net interest margin and net interest spread. However, our wholesale investment strategy has historically increased annual interest income. The high proportion of securities assets 63 and borrowings also lower the net interest spread and net interest margin compared to industry standards. Net interest income including Freddie Mac stock for the year ended September 30, 1999 increased $3.8 million, or 39.5%, to $13.6 million compared with $9.8 million for the year ended September 30, 1998. The net interest rate spread including Freddie Mac stock - the difference between the average yield on average total interest-earning assets including Freddie Mac stock and the average cost of average total interest-bearing liabilities - increased 24 basis points to negative 0.50% for the year ended September 30, 1999 from negative 0.74% for the prior year. The increase was attributable to growth in interest-earning assets other than our Freddie Mac stock during the year and an increase in the quarterly dividend per share of Freddie Mac stock during the year from $0.12 per share to $0.15 per share. Traditional bank performance measures such as the net interest rate spread and the net interest rate margin would improve as the proportion of earning assets invested in Freddie Mac stock is reduced. The average balance of the Freddie Mac stock was $306.4 million for the year ended September 30, 1999 as compared to $246.1 million for the year ended September 30, 1998. The net interest margin, which is net interest income including dividends on Freddie Mac stock divided by average total interest-earning assets, including Freddie Mac stock, increased 12 basis points to 1.74% for the year ended September 30, 1999. Provision for Loan Losses and Asset Quality During fiscal 1999, we provided $240,000 for loan losses, compared to $180,000 for the year ended September 30, 1998. The higher provision reflected higher inherent losses associated with growth in commercial real estate loans during the year ended September 30, 1999. The allowance for loan losses at September 30, 1999 was 2.67% of total loans compared with 1.22% at September 30, 1998. The increase in coverage was attributable to approximately $3.0 million in loan loss reserves that were acquired in the Citizens acquisition. The increased coverage reflected the significantly higher probable and inherent losses in the acquired loan portfolio. In particular, the consumer auto loan portfolio acquired in the Citizens acquisition was identified by management as containing significant inherent losses due to the payment history of many borrowers, low credit scores of many borrowers, significant collateral shortcomings, nonamortizing loans and the overall quality of the underwriting on these loans. With the Citizens acquisition closing late in fiscal 1999, management aggressively worked and charged off these loans during fiscal 2000. The table below shows total non-performing loans:
September 30, 1999 September 30, 1998 ------------------ ------------------ (In thousands) Total non-performing loans............. $1,989 $ 306 Foreclosed real estate, net............ 222 130 Total non-performing assets............ 2,211 436 Non-performing loans to total loans.... 0.93% 0.18% Non-performing assets to total assets.. 0.24% 0.06%
64 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. Doubtful, substandard and special mention loans are reserved at 60.0%, 17.5% and 5.0% respectively. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency. Unclassified loans are reserved at different percentages based on our perception of the inherent losses in the type of loan. Noninterest Income Total noninterest income increased $42.0 million to $38.7 million for the year ended September 30, 1999 from a loss of $3.3 million for the year ended September 30, 1998. The increase was primarily due to a $35.9 million gain on the sale of Freddie Mac stock and $448,000 of equity in earnings of limited partnerships during fiscal 1999 as compared with no gains on the sale of Freddie Mac stock and a $5.8 million equity in loss of limited partnerships during 1998. The 1998 equity in loss of limited partnerships resulted from a significant decline in the value of mortgage servicing rights owned by the partnerships resulting from decreases in mortgage interest rates. As rates stabilized and increased slightly during the last quarter of the year ended September 30, 1999, prepayments slowed and modest income resulted. Freddie Mac stock was sold in 1999 to improve our regulatory capital and liquidity as a Year 2000 precaution. Additionally, gain on sale of loans increased $103,000 in the 1999 period compared to 1998. The increase was attributable to the increase in production of residential mortgage loans and the subsequent sales of these loans to the secondary market that occurred as interest rates were declining during most of fiscal year 1999. Loan servicing fee income increased $63,000 as management retained servicing on a portion of the loans that were sold to institutional investors such as Freddie Mac. Noninterest Expense Total noninterest expense increased $4.1 million or 62.3%, to $10.7 million for the year ended September 30, 1999 compared with $6.6 million for the prior year. Charitable contributions were $2.2 million during the year ended September 30, 1999 as compared to $25,000 during 1998. This increase was primarily due to a $2.1 million contribution of Freddie Mac stock to The Charter Foundation. The donation resulted in tax benefits for CharterBank. Salaries and employee benefits increased by $694,000 from September 30, 1998 to September 30, 1999 primarily due to increased short-term and long-term incentive compensation, routine salary adjustments, and the addition of approximately 30 full time equivalent employees resulting from the Citizens acquisition. Occupancy and equipment expenses increased $317,000 as we made equipment replacements and upgrades in preparation for Year 2000, opened a loan production office and made replacements due to the Citizens acquisition. Professional fees for the year ended September 30, 1999 increased by $380,000 to $753,000 from $373,000 for the prior year. The increase in the professional fee expense was attributable to tax consulting in connection with the sale of the Freddie Mac common stock and the fees associated with the formation of Charter Insurance Company and CharterBank's subsequently withdrawn application for reorganization into a non-stock mutual holding company. 65 Income Taxes Income taxes increased $15.2 million to $14.4 million for the year ended September 30, 1999, resulting in an effective tax rate of 34.7% in fiscal 1999. The primary reason for the increase was the approximately $35.0 million pre-tax gain on the sale of Freddie Mac stock during the year ended September 30, 1999. The increase in the effective tax rate is due to the high level of taxable income which minimized the effect of the dividends received deduction on the reduction of the effective tax rate. In fiscal 1998, we had a tax benefit of $818,000 for the year due to the operating loss of $343,000 for the year and the dividends received deduction on Freddie Mac stock. 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 Federal Home Loan Bank based on eligible collateral of loans and securities up to a limit of 30% of assets. At March 31, 2001 and September 30, 2000, our maximum borrowing capacity from the Federal Home Loan Bank is approximately $280.5 million and $283.9 million, respectively. At March 31, 2001 and September 30, 2000 we had outstanding borrowings of $236.8 million and $234.8 million with unused borrowing capacity of $43.7 million and $49.1 million respectively. 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. We can also obtain funds using our Freddie Mac 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 Federal Home Loan Bank, 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 March 31, 2001, repurchase agreements totaled $115.6 million, a $1.9 million decrease over the amount outstanding at September 30, 2000 of $117.5 million. The funding for this reduction in wholesale deposits came from the sale of fixed-rate mortgage securities. Wholesale deposits were $40.9 million at March 31, 2001 as compared to $129.9 million at September 30, 2000. Loan repayment 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 competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. 66 Our primary investing activities are the origination of one- to four-family real estate, commercial real estate, commercial and consumer loans, and the purchase of mortgage and investment securities. During the six months ended March 31, 2001, we originated approximately $59.3 million in total loans. Residential mortgage loans accounted for 64.1 % of the originations, construction loans accounted for 18.4% of the originations and commercial real estate for 13.4% of the originations during the six month period ended March 31, 2001. During the year ended September 30, 2000, we originated loans of approximately $171.2 million, and during the comparable period of 1999 we originated loans of approximately $175.5 million excluding loans acquired in the Citizens acquisition. Residential mortgage loans accounted for 54.0% of total loan originations for fiscal 2000 as compared to 79.5% of total loans originated for fiscal 1999. Commercial real estate loans accounted for 32.4% of total originations for fiscal 2000 as compared to 6.1% of total origination for fiscal 1999. This reflects management's strategy of increasing the amount of commercial real estate loans. Purchases of investment securities totaled $46.5 million for the six months ended March 31, 2001 and $124.1 million for the year ended September 30, 2000 and $474.3 million for the year ended September 30, 1999. At March 31, 2001 and September 30, 2000, CharterBank had loan commitments to borrowers of approximately $7.6 million and $5.1 million, respectively and available home equity and unadvanced lines of credit of approximately $9.4 million and $7.4 million, respectively. Deposit flows are affected by the level of interest rates, by the interest rates and products offered by competitors and by other factors. Total deposits were $185.2 million at March 31, 2001, a $89.1 million decrease from the $274.3 million balance at September 30, 2000. The decrease reflects the maturing of approximately $89.3 million in brokered deposits during the period which were replaced with borrowings. Total deposits decreased by $8.6 million during the year ended September 30, 2000 as compared to fiscal 1999, as retail certificates of deposits obtained through the Citizens acquisition matured and some were not renewed. Total deposits of $283.0 million at September 30, 1999, a $147.4 million increase over total deposits of $135.6 million at September 30, 1998, reflects the acquisition of brokered deposits as a Year 2000 precaution and additional deposit accounts acquired in the Citizens acquisition. Time deposit accounts scheduled to mature within one year were $112.3 million and $202.2 million at March 31, 2001 and September 30, 2000, respectively. While CharterBank has experienced deposit run-off, we anticipate that a significant portion of these certificates of deposit will remain on deposit. Management is currently working on a new deposit pricing strategy that we believe will strengthen our focus on customer relationships. CharterBank has traditionally been a well-capitalized savings bank, due, among other factors, to the unrealized gains on Freddie Mac stock. At March 31, 2001 and September 30, 2000, we exceeded each of the applicable regulatory capital requirements. Our tier 1 capital was $54.3 million and $51.7 million at March 31, 2001 and September 30, 2000, respectively. Tier 1 capital represented 14.2% and 13.2% of risk-weighted assets at March 31, 2001 and September 30, 2000 respectively. Tier 1 capital represented 8.8% and 7.4% of total regulatory assets at March 31, 2001 and September 30, 2000 which exceeds the well capitalized requirements of 5.0%. At March 31, 2001 and September 30, 2000, respectively, we had a risk-based total capital of $108.7 million and $103.4 million, a risk-based capital ratio of 28.4% and 26.5% which significantly exceeds the applicable well capitalized requirements of 10%. We had additional unrealized gains that could not be included in Tier 2 capital due to the limitation that Tier 2 capital cannot exceed Tier 1 capital. 67 The construction of our new Auburn branch is under contract for $1.7 million. We anticipate incurring an additional $200,000 of equipment related capital expenses in connection with the Auburn branch. We also anticipate that the purchase of a customer voice response system and Internet banking software will cost approximately $250,000. Establishing other satellite 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 2001. We do not have any balloon or other payments due on any long- term obligations or any off-balance sheet items other than the commitments and unused lines of credit noted above. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board 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. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those financial instruments at fair value. If certain conditions are met, an entity may elect to designate a derivative as follows: a hedge of the exposure or changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment that are attributable to a particular risk. A hedge of the exposure to variability in the cash flows of a recognized asset or liability, or of a forecasted transaction, that is attributable to a particular risk. Or, a hedge of the foreign currency exposure of an unrecognized firm commitment, an available-for-sale security, a forecasted transaction, or a net investment in a foreign operation. This Statement generally provides for matching the timing of the recognition of the gain or loss of the hedging instrument with the recognition of the changes in the fair value of the item being hedged. Depending on the type of hedge, such recognition will be in either net income or other comprehensive income. For a derivative not designated as a hedging instrument, changes in fair value are recognized in net income in the period of change. 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 amends the accounting and reporting standards of Statement No. 133 for certain derivative instruments and certain hedging activities. CharterBank adopted SFAS No. 133 and its related amendments on October 1, 2000 and, accordingly, conducted an assessment of the nature of its derivative instruments including an assessment of its embedded derivatives, which were 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 October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage- Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise", which amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities". This statement requires that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities 68 or other retained interests based on its ability and intent to sell or hold those investments. CharterBank's adoption of this statement on January 1, 1999, did not have a material impact on our financial position or results of operation. In September 2000, FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No. 125 issued in June 1996 and is effective for fiscal years ending after December 15, 2000. SFAS No. 140 addresses implementation issues that were identified in applying SFAS No. 125. SFAS No. 140 is not expected to have a material impact on CharterBank. Impact of Inflation and Changing Prices The consolidated financial statements and accompanying notes of CharterBank have been prepared in accordance with 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. BUSINESS OF CHARTERBANK General We are a federally-chartered mutual savings and loan association founded in 1954. Our mission is to be a profitable community-oriented provider of banking products and services to individuals and small businesses, including residential and commercial mortgages, consumer loans, commercial loans, and a variety of deposit instruments. We operate through four full service banking offices and three loan production offices located in west-central Georgia and east-central Alabama. Our revenues are derived principally from interest on our loans and mortgage-backed securities and interest and dividends on our investment securities, including our investment in Freddie Mac stock. Our primary sources of funds are deposits (both wholesale and retail), scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities, reverse repurchase agreements, deferred income taxes, and funds provided by operations and borrowings. We also use borrowings from the Federal Home Loan Bank as a source of funds for loans, investments and other assets. See "-- Sources of Funds." The largest component of our expenses is the interest that we pay on deposits and borrowings. 69 Market Area We conduct our operations in west-central Georgia and east-central Alabama through our main office in West Point, Georgia, two branch offices in Valley, Alabama and a branch office in LaGrange, Georgia. The main office and two Valley, Alabama offices serve the "Valley" region of our market area which consists of West Point, Georgia, and Lanett and Valley, Alabama. The LaGrange office serves an adjacent community on Interstate 85. In addition, we are building a branch in Auburn, Alabama which is expected to open in October, 2001. We also operate loan production offices in Newnan and Columbus, Georgia, and in Auburn, Alabama. The Valley area is a small market area and we hope to expand our market area to nearby counties along the Interstate I-85 corridor which are larger and have more growth potential. The economy of our market areas has been historically supported by the textile industry. Manufacturing represents more than 30% of the workers in our market area. Over the last several decades, government, services and related trade have expanded significantly. Several large employers in our market area include the corporate headquarters of West Point Stevens, Powertel Inc., Batson Cook, ITC Deltacom and Intercall. Powertel Inc., which is headquartered in West Point, Georgia has recently been sold to VoiceStream, which is in the process of merging with Deutsche Telekom. Unemployment in our market area is generally low and, specifically, the unemployment rates in Troup and Chambers Counties are below the national average. The median household income in our area is also below national and state-wide levels. Our loan production offices are located in more urbanized areas, generally with comparatively higher income levels. We believe that our new Auburn branch office and the areas served by our loan production offices will provide the best opportunity for growth and significant opportunities for profitable banking relationships. Competition We face intense competition both in making loans and attracting deposits. West-central Georgia and east-central Alabama have a high concentration of financial institutions, many of which are branches of large money center, super- regional and regional banks which have resulted from the consolidation of the banking industry in Alabama and Georgia. Many of these competitors have greater resources than we do and may offer services that we do not provide. Our competition for loans comes from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, insurance companies and brokerage and investment banking firms. Our most direct competition for deposits has historically come from commercial banks, savings banks, savings and loan associations, credit unions and mutual funds. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds and from brokerage firms and insurance companies. Lending Activities Loan Portfolio Composition. Our loan portfolio consists of one to four- family residential first mortgage loans, commercial real estate loans, real estate construction loans, consumer loans and commercial loans. 70 At March 31, 2001 and September 30, 2000, we had total loans receivable of $252.3 million and $259.7 million, respectively. Approximately $27.0 million of the growth in loans between September 30, 1998 and September 30, 1999 was due to loans acquired in the Citizens acquisition. Residential mortgage loans comprised $153.3 million, or 60.8%, and $152.8 million, or 58.9%, of total loans at March 31, 2001 and September 30, 2000, respectively. Loans secured by mortgages on commercial real estate totaled $59.2 million at March 31, 2001 and $60.8 million at September 30, 2000. The $60.8 million balance of these loans at September 30, 2000 was a $14.3 million or 30.7% increase over the balance of commercial real estate loans at September 30, 1999. Management's strategy is to grow the commercial real estate loan portfolio. We hired additional personnel in the commercial lending area during fiscal 2000 to strengthen our operations in this area. At March 31, 2001, management estimates that approximately $20.0 million of total commercial real estate loans are secured by real estate in the Atlanta metropolitan area, approximately $25.0 million of total commercial real estate loans are secured by real estate in the local bank market, and approximately $15.0 million of total commercial real estate loans are secured by commercial real estate in other areas, primarily in the southeast United States. We expect continued growth in our commercial real estate portfolio in the future. The remaining portion of our loan portfolio at March 31, 2001 and September 30, 2000 consisted of consumer loans totaling $26.7 million and $29.9 million, respectively, real estate construction loans of $6.0 million and $7.1 million, respectively, and commercial loans of $7.1 million and $9.0 million, respectively. Our consumer loan portfolio at March 31, 2001 contains about $2.1 million in auto loans acquired as a result of the Citizens acquisition. Our loans are subject to federal and state law and regulations. The interest rates we charge on loans are affected principally by the demand for loans, the supply of money available for lending purposes and the interest rates offered by our competitors. These factors are, in turn, affected by general and local economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters. 71 The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated.
At March 31, At September 30 ---------------------------------------------------------------------------- 2001 2000 1999 1998 ------------------- ------------------ ------------------ ------------------ Percent Percent Percent Percent of of of of Amount Total Amount Total Amount Total Amount Total Amount -------- ------- -------- ------- -------- ------- -------- ------- -------- (Dollars in Thousands) 1-4 family residential real estate(1).......... $153,320 60.8% $152,822 58.9% $132,036 61.6% $116,395 69.0% $101,399 Commercial real estate..... 59,194 23.4 60,838 23.4 46,545 21.7 34,343 20.4 22,419 Consumer and other(2)...... 26,718 10.6 29,915 11.5 24,353 11.4 9,026 5.4 6,126 Commercial................. 7,096 2.8 8,987 3.5 3,245 1.5 3,601 2.1 3,116 Real estate construction... 6,003 2.4 7,138 2.7 8,038 3.8 5,295 3.1 4,390 -------- ----- -------- ----- -------- ----- -------- ----- -------- Total loans............. 252,331 100.0% 259,700 100.0% 214,217 100.0% 168,660 100.0% 137,450 ===== ===== ===== ===== Less: Net deferred loan costs (fees).................. 43 113 (51) (246) (348) Allowance for loan losses.. (5,375) (6,346) (5,710) (2,054) (1,846) -------- -------- -------- -------- -------- Loans receivable, net... $246,999 $253,467 $208,456 $166,360 $135,256 ======== ======== ======== ======== ======== --------------------------------- 1997 1996 --------------------------------- Percent Percent of of Total Amount Total ------- --------- ------- 1-4 family residential real estate(1).......... 73.7% $ 78,951 78.9% Commercial real estate..... 16.3 10,902 10.9 Consumer and other(2)...... 4.5 5,411 5.4 Commercial................. 2.3 3,878 3.9 Real estate construction... 3.2 875 0.9 ----- -------- ----- Total loans............. 100.0% 100,017 100.0% ===== ===== Less: Net deferred loan costs (fees).................. (285) Allowance for loan losses.. (1,627) -------- Loans receivable, net... $ 98,105 ========
----------------------------------- (1) Excludes loans held for sale. (2) Includes home equity loans and second mortgage loans. 72 Loan Maturity and Repricing. The following table shows the repricing dates or contractual maturity dates as of March 31, 2001. The table does not reflect prepayments or scheduled principal amortization. Demand loans, loans having no stated maturity, and overdrafts are shown as due in one year or less.
At March 31, 2001 --------------------------------------------------------------------------- 1-4 family Residential Real Estate Commercial Consumer Real Estate Loans Real Estate and Other Commercial Construction Totals ----------- ----------- --------- ---------- ------------ ------ (In thousands) Amounts due: Within one year...................... $ 50,471 $15,444 $10,715 $3,164 $6,003 $ 85,797 After one year: One to three years................ 29,829 4,882 2,968 649 - 38,328 Three to five years............... 47,126 14,531 1,506 2,957 - 66,120 Five to ten years................. 7,759 18,201 4,234 245 - 30,439 Over ten years.................... 18,135 6,136 7,295 81 - 31,647 -------- ------- ------- ------ ------------ -------- Total due after one year............. 102,849 43,750 16,003 3,932 - 166,534 -------- ------- ------- ------ ------------ -------- Total amount due: $153,320 $59,194 $26,718 $7,096 $6,003 $252,331 ======== ======= ======= ====== ============ ========
The following table presents, as of March 31, 2001, the dollar amount of all loans contractually due or scheduled to reprice after March 31, 2002 and whether such loans have fixed interest rates or adjustable interest rates.
Due After March 31, 2002 ---------------------------- Fixed Adjustable Total ----- ---------- ----- (In Thousands) 1-4 family residential real estate.......... $31,707 $71,142 $102,849 Commercial real estate.. 30,160 13,590 43,750 Consumer and other...... 16,003 - 16,003 Commercial.............. 2,991 941 3,932 ------- ------- -------- Total loans.......... $80,861 $85,673 $166,534 ======= ======= ========
73 The following table presents our loan originations, purchases, sales and principal payments for the periods indicated.
For the Six Months Ended March 31, For the Years Ended September 30, ---------------------- ---------------------------------- 2001 2000 2000 1999 1998 ---------- ------- -------- -------- --------- (In thousands) Loans(1): Balance outstanding at beginning of period..... $259,700 $214,217 $214,217 $168,660 $137,450 Originations: 1-4 family residential real estate............. 38,008 46,839 92,504 139,499 95,766 1-4 family real estate acquired in Citizens acquisition...................... - - - 8,405 - Commercial real estate and commercial.......... 7,975 16,736 55,445 10,725 16,561 Commercial real estate and commercial acquired in Citizens acquisition............. - - - 9,122 - Consumer and other loans....................... 2,327 8,730 15,506 10,769 4,576 Consumer and other loans acquired through Citizens acquisition................. - - - 9,455 - Real estate construction....................... 10,953 8,596 7,696 14,457 8,202 Real estate construction loans acquired through Citizens acquisition................. - - - 369 - -------- -------- -------- -------- -------- Total originations and loans acquired through Citizens acquisition................ 59,263 80,901 171,151 202,801 125,105 Less: Principal repayments, unadvanced funds and other, net................................... 42,645 32,756 87,430 133,428 30,590 Sale of residential mortgage loans, principal balance...................................... 22,061 16,716 36,186 23,129 63,204 Loan charge-offs (recoveries), and transfers to foreclosed real estate.................... 1,926 1,329 2,052 687 101 -------- -------- -------- -------- -------- Total deductions............................. 66,632 50,801 125,668 157,244 93,895 Net loan activity.............................. (7,369) 30,100 45,483 45,557 31,210 -------- -------- -------- -------- -------- Ending balance............................... $252,331 $244,317 $259,700 $214,217 $168,660 ======== ======== ======== ======== ========
- ------------------------- (1) Excludes loans held for sale. 74 Residential Mortgage Loans and Originations. We emphasize the origination of first and second mortgages secured by one- to four-family properties primarily within Georgia and Alabama. At March 31, 2001 and September 30, 2000, loans on one-to-four-family properties accounted for 60.8% and 58.9% of our total loan portfolio, respectively. Our mortgage origination strategy is to offer a broad array of products to meet customer needs. These products include nonconforming loans which are held in our portfolio, fixed rate loans sold to investors with servicing released for fee income, and fixed rate loans sold to the secondary market where we retain the servicing rights. Management's current strategy has been to sell more loans with servicing released, as we believe that this improves our overall profitability. Current originations of nonconforming loans are nonconforming due to property or income exceptions. Our loan portfolio also contains some loans that are nonconforming due to loan to value or credit exceptions. Our originations of all types of residential first mortgages amounted to $38.0 million for the six months ending March 31, 2001, $92.5 million for the year ended September 30, 2000, $139.5 million for the year ended September 30, 1999, and $95.8 million for the year ended September 30, 1998. Due to the low interest rate environment, a significant portion of loans originated in 1998 and 1999 were refinances, including refinances of our existing portfolio loans and loans in our servicing portfolio. The average size of our residential mortgage loans originated in the quarter ended March 31, 2001 was $108,000 and $96,000 for the year ended September 30, 2000. We utilize a variety of strategies to originate new mortgage loans including third party alliances with mortgage lenders, dedicated mortgage originators, and branch referrals. Our mortgage originators develop referrals from real estate brokers, attorneys, past customers and other key referral sources. We offer a variety of mortgage products to allow customers to select the best product for their needs. A description of the products and underwriting guidelines are highlighted below. Adjustable Rate Mortgage Loans. We offer a variety of adjustable rate mortgage products that initially adjust after one, three, five, or seven years. After the initial term, adjustable rate mortgage loans generally adjust on an annual basis at a fixed spread over the monthly average yield on United States Treasury securities. The adjusted rates are based on a constant maturity of one year (constant treasury maturity index). The interest rate adjustments are generally subject to a maximum increase of 2% per adjustment period and the aggregate adjustment is generally subject to a maximum increase of 6% over the life of the loan. We originated approximately $10.0 million in one- to four- family adjustable rate mortgage loans in the six months ended March 31, 2001 and approximately $70.0 million in the year ended September 30, 2000. At March 31, 2001 and September 30, 2000, 70.8% and 75.3%, respectively, of the residential mortgage loans in our portfolio were adjustable rate mortgage loans. Generally, we offer adjustable rate mortgage loans in amounts up to $1.0 million depending on the loan-to-value ratio and the type of property. The loan- to-value ratio is the loan amount divided by the lower of (a) the appraised value of the property or (b) the purchase price 75 of the property. The loan-to-value ratio is commonly used by financial institutions as one measure of potential exposure to risk. Our most popular portfolio product is a 5-1 adjustable rate loan that is not conforming to secondary market standards due to property or income exceptions. This type of loan yields a fixed rate for the first five years and adjusts to a pre-determined index annually thereafter. At March 31, 2001, our portfolio contained $68.9 million of 5-1 and similar adjustable rate loans with a weighted average rate of 8.21%. Loans on owner occupied one- to four-family residences are generally subject to a maximum loan to value ratio of 80% or have mortgage insurance. All adjustable rate mortgage loans are underwritten using specifications set by Freddie Mac. Generally, our adjustable rate mortgage loans with loan balances below the Freddie Mac maximum loan standard ($275,000 for a single- family property) are conforming loans maintained in our portfolio. Jumbo loans (amounts above the secondary market conforming standards) are considered non- conforming but may be saleable to other investors. Fixed Rate Mortgages Sold Servicing Released. We offer a variety of fixed- rate products that we sell to investors on a servicing released basis. These loans are underwritten to the investors' standards and are generally sold to the investor after the loan closes. The rate on these loans is committed with the investor on a best efforts basis when the borrower locks in their interest rate. Gains on sales of residential loans amounted to $536,000 and $730,000 of our non-interest income for the six months ended March 31, 2001 and the year ended September 30, 2000, respectively. Fixed Rate Mortgages Sold with Servicing Retained. We are an approved seller/servicer for Freddie Mac. Our fixed rate loans are underwritten to comply with Freddie Mac standards for sale to this investor. At March 31, 2001 and September 30, 2000, CharterBank serviced loans for Freddie Mac with an aggregate balance of $141.4 million and $152.8 million, respectively. Home Equity Credit Lines and Second Mortgages. We offer home equity lines of credit as a complement to our one- to four-family lending activities. We believe that offering home equity credit lines helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. Home equity credit lines provide adjustable-rate loans secured by a first or second mortgage on owner-occupied one- to four-family residences located primarily in Georgia and Alabama. Home equity credit lines enable customers to borrow at rates tied to the prime rate as reported in The Wall Street Journal. The underwriting standards applicable to home equity credit lines are generally the same as one- to four-family first mortgage loans with the exception of loan to value ratios which may go to 100%. Starting in 1999, equity lines with loan to value ratios over 80% were generally insured with lender paid mortgage insurance. At March 31, 2001 and September 30, 2000, we had $21.1 million and $22.3 million, respectively, of home equity and second mortgage loans. We also had $4.9 million and $5.0 million of unfunded home equity commitments at March 31, 2001 and September 30, 2000, respectively 76 Commercial Real Estate Loans. CharterBank embarked on a strategy of increasing its commercial real estate loan portfolio during fiscal 1998. We originate commercial real estate loans secured by properties located in our primary market area and metropolitan Atlanta. In underwriting commercial real estate loans, we consider not only the property's historic cash flow, but also its current and projected occupancy, location, and physical condition. We generally lend up to a maximum loan-to-value ratio of 80% on commercial properties and require a minimum debt coverage ratio of 1.25 or compensating factors. At March 31, 2001 and September 30, 2000, respectively, we had $59.2 million and $60.8 million of loans in our commercial real estate portfolio. The average loan size at September 30, 2000 is larger than the average loan size in prior years due to several multi-million commercial loans that were closed during fiscal 2000. Our largest loan exposure is a commercial real estate construction permanent loan with a commitment of $5.6 million at September 30, 2000 and $5.2 million at March 31, 2001 with approximately $371,000 drawn. This loan was secured by a hotel located in Auburn, Alabama. We also have a $15.0 million credit line secured by two properties in Florida. CharterBank sold 66.6% of this relationship in a loan participation, leaving us with a maximum exposure of $5.0 million on the line of credit. Commercial real estate lending involves additional risks compared with one- to four-family residential lending. Payments on loans secured by commercial real estate properties often depend on the successful management of the properties, on the amount of rent from the properties, or on the level of expenses needed to maintain the properties. Repayment of such loans may therefore be adversely affected by conditions in the real estate market or the general economy. Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. In order to mitigate this risk, we monitor our loan concentration and our loan policies generally limit the amount of loans to a single borrower or group of borrowers. We also utilize the services of an outside consultant to conduct credit quality reviews of the commercial loan portfolio. Because of increased risks associated with commercial real estate loans, our commercial real estate loans generally have higher rates and shorter maturities than residential mortgage loans. We usually offer commercial real estate loans at fixed rate and adjustable rates tied to the prime rate or to yields on U.S. Treasury securities. The terms of such fixed rate loans generally do not exceed 25 years. We closely monitor the performance of our commercial real estate loan portfolio. We are in the process of expanding our internal risk rating system for our commercial real estate loans. In order to update the grades assigned to individual commercial real estate loans under the internal risk rating system, we will be regrading the entire commercial real estate loan portfolio according to the new criteria established. Commercial Loans. Commercial loans generally are limited to terms of five years or less. Whenever possible, we collateralize these loans with a lien on commercial real estate, or alternatively, with a lien on business assets and equipment. We also generally require the personal guarantee of the business owner. Interest rates on commercial loans generally have higher yields than residential or commercial real estate loans due to the risk inherent in this type of loan. Commercial loans are generally considered to involve a higher degree of risk than residential or commercial real estate loans because the collateral may be in the form of intangible assets and/or inventory subject to market obsolescence. Commercial loans may also involve 77 relatively large loan balances to single borrowers or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation and income stream of the borrower. Such risks can be significantly affected by economic conditions. In addition, business lending generally requires substantially greater supervision efforts by our management compared to residential or commercial real estate lending. In this regard, we have recently hired three senior commercial banking officers who have extensive experience in business banking in our market. Commercial loans however, comprise a small portion of our loan portfolio, at approximately 3% of total loans receivable at March 31, 2001 and September 30, 2000. Consumer Loans. We offer a variety of consumer loans to retail customers in the communities we serve in order to increase the yield on our loan portfolio. Examples of our consumer loans include: . home equity loans-open and closed end; . secured deposit loans; . credit lines tied to deposit accounts to provide overdraft protection; and . unsecured credit lines and installment loans. At March 31, 2001 and September 30, 2000, the consumer loan portfolio totaled $26.7 million and $29.9 million, respectively, or 10.6% and 11.5% of total loans. Consumer loans are generally originated at higher interest rates than residential and commercial mortgage loans and tend to have a higher credit risk than residential loans because they may be secured by a home with a loan-to- value of 100%, secured by rapidly depreciable assets, or unsecured. Despite these risks, our level of consumer loan delinquencies, excluding auto loans, has generally been low. We cannot assure you, however, that our delinquency rate on consumer loans will continue to remain low in the future, or that we will not incur future losses on these activities. At March 31, 2001, we had a total of $2.1 million of auto loans in our consumer loan portfolio. These loans were acquired in connection with the Citizens acquisition. The balance of the portfolio was approximately $7.0 million at the time of the Citizens acquisition. During due diligence, management identified numerous risks associated with the portfolio. Notably, underwriting standards on these loans were well below CharterBank standards. Many of the borrowers displayed low credit scores, had collateral shortages, or poor income coverage ratios. Management also discovered that over $1.0 million of these loans had balloon payments at the end of their terms and were not amortizing properly. Accordingly, many of these loans have had poor payment histories and CharterBank has continually worked this loan portfolio and charged off auto loans as appropriate. Charge-offs on the auto loan portfolio amounted to approximately $1.0 million for the six months ended March 31, 2001 and $470,000 for the year ending September 30, 2000. At March 31, 2001, management has established reserves of over $1,000,000 for consumer loans with the reserves on auto loans being the primary component of these reserves. 78 We make loans for up to 50% of the amount of a borrower's savings account or certificates of deposit balance. These savings secured loans totaled $855,000 and $639,000 at March 31, 2001 and September 30, 2000, respectively. Loan Approval Procedures and Authority. Our lending policies provide that various lending departments may review and approve loans and lines up to prescribed limits as follows: . Residential mortgage loans up to conforming limits of $275,000; . Commercial real estate mortgage loans up to $250,000 that meet our underwriting standards; . Home equity loans or lines for owner occupied one to four properties up to $250,000 that conform to our underwriting guidelines; . Home equity loans or lines up to $100,000 for vacation and non- owner occupied properties; . Unsecured loans up to $50,000; and . Commercial loans up to $250,000. All loan applications that exceed the above mentioned amounts up to $500,000 require a senior management loan authority approval and all loans above $500,000 require approval of either the Executive Committee of the Board of Directors or approval of the Board Loan Committee. In addition, on loans with a loan to value ratio of greater than 80%, we generally require the borrower to obtain private mortgage insurance. The following generally describes our current lending procedures for residential mortgages and home equity lines and loans. Upon receipt of a completed loan application from a prospective borrower, we order a credit report and verify other information. If necessary, we obtain additional financial or credit related information. We require an appraisal for all mortgage loans, except for home equity loans or lines where an alternative evaluation may be used to determine the loan to value ratio. Appraisals are performed by licensed or certified third-party appraisal firms and are reviewed by our lending department. We require title insurance or a title opinion on all mortgage loans, except for home equity lines and loans. We require borrowers to obtain hazard insurance and we may require borrowers to obtain flood insurance prior to closing. For properties with a private sewage disposal system, we also require evidence of compliance with applicable law on residential mortgage loans. Further, we generally require borrowers to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which we make disbursements for items such as real estate taxes, hazard insurance, flood insurance and private mortgage insurance premiums, if required. Commercial real estate loans are approved through the Bank's Credit Committee process. The Credit Committee consists of the President, the Executive Vice President, the Chief Financial Officer and certain other senior lending and credit officers. The Credit Committee has 79 authority to approve individual loans and modifications up to $500,000. Commercial real estate loans less than $250,000 may be approved outside the Committee process by an officer who has commercial real estate loan authority. Asset Quality One of our key operating objectives has been and continues to be the achievement of a high level of asset quality. We maintain a large proportion of loans secured by residential one- to four-family properties and commercial properties; we set sound credit standards for new loan originations; and we follow careful loan administration procedures. These practices and relatively favorable economic and real estate market conditions have resulted in a low level of non-performing assets in recent years. Subsequent to December 31, 2000, we strengthened our focus on credit risk by hiring additional personnel in the credit risk management area. Currently, we are re-assessing our loan review process and other credit risk factors in light of the new talent in this area. Delinquencies increased during the year ended September 30, 2000 due to loans acquired in the Citizens acquisition and higher delinquencies in nonconforming residential loans as the average age of these loans reaches the third year. Freddie Mac has estimated that most mortgage loans that encounter delinquency troubles usually begin in the third to sixth year of the mortgage. Delinquent Loans and Foreclosed Assets. Our policies require that management continuously monitor the status of the loan portfolio and report to the Loan Committee of the Board of Directors on a monthly basis. These reports include information on delinquent loans and foreclosed real estate, and our actions and plans to cure the delinquent status of the loans and to dispose of the foreclosed property. The Loan Committee approves action plans on all loans that are 90 days delinquent. The Loan committee consists of two outside directors and at least one Board member who is a member of management. One of the outside directors acts as Chairman of the Loan Committee, while other Board members rotate monthly in the second outside director position. The following table presents information regarding total nonaccrual loans, accruing loans delinquent 90 days or more, and foreclosed real estate as of the dates indicated. At March 31, 2001, and September 30, 2000, 1999 and 1998, we had $1.7 million, $2.8 million, $2.0 million, and $306,000, respectively, of nonperforming loans. If all nonaccrual loans had been performing in accordance with their original terms and had been outstanding from the earlier of the beginning of the period or origination, we would have recorded additional interest income on these loans of approximately $50,000 for the six month period ended March 31, 2001. For the year ended September 30, 2000, there would have been $176,000 of additional interest income recorded on these loans. 80
At September 30, At March 31, ------------------------------------------ 2001 2000 1999 1998 1997 1996 ----------- ------- ---- ---- ---- ----- (In thousands) Underperforming loans - accruing loans delinquent 90 days or more........... $ 574 $ 159 $ - $ - $ - $ - ====== ====== ====== ===== ====== ====== Total non-performing loans.............. 1,661 2,831 1,989 306 1,173 1,611 Foreclosed real estate, net............. 768 630 222 130 270 98 ------ ------ ------ ----- ------ ------ Total non-performing assets............. 2,429 3,461 2,211 436 1,443 1,709 ====== ====== ====== ===== ====== ====== Non-performing loans to total loans..... 0.66% 1.09% 0.93% 0.18% 0.85% 1.61% ====== ====== ====== ===== ====== ====== Non-performing assets to total assets... 0.26% 0.37% 0.24% 0.06% 0.29% 0.49% ====== ====== ====== ===== ====== ======
Nonperforming assets at March 31, 2001 and September 30, 2000, 1999 and 1998 were $2.4 million, $3.5 million, $2.2 million, and $436,000 respectively. Of these totals, $88,000, $824,000, $523,000, and $0 respectively represented auto loans. We generally stop accruing income when interest or principal payments are 90 days in arrears. We may stop accruing income on such loans earlier than 90 days when we consider the timely collectibility of interest or principal to be doubtful. We may continue to accrue interest income beyond 90 days if the loan is well secured and we determine that the ultimate collection of all principal and interest is not in doubt. When we designate nonaccrual loans, we reverse all outstanding interest that we had previously credited. If we receive a payment on a nonaccrual loan, we may recognize a portion of that payment as interest income, if we determine that the ultimate collectibility of principal is no longer in doubt. However, such loans would remain on nonaccrual status. All nonaccrual commercial real estate and commercial loans are classified as impaired loans. Impaired loans are individually assessed to determine whether the carrying value exceeds the fair value of the collateral or the present value of the undiscounted cash flow produced by the underlying collateral. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, are collectively evaluated for impairment. At March 31, 2001, September 30, 2000, and September 30, 1999, impaired loans totaled $400,000, $1,200,000 and $2,000,000 respectively. Approximately $309,000, $460,000, and $500,000 of total impaired loans at March 31, 2001, September 30, 2000, and September 30, 1999, respectively, relate to loans acquired through the Citizens acquisition. At March 31, 2001 and September 30, 2000 and 1999, we had no loans classified as troubled debt restructurings. Foreclosed real estate consists of property we have acquired through foreclosure or deed in lieu of foreclosure. Foreclosed real estate properties are initially recorded at the lower of the recorded investment in the loan or fair value. Thereafter, we carry foreclosed real estate at fair value less estimated selling costs. At March 31, 2001 and September 30, 2000 and 1999, respectively, we had $768,000, $630,000 and $222,000 in foreclosed real estate. 81 Allowance for Loan Losses. The following table presents the activity in our allowance for loan losses and other ratios at or for the dates indicated.
At or for Six Months Ended March 31, At or for Years Ended September 30, --------------------- ------------------------------------------------------ 2001 2000 2000 1999 1998 1997 1996 ------ ------- ----- ---- ---- ---- ----- (Dollars in Thousands) Balance at beginning of period............ $ 6,346 $ 5,710 $ 5,710 $ 2,054 $ 1,846 $ 1,627 $ 1,459 Loan loss reserve of acquired company(1)............................. - - - 3,752 - - - Charge-offs: 1-4 residential real estate............ (33) (25) (104) (49) (156) (37) (30) Commercial real estate................. - (91) (91) - - - - Commercial............................. (364) (21) (26) (133) (1) (2) - Consumer and other..................... (1,197) (349) (713) (238) (100) (84) (64) Real estate construction............... (23) (204) (204) - - - - -------- -------- -------- -------- -------- -------- -------- Total charge-offs...................... (1,617) (690) (1,138) (420) (257) (123) (94) -------- -------- -------- -------- -------- -------- -------- Recoveries: 1-4 residential real estate............ 119 1 32 1 25 - 3 Commercial real estate................. 21 18 18 - 220 - - Commercial............................. - 20 20 - - - 20 Consumer and other..................... 206 176 294 83 40 42 68 Real estate construction............... - - - - - - - -------- -------- -------- -------- -------- -------- -------- Total recoveries....................... 346 215 364 84 285 42 91 -------- -------- -------- -------- -------- -------- -------- Net (charge-offs) recoveries.............. (1,271) (475) (774) (336) 29 (81) (3) Provision for loan losses................. 300 180 1,410 240 180 300 171 -------- -------- -------- -------- -------- -------- -------- Balance at end of period.................. $ 5,375 $ 5,415 $ 6,346 $ 5,710 $ 2,054 $ 1,846 $ 1,627 ======== ======== ======== ======== ======== ======== ======== Total loans receivable (2)................ $252,331 $244,317 $259,700 $214,217 $168,660 $137,450 $100,017 ======== ======== ======== ======== ======== ======== ======== Average loans outstanding................. $257,750 $226,970 $242,868 $178,496 $153,404 $121,523 $ 82,135 ======== ======== ======== ======== ======== ======== ======== Allowance for loan losses as a percent of total loans receivable (2)................... 2.13% 2.22% 2.44% 2.67% 1.22% 1.34% 1.63% ======== ======== ======== ======== ======== ======== ======== Net loans (charged off) recovered as a percent of average outstanding(3).............. (0.99)% (0.42)% (0.64)% (0.38)% 0.00% (0.13)% (0.00)% ======== ======== ======== ======== ======== ======== ========
- ----------------------------------- (1) Established as a result of Citizens acquisition. (2) Does not include loans held for sale or deferred fees. (3) Interim periods have been annualized. 82 Our evaluation of the loan portfolio includes the review of all loans on which the collection of principal might be at risk. We consider the following factors as part of this evaluation: . our historical loan loss experience; . known and inherent risks in the loan portfolio; . increases in categories with higher loss potential, such as commercial real estate loans and jumbo loans; . credit scores and credit history; . the estimated value of the underlying collateral; and . current economic and market trends. There may be other factors that may warrant our consideration in maintaining the allowance at a level sufficient to cover probable losses. Although we believe that we have established and maintained the allowance for loan losses at adequate levels, future additions may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. In addition, the Office of Thrift Supervision as an integral part of its examination process, periodically reviews our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. The OTS may require us to increase the allowance for loan losses or the valuation allowance for foreclosed real estate based on their judgments of information available to them at the time of their examination, thereby adversely affecting our results of operations. For the six months ended March 31, 2001 and the year ended September 30, 2000, we increased our allowance for loan losses through a $300,000 and $1.4 million provision for loan losses, respectively, based on our evaluation of the items discussed above. We believe that the current allowance for loan losses adequately reflects the level of risk in the current loan portfolio. To determine the adequacy of the allowance, we look at historical trends in the growth and composition of our loan portfolio, among other factors. The most significant risk trends over the last five years are the growth of our commercial real estate loan portfolio, the growth of the nonconforming residential loan portfolio, and the increase in nonperforming loans due to the Citizens acquisition. We believe that, despite using prudent underwriting standards, commercial real estate loans contain higher loss potential than one- to four-family residential mortgages. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--for the Six Months Ended March 31, 2001 and 2000 and the Years Ended September 30, 2000, 1999 and 1998 -- Provision for Loan Losses." 83 Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans indicated.
At September 30, At March 31, -------------------------------------------------------------- 2001 2000 1999 ----------------------------- ------------------------------ ----------------------------- Percent Percent Percent of loans of loans of loans Loan in Each Loan in Each Loan in Each Balances Category Balances Category Balances Category by to Total by to Total by to Total Loan Category Amount Category Loans Amount Category Loans Amount Category Loans ----- -------- ----- ------ -------- ----- ------ -------- ----- (Dollars in thousands) 1-4 family residential real estate............. $1,421 $153,320 60.8% $1,228 $152,822 58.9% $1,529 $132,036 61.6% Commercial real estate..... 1,632 59,194 23.4 1,487 60,838 23.4 1,448 46,545 21.7 Consumer loans and other(1)................ 1,030 26,718 10.6 2,345 29,915 11.5 2,154 24,353 11.4 Commercial................. 425 7,096 2.8 623 8,987 3.5 376 3,245 1.5 Real estate construction... 411 6,003 2.4 236 7,138 2.7 119 8,038 3.8 Unallocated................ 456 - - 427 - - 84 - - ------ -------- ------ ------ -------- ------ ------ -------- ------ Total allowance for loan losses.................. $5,375 $252,331 100.00% $6,346 $259,700 100.00% $5,710 $214,217 100.00% ====== ======== ====== ====== ======== ====== ====== ======== ====== At September 30, ------------------------------------------------------------------------------------------------ 1998 1997 1996 ------------------------------------------------------------------------------------------------ Percent Percent Percent of loans of loans of loans Loan In Each Loan In Each Loan In Each Balances Category Balances Category Balances Category by to Total by to Total by to Total Loan Category Amount Category Loans Amount Category Loans Amount Category Loans ------ -------- -------- ------ -------- ------- ------ -------- -------- (Dollars In Thousands) 1-4 family residential real estate............. $ 727 $116,395 69.0% $ 625 $101,399 73.7% $ 526 $ 78,951 78.9% Commercial real estate..... 684 34,343 20.4 725 22,419 16.3 559 10,902 10.9 Consumer loans and other(1)................ 248 9,026 5.4 162 6,126 4.5 73 5,411 5.4 Commercial................. 54 3,601 2.1 56 3,116 2.3 15 3,878 3.9 Real estate construction... 58 5,295 3.1 44 4,390 3.2 16 875 0.9 Unallocated................ 283 - - 234 - - 438 - - ------ -------- ------ ------ -------- ------ ------ -------- ------ Total allowance for loan losses.................. $2,054 $168,660 100.00% $1,846 $137,450 100.00% $1,627 $100,017 100.00% ====== ======== ====== ====== ======== ====== ====== ======== ======
_____________________ (1) Includes home equity lines of credit, excludes loans held for sale. 84 Investment Activities The Board of Directors reviews and approves our investment policy on an annual basis. The President and Chief Financial Officer, as authorized by the Board, implements this policy based on the established guidelines within the written investment policy, and other established guidelines, including those set periodically by the Asset Liability Management Committee. The primary goal of our investment policy is to invest funds in assets with varying maturities which will result in the best possible yield while maintaining the safety of the principal invested and assist in managing interest rate risk. We also seek to use our strong capital position to maximize our net income through investment in higher yielding mortgage related securities funded by borrowings. The investment portfolio is also viewed as a source of liquidity. The broad objectives of our investment portfolio management are to: . Minimize the risk of loss of principal or interest; . Generate a favorable return without incurring undue interest rate and credit risk; . Manage the interest rate sensitivity of our assets and liabilities; . Meet daily, cyclical and long term liquidity requirements while complying with our established policies and regulatory liquidity requirements; . Diversify assets in stable economic regions and address specific gap imbalances; and . Provide collateral for pledging requirements. In determining our investment strategies, we consider our interest rate sensitivity, yield, credit risk factors, maturity and amortization schedules, collateral value and other characteristics of the securities to be held. Our investment policies and procedures also encompass evaluating and monitoring our Freddie Mac stock investment. Liquidity We calculate liquidity by taking the total of: . our cash; . cash we have in other banks; . unpledged U.S. Government or Government Agency Securities; and . unpledged mortgage-backed securities guaranteed by the U.S. Government or Agencies or rated AAA. 85 We utilize borrowing lines of credit supported by available collateral, including Freddie Mac stock, which provides a high level of liquidity. We borrow funds from the Federal Home Loan Bank based on eligible collateral of loans and securities up to a limit of 30% of assets. Our maximum borrowing capacity from the Federal Home Loan Bank is approximately $280.4 million, of which $236.8 million of borrowings are already outstanding. We utilize Federal Home Loan Bank advances, reverse repurchase agreements and other borrowings to fund the purchase of higher yielding investment securities in order to increase our net income and return on equity. Investment Portfolio General. Federally chartered thrifts have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, mortgage-backed securities, certain certificates of deposit of insured financial institutions, repurchase agreements, overnight and short term loans to other banks, corporate debt instruments, and Fannie Mae and Freddie Mac equity securities. Our investments primarily fall into three major categories: . U.S. agency obligations; . equity investments; and . collateralized mortgage obligations and mortgage-backed securities. Securities can be classified as trading, held to maturity, or available for sale at the date of purchase. All of our securities are currently classified as "available for sale." The weighted average annualized yield of the portfolio was 6.53% and 6.97% as of March 31, 2001 and September 30, 2000, respectively. We believe the credit quality of the portfolio is high, with 99% of the portfolio, excluding equity investments, invested in U.S. Government, U.S. Government Agency, or U.S. Government Agency-guaranteed mortgage-backed securities or mortgage related securities with a rating of AA or better as of March 31, 2001 and September 30, 2000. For information see "Management Discussion and Analysis - Carrying Values, Yields and Maturities." 86 Investment Portfolio. The following table sets forth the composition of our investment securities portfolio at the dates indicated.
At September 30, At March 31, ----------------------------------------------------------------------- 2001 2000 1999 1998 ---------------------- ---------------------- ----------------------- ---------------------- Amortized Market Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value Cost Value ---------- --------- ----------- --------- ----------- ---------- ---------- ---------- (Dollars in Thousands) Investment Securities: Federal Home Loan Bank stock..................... $ 12,700 $ 12,700 $ 12,588 $ 12,588 $ 10,408 $ 10,408 $ 9,890 $ 9,890 SBA loan participation certificates.............. - - - - - - - - U.S. Government agencies... 7,932 7,751 14,449 12,880 31,388 29,950 - - Other debt securities...... 1,000 1,035 1,000 1,003 2,044 2,256 1,756 1,995 -------- -------- -------- -------- -------- -------- -------- -------- Total investment securities............. $ 21,632 $ 21,486 $ 28,037 $ 26,471 $ 43,840 $ 42,614 $ 11,646 $ 11,885 -------- -------- -------- -------- -------- -------- -------- -------- Mortgage-backed and mortgage-related securities: Ginnie Mae................. 43,474 42,925 85,700 82,171 81,651 77,919 10,564 10,547 Fannie Mae................. 43,126 42,715 52,832 50,783 64,839 62,536 45,591 45,602 Freddie Mac................ 4,165 4,185 25,043 24,355 24,357 23,785 22,498 22,667 Non-agency................. - - - - - - 1,970 1,905 -------- -------- -------- -------- -------- -------- -------- -------- Total mortgage-backed and mortgage- related securities.. 90,765 89,825 163,575 157,309 170,847 164,240 80,623 80,721 -------- -------- -------- -------- -------- -------- -------- -------- Collateralized mortgage obligations: Fannie Mae................. 69,927 69,854 78,831 77,777 61,621 60,528 81,894 82,682 Freddie Mac................ 79,396 79,175 70,513 69,369 60,493 59,464 42,180 42,660 Non-agency................. 60,447 58,361 67,198 59,946 74,288 68,950 44,413 44,772 Ginnie Mae................. 3,517 3,522 3,518 3,306 3,504 3,316 - - -------- -------- -------- -------- -------- -------- -------- -------- Total collateralized mortgage obligations... 213,287 210,912 220,060 210,398 199,906 192,258 168,487 170,114 -------- -------- -------- -------- -------- -------- -------- -------- Total mortgage-backed securities and collateralized mortgage obligations....... 304,052 300,737 383,635 367,707 370,753 356,498 249,110 250,835 -------- -------- -------- -------- -------- -------- -------- -------- Total investment and mortgage securities.... $325,684 $322,223 $411,672 $394,178 $414,593 $399,112 $260,756 $262,720 ======== ======== ======== ======== ======== ======== ======== ======== Freddie Mac common stock... $ 6,886 $327,716 $ 6,886 $273,286 $ 6,886 $262,860 $ 7,642 $280,877 ======== ======== ======== ======== ======== ======== ======== ======== Total investment and mortgage securities and Freddie Mac common stock.................. $332,570 $649,939 $418,558 $667,464 $421,479 $661,972 $268,398 $543,597 ======== ======== ======== ======== ======== ======== ======== ======== At September 30, --------------------------------------------- 1997 1996 --------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value ---------------------- --------------------- Investment Securities: Federal Home Loan Bank stock..................... $ 8,716 $ 8,716 $ 5,488 $ 5,488 SBA loan participation certificates.............. - - 3,940 3,946 U.S. Government agencies... 5,811 5,794 3,806 3,761 Other debt securities...... 1,929 2,047 1,093 1,179 -------- -------- -------- -------- Total investment securities............. $ 16,456 $ 16,557 $ 14,327 $ 14,374 -------- -------- -------- -------- Mortgage-backed and mortgage-related securities: Ginnie Mae................. 5,074 5,057 2,997 2,945 Fannie Mae................. 23,280 23,247 6,323 6,281 Freddie Mac................ 6,423 6,426 4,546 4,584 Non-agency................. - - - - -------- -------- -------- -------- Total mortgage-backed and mortgage- related securities.. 34,777 34,730 13,866 13,810 -------- -------- -------- -------- Collateralized mortgage obligations: Fannie Mae................. 45,672 45,805 28,481 28,027 Freddie Mac................ 37,941 38,138 28,246 28,153 Non-agency................. 10,240 10,324 17,758 17,716 Ginnie Mae................. - - - - -------- -------- -------- -------- Total collateralized mortgage obligations... 93,853 94,267 74,485 73,896 -------- -------- -------- -------- Total mortgage-backed securities and collateralized mortgage obligations....... 128,630 128,997 88,351 87,706 -------- -------- -------- -------- Total investment and mortgage securities.... $145,086 $145,554 $102,678 $102,080 ======== ======== ======== ======== Freddie Mac common stock... $ 7,642 $199,515 $ 7,709 $139,566 ======== ======== ======== ======== Total investment and mortgage securities and Freddie Mac common stock.................. $152,728 $345,069 $110,387 $241,646 ======== ======== ======== ========
87 The following table sets forth the composition of the investment portfolio at the dates indicated and whether such investments have fixed or adjustable interest rates.
At March 31, 2001 At September 30, 2000 -------------------------------------- -------------------------------------- Amortized Unrealized Amortized Unrealized Costs Market Value Gain/(Loss) Costs Market Value Gain/(Loss) ---------- ------------ ------------ ---------- ------------ ------------ (Dollars in Thousands) Fixed rate investment securities: U.S. Government agencies...................... $ 7,932 $ 7,751 $ (181) $ 14,449 $ 12,880 $ (1,569) -------- -------- -------- -------- -------- -------- Total fixed rate investment securities..... 7,932 7,751 (181) 14,449 12,880 (1,569) Fixed rate mortgage-backed and mortgage-related securities: Ginnie Mae.................................... 41,293 40,731 (562) 83,450 79,960 (3,490) Fannie Mae.................................... 34,219 33,794 (425) 47,213 45,263 (1,950) Freddie Mac................................... 4,165 4,185 20 4,290 4,088 (202) -------- -------- -------- -------- -------- -------- Total fixed rate mortgage-backed and mortgage related securities............ 79,677 78,710 (967) 134,953 129,311 (5,642) Fixed rate collateralized mortgage obligations: Fannie Mae.................................... 2,860 2,913 53 15,649 15,330 (319) Freddie Mac................................... 4,341 4,383 42 15,714 15,092 (622) Non-agency.................................... 53,471 51,394 (2,078) 68,425 61,161 (7,264) Ginnie Mae.................................... 3,517 3,522 4 3,518 3,306 (212) -------- -------- -------- -------- -------- -------- Total fixed rate collateralized mortgage obligations................... 64,189 62,212 (1,977) 103,306 94,889 (8,417) Total fixed rate mortgage-backed securities and collateralized mortgage obligations............................ 143,866 140,922 (2,944) 238,259 224,200 (14,059) Total fixed rate investment and mortgage securities............................. 151,798 148,673 (3,125) 252,708 237,080 (15,628) Variable rate investment and mortgage securities.................... 1,000 1,035 35 1,000 1,003 3 Variable rate mortgage-backed and mortgage- related securities......................... 11,087 11,115 28 28,622 27,998 (624) Variable rate collateralized mortgage obligations....................... 149,099 148,700 (399) 116,754 115,509 (1,245) -------- -------- -------- -------- -------- -------- Total variable rate investment and mortgage securities........................ 161,186 160,850 (336) 146,376 144,510 (1,866) Federal Home Loan Bank stock.................. 12,700 12,700 - 12,588 12,588 - Freddie Mac Common Stock...................... 6,886 327,716 320,830 6,886 273,286 266,400 -------- -------- -------- -------- -------- -------- Total investment and mortgage securities and Freddie Mac common stock.... $332,570 $649,939 $317,369 $418,558 $667,464 $248,906 ======== ======== ======== ======== ======== ========
88 Investment Portfolio Maturities. The composition and maturities of the investment securities portfolio (debt securities) and the mortgage-backed securities portfolio at March 31, 2001 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or redemptions that may occur.
More than One Year More than Five Years One Year or Less through Five Years through Ten Years More than Ten Years ------------------- ------------------- -------------------- -------------------- Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- -------- --------- -------- --------- -------- --------- -------- (Dollars in Thousands) Investment securities available for sale: Federal Agencies.......... $ - - $ - - $ - - $ 7,932 6.18% Other debt securities..... 1,000 8.23% - - - - - - --------- --------- ------- -------- Total investment securities.............. 1,000 8.23 - - - - 7,932 6.18 --------- --------- ------- -------- Mortgage-backed securities available for sale: Ginnie Mae................ - - - - - - 43,474 6.35 Fannie Mae................ - - 5,400 6.47 9,779 6.11% 27,948 6.49 Freddie Mac............... - - - - 54 6.44 4,111 6.24 --------- --------- ------- -------- Total mortgage-backed securities.............. - - 5,400 6.47 9,833 6.11 75,533 6.39 --------- --------- ------- -------- Collateralized mortgage obligations: Fannie Mae................ - - - - - - 69,927 6.63 Freddie Mac............... - - - - 186 5.76 79,210 6.61 Non-agency................ - - - - 107 7.05 60,340 6.59 Ginnie Mae................ - - - - - - 3,517 6.78 --------- --------- ------- -------- Total collateralized mortgage obligations.... - - - - 293 6.23 212,994 6.62 --------- --------- ------- -------- Total...................... $1,000 8.23% $5,400 6.47% $10,126 6.11 $296,458 6.38% ========= ========= ======= ======== Total Securities ---------------------------------- Weighted Amortized Market Average Cost Value Yield --------- ------ -------- Investment securities available for sale: Federal Agencies.......... $ 7,932 $ 7,751 6.18% Other debt securities..... 1,000 1,035 8.23 -------- -------- Total investment securities.............. 8,932 8,786 6.41 -------- -------- Mortgage-backed securities available for sale: Ginnie Mae................ 43,474 42,925 6.35 Fannie Mae................ 43,126 42,715 6.40 Freddie Mac............... 4,165 4,185 6.24 -------- -------- Total mortgage-backed securities.............. 90,765 89,825 6.36 -------- -------- Collateralized mortgage obligations: Fannie Mae................ 69,927 69,854 6.63 Freddie Mac............... 79,396 79,175 6.61 Non-agency................ 60,447 58,361 6.59 Ginnie Mae................ 3,517 3,522 6.78 -------- -------- Total collateralized mortgage obligations.... 213,287 210,912 6.60 -------- -------- Total...................... $312,984 $309,523 6.53% ======== ========
89 U.S. Agency Obligations. The balances of U.S. Agency obligations of $7.8 million at March 31, 2001 are relatively small compared to mortgage related securities or total assets. These securities provide some diversification from the mortgage related securities. Equity Securities. As of March 31, 2001, equity securities are primarily comprised of 5,055,000 shares of Freddie Mac common stock which had a per share market value of $64.83 per share, a total market value of $327.7 million and a cost basis of approximately $1.40 per share. The large unrealized pre-tax gain of approximately $320.8 million is the result of a series of well-timed investments in Freddie Mac stock in the middle to late 1980's, the substantial portion of which we continue to own. As a result of strong fundamental growth at Freddie Mac and favorable stock market environment, our Freddie Mac stock investment has appreciated significantly, constituting approximately 35.1% of our total assets. The unrealized gain in Freddie Mac stock has substantially strengthened our capital and earnings. The after tax unrealized gain in Freddie Mac stock constitutes 79.9% of our equity capital, making it the largest segment of our equity position. In addition, our substantial investment in Freddie Mac stock has allowed us to increase our interest rate risk position, with the intent of receiving increased net interest income. Dividends on Freddie Mac stock have also significantly increased our dividend and interest income. Because we believe that our ownership of Freddie Mac stock continues to present attractive earnings growth potential and because the sale of Freddie Mac stock would result in substantial tax liability for us, we have no current plans to liquidate our Freddie Mac stock investment. However, we are reallocating the Freddie Mac stock so as to more effectively manage our investment and retail operations. In this regard, as part of the reorganization, 2.5 million shares of the Freddie Mac stock will be transferred out of CharterBank's portfolio to Charter Financial, First Charter, MHC and Charter Insurance Company, leaving 50.5% of the Freddie Mac stock in CharterBank's portfolio. Following the reorganization, we will continue to monitor our Freddie Mac stock investment. Mortgage Related Securities. Our mortgage-backed security portfolio is composed of collateralized mortgage obligations and mortgage-backed securities. Collateralized mortgage obligations and mortgage-backed securities consist of various types of securities issued by the major secondary market issuers including Ginnie Mae, Fannie Mae and Freddie Mac, as well as a variety of private issuers. The portfolio includes securities with a wide variety of structures including variable rate and fixed rate securities, including many hybrid securities with balloon terms. Mortgage-backed securities generally yield less than the loans that underlie these securities because of the cost of payment guarantees or credit enhancements that reduce credit risk. However, mortgage-backed securities are more liquid than individual mortgage loans and may be used as collateral for our borrowings. In general, mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae or private issuers that rate AA or better are weighted at not more than 20% for risk-based capital purposes, compared to 50% risk weighting assigned to most non-securitized residential mortgage loans. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, they remain subject to the risk of a fluctuating interest rate environment. Along with other factors, such as the geographic distribution of the underlying mortgage loans, changes in interest 90 rates may alter the prepayment rate of those mortgage loans and affect both prepayment rates and value of mortgage-backed securities. While mortgage related securities have maturities as stated in the accompanying tables, average maturities may be significantly shorter based on interest rates and underlying loan prepayments. Based on interest rates and market prepayment assumptions as of March 31, 2001, the estimated average life of our fixed rate mortgage backed security portfolio was 10.1 years and of our fixed rate collateralized mortgage obligation portfolio was 17.6 years. As discussed above, we have sought to utilize our strong equity position to enhance our earnings and return on equity by using Federal Home Loan Bank advances, reverse repurchase agreements and other borrowings to fund the purchase of higher yielding investment securities. In this regard, our mortgage- backed securities portfolio has been effective in leveraging our strong capital and increasing net earnings levels. Collateralized mortgage obligations and mortgage-backed securities and other securities will continue to be purchased in the future with the same general objectives. 91 Mortgage-Backed Securities and Mortgage-Related Securities. The following table discloses the amortized cost and fair value of our mortgage-backed and mortgage-related securities, all of which are classified as available for sale as of the dates indicated. Since 1994, all mortgage-backed and mortgage-related securities have been classified as available for sale.
At March 31, ------------------------------- 2001 2000 ------------------------------ ------------------------------- Amortized Percent of Market Amortized Percent of Market Cost Total Value Cost Total Value --------- ---------- ------ --------- ---------- ------- (Dollars In Thousands) Mortgage-backed securities available for sale: Ginnie Mae................. $ 43,474 14.30% $ 42,925 $ 85,700 22.33% $ 82,171 Fannie Mae................. 43,126 14.18 42,715 52,832 13.77 50,783 Freddie Mac................ 4,165 1.37 4,185 25,043 6.53 24,355 Other...................... - - - - - - Collateralized mortgage obligations available for sale: Fannie Mae................. 69,927 23.00 69,854 78,831 20.55 77,777 Freddie Mac................ 79,396 26.11 79,175 70,513 18.38 69,369 Other...................... 60,447 19.88 58,361 67,198 17.52 59,946 Ginnie Mae................. 3,517 1.16 3,522 3,518 0.92 3,306 -------- ------ -------- -------- ------ -------- Total................... $304,052 100.00% $300,737 $383,635 100.00% $367,707 ======== ====== ======== ======== ====== ======== At September, 30 ----------------------------------------------------------------- 1999 1998 ------------------------------ ------------------------------- Amortized Percent of Market Amortized Percent of Market Cost Total Value Cost Total Value --------- ---------- ------ --------- ---------- ------- Mortgage-backed securities available for sale: Ginnie Mae................. $ 81,651 22.01% $ 77,919 $ 10,564 4.24% $ 10,547 Fannie Mae................. 64,839 17.49 62,536 45,591 18.30 45,602 Freddie Mac................ 24,357 6.57 23,785 22,498 9.03 22,667 Other...................... - - - 1,970 0.79 1,905 Collateralized mortgage obligations available for sale: Fannie Mae................. 61,621 16.62 60,528 81,894 32.88 82,682 Freddie Mac................ 60,493 16.32 59,464 42,180 16.93 42,660 Other...................... 74,288 20.04 68,950 44,413 17.83 44,772 Ginnie Mae................. 3,504 0.95 3,316 - - - -------- ------ -------- -------- ------ -------- Total................... $370,753 100.00% $356,498 $249,110 100.00% $250,835 ======== ====== ======== ======== ====== ======== At September 30, ----------------------------------------------------------------- 1997 1996 ------------------------------ ------------------------------- Amortized Percent of Market Amortized Percent of Market Cost Total Value Cost Total Value --------- ---------- ------ --------- ---------- ------- (Dollars In Thousands) Mortgage-backed securities available for sale: Ginnie Mae................. $ 5,074 3.94% $ 5,057 $ 2,997 3.39% $ 2,945 Fannie Mae................. 23,280 18.10 23,247 6,323 7.16 6,281 Freddie Mac................ 6,423 4.99 6,426 4,546 5.15 4,584 Collateralized mortgage obligations available for sale: Fannie Mae................. 45,672 35.51 45,805 28,481 32.23 28,027 Freddie Mac................ 37,941 29.50 38,138 28,246 31.97 28,153 Other...................... 10,240 7.96 10,324 17,758 20.10 17,716 -------- ------ -------- -------- ------ -------- Total................... $128,630 100.00% $128,997 $ 88,351 100.00% $ 87,706 ======== ====== ======== ======== ====== ========
92 Federal Home Loan Bank Stock. Every federally insured financial institution that borrows funds from a Federal Home Loan Bank as a source of liquidity is required to invest in the stock of that Federal Home Loan Bank. The institution's investment in Federal Home Loan Bank stock, along with other assets of the institution, is then pledged as collateral for the advances. As of March 31, 2001, we owned approximately $12.7 million of stock in the Federal Home Loan Bank of Atlanta. Sources of Funds Deposits (both retail and wholesale), borrowings, securities under agreements to repurchase, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investments securities and funds provided by operations are our primary sources of funds for use in lending, investing and for other general purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Deposits. At March 31, 2001, our total deposits amounted to $185.2 million, of which $144.3 were retail deposits and $40.9 were wholesale deposits. Wholesale deposits consist of brokered certificates of deposit and/or funds on deposit from credit unions. At September 30, 2000, our retail deposits totaled $144.5 million, or 52.7% of total deposits, and our wholesale deposits totaled $129.9 million, or 47.3% of total deposits. Retail Deposits. We offer a variety of deposit products to meet the needs of retail and business customers. We currently offer non-interest bearing demand accounts, interest bearing demand accounts (NOWs), savings passbook and statement accounts, money market accounts and certificates of deposits. Deposit products are developed to meet the needs of our targeted markets. At this point no new deposit products are anticipated post reorganization. Our deposit flows are influenced by a number of factors including: . general and local economic conditions; . the perceived strength of the stock and stock mutual fund market; . prevailing interest rates; and . competition. Our retail deposits are primarily obtained from areas surrounding our offices. To attract and retain deposits, we utilize a strategy that incorporates competitive pricing with high quality service and the development of long term relationships. We determine our deposit rates by evaluating our competition's pricing, the cost of Federal Home Loan Bank borrowings, rates on U.S. Treasury securities and other related funds. As of March 31, 2001 and September 30, 2000, demand deposits, NOW deposits, savings, and money market accounts represented 25.1% and 15.3% of total retail deposits respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Analysis of Net Interest Income" for information relating to the average balances and 93 costs of our deposit accounts for the six months ended March 31, 2001 and the years ended September 30, 2000, 1999, and 1998. We expect that the composition of our retail deposit base will expand to reflect the planned expansion of our retail branch network and that our transaction accounts will increase as a result of our increased marketing efforts related to such accounts within our targeted market area. Wholesale Deposits. Our wholesale deposits consist of brokered deposits and/or funds on deposit from credit unions. CharterBank solicits brokered certificates of deposit with terms of less than two years to increase liquidity through deposit brokers. A deposit broker is broadly defined as any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions. CharterBank obtains brokered deposits through major securities brokers. The fees paid in connection with the brokered deposits are amortized over the life of the deposit and are included in interest expense. CharterBank obtains credit union deposits by placing rates on a rate service. CharterBank pays to advertise its rates with the third party. Credit unions with an interest in depositing funds with CharterBank contact CharterBank directly. Legal title to these brokered deposits is held in street name. These certificates of deposit are actively traded based on prevailing interest rates, and ownership changes hands on a daily basis and are held by a broker in "street name." We had no brokered deposits as of March 31, 2001. At September 30, 2000, our brokered certificates of deposit totaled $89.3 million, or 32.5% of total deposits, with a weighted average interest rate of 5.96%. Wholesale deposits of approximately $40.9 million are scheduled to mature during the next several quarters. The balances of our wholesale deposits are more volatile than retail deposits. As wholesale deposits mature, these deposits are less likely to remain with CharterBank, as compared to the relatively stable balances of our core retail deposit base. While we expect our retail deposit base to increase in the next several years, the maturities of our brokered deposits will most likely outpace the growth of our retail deposit base. Accordingly, we plan to utilize either borrowed funds or increase the balances of our wholesale certificates of deposit to fund loans. At March 31, 2001, our credit union certificates of deposit totaled $40.9 million, or 22.1% of total deposits. At September 30, 2000, our credit union certificates of deposit totaled $40.5 million, or 14.8% of total deposits. 94 Deposit Distribution Weighted Average. The following table sets forth the distribution of our deposit accounts, by account type, at the dates indicated.
At March 31, ---------------------------- 2001 2000 ----------------------------- ---------------------------- Weighted Weighted Average Average Amount Percent Rates Amount Percent Rates -------- ------- -------- ------ ------- -------- (Dollars in thousands) Retail: Non-certificated accounts: Non-interest bearing demand deposits (1)..... $ 8,715 4.71% -% $ 8,060 2.94% -% NOW deposits............. 14,449 7.80 1.79 13,962 5.09 1.95 Savings deposits......... 8,328 4.50 1.99 8,386 3.06 1.99 Money market deposits.... 15,015 8.11 4.45 11,440 4.17 5.42 -------- ------ -------- ------ Total non-certificated accounts................. 46,507 25.12 2.35 41,848 15.25 2.53 Certificates of deposit: Due within 1 year........ 74,984 40.49 5.81 77,076 28.09 5.74 Over 1 year through 3 years................... 16,979 9.17 5.07 19,204 7.00 6.08 Over 3 years............. 5,819 3.14 5.40 6,418 2.34 6.32 -------- ------ -------- ------ Total retail certificates of deposit................ 97,782 52.80 5.89 102,698 37.43 5.76 -------- ------ -------- ------ Total retail deposits.... 144,289 77.92 4.75 144,546 52.68 4.83 -------- ------ -------- ------ Wholesale: Certificates of deposit Due within 1 year......... 37,324 20.15 6.93 125,166 45.62 6.13 Over 1 year through 3 years.................... 3,574 1.93 6.95 4,659 1.70 6.55 Over 3 years.............. - - - - - - -------- ------ -------- ------ Total wholesale:.......... 40,898 22.08 6.93 129,825 47.32 6.15 -------- ------ -------- ------ Total certificate accounts................ 138,680 74.88 6.20 232,523 84.75 5.98 -------- ------ -------- ------ Total deposit accounts... $185,187 100.00% 5.23% $274,371 100.00% 5.48% ======== ====== ======== ====== At September 30, -------------------------------------------------------------- 1999 1998 ----------------------------- ----------------------------- Weighted Weighted Average Average Amount Percent Rates Amount Percent Rates -------- ------- -------- ------ ------- -------- Retail: Non-certificated accounts: Non-interest bearing demand deposits (1)..... $ 8,704 3.08% -% $ 2,608 1.92% -% NOW deposits............. 14,495 5.12 2.00 5,169 3.81 2.42 Savings deposits......... 8,789 3.11 2.49 7,345 5.42 2.68 Money market deposits.... 9,686 3.42 4.10 6,160 4.54 4.08 -------- ------ -------- ------ Total non-certificated accounts................. 41,674 14.73 2.17 21,282 15.69 2.69 Certificates of deposit: Due within 1 year........ 87,533 30.93 5.07 63,435 46.78 5.73 Over 1 year through 3 18,755 6.63 5.45 12,363 9.12 5.69 years................... Over 3 years............. 5,769 2.04 5.43 3,728 2.75 5.53 -------- ------ -------- ------ Total retail certificates of deposit................ 112,057 39.60 5.09 79,526 58.64 5.71 -------- ------ -------- ------ Total retail deposits.... 153,731 54.33 4.30 100,808 74.34 5.08 -------- ------ -------- ------ Wholesale: Certificates of deposit Due within 1 year......... 84,206 29.76 5.25 26,782 19.75 5.94 Over 1 year through 3 years.................... 44,929 15.88 5.22 7,922 5.84 5.99 Over 3 years.............. 99 - 6.13 99 - 6.13 -------- ------ -------- ------ Total wholesale:.......... 129,234 45.67 5.24 34,803 25.66 5.95 -------- ------ -------- ------ Total certificate accounts................ 241,291 85.27 5.17 114,329 84.31 5.79 -------- ------ -------- ------ Total deposit accounts... $282,965 100.00% 4.80% $135,611 100.00% 5.26% ======== ====== ======== ======
_________________________ (1) Includes mortgagors' escrow payments. 95 Deposit Flow. The following table summarizes the deposit activity of the Bank for the periods indicated.
Six Months Ended March 31, For the Years Ended September 30, ------------------ --------------------------------- 2001 2000 2000 1999 1998 -------- -------- -------- -------- -------- (Dollars in thousands) Balance at beginning of period... $274,371 $282,965 $282,965 $135,611 $ 89,889 Net (decrease) increase before interest credited............. (93,664) (14,804) (17,679) 142,798 42,917 Interest credited................ 4,480 3,788 9,085 4,556 2,805 -------- -------- -------- -------- -------- Balance at end of period......... $185,187 $271,949 $274,371 $282,965 $135,611 ======== ======== ======== ======== ======== Total (decrease) increase in deposit accounts.......... $(89,184) $(11,016) $ (8,594) $147,354 $ 45,722 ======== ======== ======== ======== ======== Percentage (decrease) increase... (32.50)% (3.89)% (3.04)% 108.66% 50.86%
C.D. Maturities. At March 31, 2001, we had $33.2 million in certificates of deposits with balances of $100,000 and over maturing as follows:
Weighted Average Maturity Period Amount Rate - -------------------------------------- -------- -------- (In thousands) Retail: Three months or less.................. $ 6,885 6.16% Over three months through six months.. 6,621 6.09 Over six months through 12 months..... 5,920 5.99 Over 12 months........................ 6,112 6.67 ------- ---- Total.............................. $25,538 6.23% ======= ==== Wholesale: Three months or less.................. $ 4,600 7.31% Over three months through six months.. 600 6.51 Over six months through 12 months..... 1,500 6.65 Over 12 months........................ 1,000 6.93 ------- ---- Total.............................. $ 7,700 7.07% ======= ==== Total................................. $33,238 6.42% ======= ====
96 C.D. Balances by Rates. The following table sets forth, by interest rate ranges, information concerning our certificates of deposit at the dates indicates.
At March 31, 2001 ----------------------------------------------------------------------- Period To Maturity ----------------------------------------------------------------------- Less than One to Two to More Than Percent of One Year Two Years Three Years Three Years Total Total --------- --------- ----------- ----------- ----- ---------- (Dollars in Thousands) Retail: 4.00% and below.. $ - $ - $ - $ - $ - - 4.01% to 5.00%... 6,160 930 292 365 7,747 7.92% 5.01% to 6.00%... 38,480 4,617 2,629 1,220 46,946 48.01 6.01% to 7.00%... 29,532 4,842 2,910 3,989 41,273 42.21 7.01% and above.. 812 285 474 245 1,816 1.86 ------- ------- ------ ------ ------- ------ Total........ $74,984 $10,674 $6,305 $5,819 $97,782 100.00% ======= ======= ====== ====== ======= ====== Wholesale: 4.00% and below.. - - - - - - 4.01% to 5.00%... 99 - - - 99 .24% 5.01% to 6.00%... 6,802 298 - - 7,100 17.36 6.01% to 7.00%... 5,876 1,290 199 - 7,365 18.01 7.01% and above.. 24,547 1,787 - - 26,334 64.39 ------- ------- ------ ------ ------- ------ Total........ $37,324 $ 3,375 $ 199 $ - $40,898 100.00% ======= ======= ====== ====== ======= ======
Borrowings. In addition to deposits, borrowings from the Federal Home Loan Bank and securities sold under agreements to repurchase provide an additional source of funds to finance our lending and investing activities. We also utilize borrowings to leverage our capital position. At March 31, 2001, our total borrowings totaled $352.3 million, as compared to $352.2 million at September 30, 2000. Our utilization of borrowings has contributed to our profitability and we will continue to employ borrowings as a source of funds. At the same time, we will consider whether to undertake future borrowings as a source of funds only after a complete review of numerous relevant factors including: . the potential interest spread and risks involved; . analysis of the current and anticipated interest rate environment; . the current and expected levels of our deposit base; and . various other risk factors associated with using borrowings as a source of funds. 97 Federal Home Loan Bank Advances. At March 31, 2001, our outstanding FHLB advances totaled $236.7 million, as compared to $234.7 million at September 30, 2000. At March 31, 2001, CharterBank had pledged, under a specific collateral lien with the Federal Home Loan Bank of Atlanta: . all stock of the Federal Home Loan Bank of Atlanta held by CharterBank; . certain qualifying first mortgage loans with unpaid principal balances totaling $147.1 million; and . certain mortgage-backed securities, collateralized mortgage obligations, corporate securities, and U.S. Government Agency securities with an aggregate fair value of $125.6 million. At March 31, 2001, CharterBank has available lines of credit commitments with the FHLB totaling $280.5 million, of which $236.8 million was advanced and $43.7 million was available at March 31, 2001. Securities Sold Under Agreements to Repurchase. We had approximately $115.6 million and $117.5 million of securities sold under agreements to repurchase outstanding at March 31, 2001 and September 30, 2000, respectively. The securities sold under agreement to repurchase at March 31, 2001 are secured by certain mortgage-backed securities, collateralized mortgage obligations, and U.S. Government Agency securities with an aggregate fair market value, including accrued interest of $122.0 million, as compared to $124.4 million at September 30, 2000. All securities sold under the agreements to repurchase are under our control. The repurchase agreements at March 31, 2001 and September 30, 2000 have maturities of less than 90 days and provide for the purchase of identical securities and specify delivery of the underlying securities to an approved custodian. 98 The following table sets forth information concerning balances and interest rates on the Bank's Federal Home Loan Bank advances and securities sold under agreement to repurchase at the dates and for the periods indicated.
At or for the Six Months Ended March 31, At or for the Year Ended September 30, -------------------------- -------------------------------------- 2001 2000 2000 1999 1998 --------- -------- --------- -------- --------- (Dollars in thousands) Federal Home Loan Bank advances: Average balance outstanding........ $239,517 $235,151 $239,921 $189,030 $175,881 Maximum amount outstanding at any month-end during the period.... 254,000 255,650 260,500 206,900 197,000 Balance outstanding at end of the period..................... 236,750 237,500 234,750 205,650 197,000 Weighted average interest rate during the period.............. 6.26% 5.76% 6.25% 4.61% 5.07% Weighted average interest rate at end of period.................. 5.83% 6.11% 6.32% 5.34% 4.80% Securities sold under agreements to repurchase: Average balance outstanding........ $130,281 $107,827 $122,726 $ 60,135 $ 59,660 Maximum amount outstanding at any month-end during the period.... 157,963 137,127 153,308 111,320 127,765 Balance outstanding at end of the period..................... 115,555 137,127 117,469 107,217 91,638 Weighted average interest rate during the period.............. 6.49% 6.09% 6.64% 5.42% 5.82% Weighted average interest rate at end of period.................. 5.54% 5.11% 6.76% 5.54% 5.67%
Current and Planned Sources of Funds. As discussed above, we expect to continue to rely on a combination of both retail and wholesale deposits to fund our operations. We will seek to grow the retail component of our funding structure, while reducing our dependence on brokered deposits as a source of funds. In this regard, the Auburn market, where we expect to open a branch in October 2001, offers a larger, higher growth market, than our current market area. In addition, our planned branch expansion within our targeted market area and the on-going establishment of smaller retail facilities and ATMs should enhance our ability to attract retail deposits. While we will attempt to reduce our reliance on wholesale deposits in the long term, the maturities of our brokered deposits and the growth of our loan portfolio will most likely outpace the growth of our retail deposit base over the next several years. Thus, wholesale deposits and borrowings will continue to remain a significant source of funds for CharterBank in the near term. In addition to deposits and borrowings, other significant sources of funds include liquidity, loan repayments, maturing investments and retained earnings. 99 Investment in Limited Partnerships In 1997, CharterBank purchased interests in two limited partnerships, which were formed to acquire mortgage servicing rights for $7.0 million. CharterBank was allocated approximately 12% and 21% of the respective earnings or losses of these two partnerships. During 1998, CharterBank wrote off its entire limited partnership investment of $2.0 million in the partnership for which it had a previous 12% interest and recorded a $3.7 million valuation allowance relating to its $5.0 million limited partnership investment for which it has a 21% interest. For the six months ended March 31, 2001, CharterBank recognized $(71,615) equity in the net earnings (loss) of the limited partnerships, and $(28,602) and $448,000 for the years ended September 30, 2000 and 1999, respectively. CharterBank's current equity investment in the limited partnership is approximately $1.8 million. See Note 11 of the Notes to Consolidated Financial Statements for further discussion of the limited partnership interest. 100 Properties We currently conduct our business through four full-service banking offices and three loan production offices. We are also in the process of building a new facility located in Auburn, Alabama. We anticipate that occupancy of the building will occur by October, 2001. The estimated cost is approximately $2.5 million. The Auburn loan production office is qualified to accept deposits but is actively soliciting only loan customers for noncash deposits until the full- service facility is open. As of March 31, 2001, the properties and leasehold improvements owned by us had an aggregate net book value of $2.0 million.
Year of Lease or License Deposits as of Location Ownership Year Opened Expiration(1) March 31, 2001 - --------------------------- --------- ----------- ------------- -------------- (In thousands) Administrative/Main Office: 600 Third Avenue Owned 1965 - $94,332 West Point, Georgia Branch Offices: 300 Church Street Owned 1976 - 23,184 LaGrange, Georgia 3500 20/th/ Avenue(2) Leased 1963 7/31/08 61,020 Valley, Alabama 91 River Road(2) Owned 1989 - 6,313 Valley, Alabama Auburn, Alabama(3) Owned 2001 - - Loan Production Offices: 15 Ruth Drive, Suite C Leased 1993 Month-to- - Newnan, Georgia Month 118-C Enterprise Court Leased 1993 10/31/01 - Columbus, Georgia Airport Plaza Leased 1994 Month-to- 338 Auburn, Alabama(3) Month
___________________ (1) Lease expiration dates assume all options to extend lease terms are exercised. (2) Includes time period operated by Citizens National Bank prior to the Citizens acquisition. (3) Target opening date of October 2001, for the permanent branch but are authorized to accept deposits in loan production office where we are accepting deposits. We are not aggressively pursuing deposits. 101 Legal Proceedings We are not involved in any pending legal proceeding other than routine legal proceedings occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are immaterial to our financial condition and results of operations. Personnel As of March 31, 2001, CharterBank had 124 full-time equivalent employees. The employees are not represented by a collective bargaining unit, and we consider our relationship with our employees to be excellent. Subsidiary Activities CharterBank has one subsidiary Charter Holdings, Inc. Charter Holdings is a Georgia corporation whose sole purpose is to own all of the outstanding stock of Charter Insurance Company, a Hawaiian corporation. Charter Insurance Company was incorporated for the purpose of engaging in mortgage reinsurance activities and commenced activities in December 2000. After the reorganization, Charter Insurance Company will be a subsidiary of Charter Financial and Charter Holding will be dissolved. Charitable Activities CharterBank has also created The Charter Foundation, Inc., an Alabama non- stock tax qualified not-for-profit corporation incorporated in 1994. The purpose of The Charter Foundation is to make grants to the local community to improve the quality of life. CharterBank has donated $5.0 million of Freddie Mac common stock and approximately $200,000 of real estate since The Charter Foundation's formation in 1994. By contributing shares of Freddie Mac stock to The Charter Foundation, CharterBank recognizes any gain, which is exempt from income taxes, on the disposition of the stock, while receiving a tax benefit in the way of a deduction as a contribution expense of the total fair market value of any Freddie Mac stock donated to the foundation. CharterBank has charitable contribution carryovers aggregating approximately in $1.7 million at September 30, 2000 for tax reporting purposes. 102 BUSINESS OF CHARTER FINANCIAL Charter Financial has not engaged in any business to date. Upon completion of the reorganization, Charter Financial will own CharterBank. Charter Financial will retain up to 50% of the net proceeds from the offering. We will invest our initial capital as discussed in "How We Intend to Use the Proceeds from the Offering." Immediately after consummation of the reorganization, it is expected that the only business activities of Charter Financial will include holding all of the outstanding common stock of CharterBank, funding a loan to the ESOP from the proceeds of capital raised in the offering, and contributing 50% of the net proceeds from the offering to CharterBank as additional capital. Charter Financial will also hold 1.7 million shares of Freddie Mac common stock and will be the parent corporation to Charter Insurance Company (in addition to CharterBank) following the reorganization. Charter Insurance Company will hold 400,000 shares of Freddie Mac common stock following the reorganization. Charter Financial may use the net proceeds retained by it to pay dividends to stockholders and to repurchase shares of its common stock. In the future, however, Charter Financial as the holding company of CharterBank, will be authorized to pursue other business activities permitted by applicable laws and regulations for savings and loan companies, which may include the issuance of additional shares of common stock to raise capital or to support mergers or acquisitions and borrowing funds for reinvestment in CharterBank. There are no plans for any additional capital issuance, merger or acquisition, or other diversification of the activities of Charter Financial at the present time. Our cash flow will depend upon earnings from the investment of the portion of net proceeds we retain and any dividends Charter Financial receives from CharterBank. Initially, Charter Financial will neither own nor lease any property, but will instead use the premises, equipment and furniture of CharterBank. At the present time, we intend to employ only persons who are officers of CharterBank to serve as officers of Charter Financial. We will however, use the support staff of CharterBank from time to time. These persons will not be separately compensated by Charter Financial. Charter Financial will hire additional employees, as appropriate, to the extent it expands its business in the future. See "How We Intend to Use the Proceeds from the Offering." 103 REGULATION OF CHARTERBANK AND CHARTER FINANCIAL General Charter Financial and First Charter, MHC, will be regulated as savings and loan holding companies by the Office of Thrift Supervision. CharterBank, as a federal stock savings bank, will continue to be subject to the regulation, examination and supervision by the Office of Thrift Supervision. CharterBank must file reports with the Office of Thrift Supervision concerning its activities and financial condition. Charter Financial and First Charter, MHC will also be required to file reports with, and otherwise comply with the rules and regulations of the Office of Thrift Supervision. Charter Financial will also be required to file reports with, and otherwise comply with, the rules and regulations of the SEC under the federal securities laws. On November 12, 1999, President Clinton signed into law landmark financial services legislation, titled the Gramm-Leach-Bliley Act ("GLB Act"). The GLB Act repeals depression-era laws restricting affiliations among banks, securities firms, insurance companies and other financial services providers. The impact of the GLB Act on Charter Financial, CharterBank and First Charter, MHC, where relevant, is discussed throughout the regulation section below. Any change in such laws and regulations, whether by the Office of Thrift Supervision, the FDIC, or through legislation, could have a material adverse impact on Charter Financial and CharterBank and their operations and stockholders. Federal Banking Regulation Activity Powers. CharterBank derives its lending and investment powers from the Home Owners' Loan Act, as amended, and the regulations of the Office of Thrift Supervision. Under these laws and regulations, CharterBank may invest in mortgage loans secured by residential and commercial real estate; commercial and consumer loans; certain types of debt securities; and certain other assets. CharterBank may also establish service corporations that may engage in activities not otherwise permissible for CharterBank, including certain real estate equity investments and securities and insurance brokerage. CharterBank's authority to invest in certain types of loans or other investments is limited by federal law. Loans-to-One-Borrower Limitations. CharterBank is generally subject to the same limits on loans to one borrower as a national bank. With specified exceptions, CharterBank's total loans or extensions of credit to a single borrower cannot exceed 15% of CharterBank's unimpaired capital and surplus which does not include accumulated other comprehensive income. CharterBank may lend additional amounts up to 10% of its unimpaired capital and surplus, if the loans or extensions of credit are fully-secured by readily-marketable collateral. CharterBank currently complies with applicable loans-to-one-borrower limitations. QTL Test. Under federal law, CharterBank must comply with the qualified thrift lender, or "QTL" test. Under the QTL test, CharterBank is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least nine months of the most recent 12-month period. "Portfolio assets" means, in general, CharterBank's total assets less the sum of: 104 . specified liquid assets up to 20% of total assets; . goodwill and other intangible assets; and . the value of property used to conduct CharterBank's business. "Qualified thrift investments" includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of CharterBank's portfolio assets. Recent legislation broadened the scope of "qualified thrift investments" to include 100% of an institution's credit card loans, education loans and small business loans. CharterBank may also satisfy the QTL test by qualifying as a "domestic building and loan association" as defined in the Internal Revenue Code of 1986. CharterBank met the QTL test at March 31, 2001, and in each of the prior 12 months, and, therefore, qualifies as a thrift lender. For purposes of calculating compliance with the QTL test, we use the cost basis of our investment of our Freddie Mac stock, rather than the current market value of the stock. If CharterBank fails the QTL test it must either operate under certain restrictions on its activities or convert to a bank charter. Capital Requirements. Office of Thrift Supervision regulations require CharterBank to meet three minimum capital standards: (1) a tangible capital ratio requirement of 1.5% of total assets, as adjusted under the Office of Thrift Supervision regulations; (2) a leverage ratio requirement of 3% of core capital to such adjusted total assets, if a savings association bas been assigned the highest composite rating of 1 under the Uniform Financial Institutions Ratings System; and (3) a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-weighted assets. The minimum leverage capital ratio for any other depository institution that does not have a composite rating of 1 will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. In determining compliance with the risk-based capital requirement, CharterBank must compute its risk-weighted assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the Office of Thrift Supervision capital regulation based on the risks that the Office of Thrift Supervision believes are inherent in the type of asset. Tangible capital is defined, generally, as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related earnings and minority interests in equity accounts of fully consolidated subsidiaries, less intangibles (other than certain mortgage servicing rights) and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, 105 but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative and other perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. In addition, up to 45% of unrealized gains on available-for-sale equity securities with a readily determinable fair value may be included in supplementary capital. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk- weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. At March 31, 2001, CharterBank met each of its capital requirements. Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), as implemented by Office of Thrift Supervision regulations, CharterBank has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for CharterBank nor does it limit its discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the Office of Thrift Supervision, in connection with its examination of CharterBank, to assess CharterBank's record of meeting the credit needs of its community and to take the record into account in its evaluation of certain applications by CharterBank. The CRA also requires all institutions to make public disclosure of their CRA ratings. CharterBank received a "Satisfactory" CRA rating in its most recent examination. CRA regulations rate an institution based on its actual performance in meeting community needs. In particular, the system focuses on three tests: . lending test, to evaluate the institution's record of making loans in its assessment areas; . an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefitting low or moderate income individuals and businesses; and . a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices. Transactions with Related Parties. CharterBank's authority to engage in transactions with its "affiliates" is limited by the Office of Thrift Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act (the "FRA"). In general, these transactions must be on terms which are as favorable to CharterBank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of CharterBank's capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from CharterBank. In addition, the Office of Thrift Supervision regulations prohibit a savings association from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. 106 CharterBank's authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of CharterBank's capital. In addition, extensions of credit in excess of certain limits must be approved by CharterBank's Board of Directors. Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over savings associations, including CharterBank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices. Standards For Safety And Soundness. Under federal law, the Office of Thrift Supervision has adopted, a set of guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings standards, and compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. In addition, the Office of Thrift Supervision adopted regulations that authorize, but do not require, the Office of Thrift Supervision to order an institution that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being notified, an institution fails to submit an acceptable plan or fails in any material respect to implement an accepted plan, the Office of Thrift Supervision must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of federal law. If an institution fails to comply with such an order, the Office of Thrift Supervision may seek to enforce such order in judicial proceedings and to impose civil money penalties. Limitation on Capital Distributions. The Office of Thrift Supervision imposes various restrictions or requirements on CharterBank's ability to make capital distributions, including cash dividends. A savings institution that is the subsidiary of a savings and loan holding company must file an application or a notice with the Office of Thrift Supervision at least 30 days before making a capital distribution. CharterBank must file an application for prior approval if: . it is not eligible for expedited treatment; . the total amount of its capital distributions, including the proposed distribution, for the applicable calendar year would exceed an amount equal to CharterBank's net income for that year plus CharterBank's retained net income for the previous two years; 107 . it would not adequately be capitalized after the distribution; or . the distribution would violate an agreement with the Office of Thrift Supervision or applicable regulation. CharterBank will be required to file a capital distribution notice or application with the Office of Thrift Supervision before paying Charter Financial a dividend. The Office of Thrift Supervision may disapprove of a notice or application if: . CharterBank would be undercapitalized following the distribution; . the proposed capital distribution raises safety and soundness concerns; or . the capital distribution would violate a prohibition contained in any statute, regulation or agreement. Liquidity. CharterBank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. Prompt Corrective Action Regulations. Under the Office of Thrift Supervision prompt corrective action regulations, the Office of Thrift Supervision is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings association would be placed in one of the following four categories based on the association's capital: . well capitalized; . adequately capitalized; . undercapitalized; and . critically undercapitalized. At March 31, 2001, CharterBank met the criteria for being considered "well- capitalized." When appropriate, the Office of Thrift Supervision can require corrective action by a savings association holding company under the "prompt corrective action" provisions of federal law. Insurance of Deposit Accounts. CharterBank is a member of the Savings Association Insurance Fund, and CharterBank pays its deposit insurance assessments to the SAIF. The FDIC also maintains another insurance fund, the Bank Insurance Fund, which primarily insures the deposits of banks and state chartered savings banks. Under federal law, the FDIC established a risk based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the quarter ending three months before the beginning of 108 the assessment period. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%. In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately .0212% of insured deposits to fund interest payment on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the Financing Corporation bonds mature in 2017. Federal Home Loan Bank System. CharterBank is a member of the Federal Home Loan Bank of Atlanta, which is one of the regional Federal Home Loan Banks making up the Federal Home Loan Bank System. Each Federal Home Loan Bank provides a central credit facility primarily for its member institutions. CharterBank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of Atlanta in an amount equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home- purchase contracts and similar obligations, but not less than $500 or 5% of outstanding advances. CharterBank was in compliance with this requirement with an investment in the capital stock of the Federal Home Loan Bank of Atlanta at March 31, 2001, of $12.7 million. Any advances from a Federal Home Loan Bank must be secured by specified types of collateral, and all long term advances may be obtained only for the purpose of providing funds for residential housing finance. The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the Federal Home Loan Banks can pay as dividends to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, CharterBank's net interest income would be affected. Under the GLB Act, membership in the Federal Home Loan Bank System is now voluntary for all federally-chartered savings associations, such as CharterBank. The GLB Act also replaces the existing redeemable stock structure of the Federal Home Loan Bank System with a capital structure that requires each Federal Home Loan Bank to meet a leverage limit and a risk-based permanent capital requirement. Two classes of stock are authorized: Class A (redeemable on 6- months notice) and Class B (redeemable on 5-years notice). Prohibitions Against Tying Arrangements. Federal savings banks are subject to the prohibitions of 12 U.S.C. (S) 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution. 109 Federal Reserve System Under Federal Reserve Board regulations, CharterBank is required to maintain non-interest-earning reserves against its transaction accounts. The Federal Reserve Board regulations generally require that reserves of 3% must be maintained against aggregate transaction accounts of $42.8 million or less, subject to adjustment by the Federal Reserve Board, and an initial reserve of $1.3 million plus 10%, subject to adjustment by the Federal Reserve Board between 8% and 14%, against that portion of total transaction accounts in excess of $42.8 million. The first $5.5 million of otherwise reservable balances, subject to adjustments by the Federal Reserve Board, are exempted from the reserve requirements. CharterBank is in compliance with these requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce CharterBank's interest-earning assets, to the extent the requirement exceeds vault cash. Holding Company Regulation Charter Financial and First Charter, MHC will be savings and loan holding companies regulated by the Office of Thrift Supervision. As such, Charter Financial and First Charter, MHC will register with and be subject to Office of Thrift Supervision examination and supervision, as well as certain reporting requirements. In addition, the Office of Thrift Supervision has enforcement authority over Charter Financial and First Charter, MHC and any of their non- savings institution subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings institution. Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the Federal Reserve System. Restrictions Applicable to Charter Financial. Because Charter Financial will be acquired after May 4, 1999, under the GLB Act it will be prohibited from engaging in non-financial activities. Unitary savings and loan associations acquired before this date are "grandfathered" under the GLB Act and generally have no restrictions on their business activities. Charter Financial's activities, however, will be restricted to: . furnishing or performing management services for a savings institution subsidiary of such holding company; . conducting an insurance agency or escrow business; . holding, managing, or liquidating assets owned or acquired from a savings institution subsidiary of such company; . holding or managing properties used or occupied by a savings institution subsidiary of such company; . acting as trustee under a deed of trust; 110 . any other activity (a) that the Federal Reserve Bank ("FRB"), by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956 ("BHC"), unless the Director of the Office of Thrift Supervision, by regulation, prohibits or limits any such activity for savings and loan holding companies, or (b) in which multiple savings and loan holding companies were authorized by regulation to directly engage on March 5, 1987; . purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such holding company is approved by the Director of the Office of Thrift Supervision; and . any activity permissible for financial holding companies under section 4(k) of the BHC. Permissible activities which are deemed to be financial in nature or incidental thereto under section 4(k) of the Banking Holding Company Act include: . lending, exchanging, transferring, investing for others or safeguarding money or securities; . insurance activities or providing and issuing annuities, and acting as principal, agent or broker; . financial, investment or economic advisory services; . issuing or selling instruments representing interests in pools of assets that a bank is permitted to hold directly; . underwriting, dealing in, or making a market in securities; . activities previously determined by the Federal Reserve Board to be closely related to banking; . activities that bank holding companies are permitted to engage in outside of the U.S.; merchant banking activities; and . portfolio investments made by an insurance company. In addition, Charter Financial cannot be acquired or acquire a company unless the company is engaged solely in financial activities. Restrictions Applicable to Activities of Mutual Holding Companies. Under federal law, a mutual holding company may engage only in the following activities: . investing in the stock of a savings institution; 111 . acquiring a mutual association through the merger of such association into a savings institution subsidiary of such holding company or an interim savings institution subsidiary of such holding company; . merging with or acquiring another holding company, one of whose subsidiaries is a savings institution; . investing in a corporation the capital stock of which is available for purchase by a savings institution under federal law or under the law of any state where the subsidiary savings institution or association is located; and . the permissible activities described above for non-grandfathered savings and loan holding companies. If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed above, and it has a period of two years to cease any non-conforming activities and divest any non-conforming investments. Restrictions Applicable to All Savings and Loan Holding Companies. Federal law prohibits a savings and loan holding company, including Charter Financial and First Charter, MHC, directly or indirectly, from acquiring: . control (as defined under HOLA) of another savings institution (or a holding company parent) without prior Office of Thrift Supervision approval; . through merger, consolidation, or purchase of assets, another savings institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company) without prior Office of Thrift Supervision approval; or . control of any depository institution not insured by the FDIC (except through a merger with and into the holding company's savings institution subsidiary that is approved by the Office of Thrift Supervision). A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its subsidiary institution is located, except: . in the case of certain emergency acquisitions approved by the FDIC; . if such holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or . if the laws of the state in which the savings institution to be acquired is located specifically authorize a savings institution chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings 112 institution or savings and loan holding company is located or by a holding company that controls such a state chartered association. If the savings institution subsidiary of a federal mutual holding company fails to meet the QTL test set forth in Section 10(m) of the HOLA and regulations of the Office of Thrift Supervision, the holding company must register with the FRB as a bank holding company under the BHC Act within one year of the savings institution's failure to so qualify. TAXATION Federal General. For federal income tax purposes, we report income on the basis of a taxable year ending September 30, using the accrual method of accounting, and we are generally subject to federal income taxation in the same manner as other corporations. Following the reorganization, CharterBank and Charter Financial will constitute an affiliated group of corporations and, therefore, will be eligible to report their income on a consolidated basis. CharterBank is not currently under audit by the IRS and has not been audited for the past five years. The last federal audit of CharterBank's federal tax return was related to the fiscal year ended September 30, 1991. Distributions. To the extent that we (CharterBank) make "non-dividend distributions" to stockholders, such distributions will be considered to result in distributions from our unrecaptured tax bad debt reserve as of December 31, 1987 (our "base year reserve"), to the extent thereof and then from our supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in our income. Non-dividend distributions include distributions in excess of our current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. Dividends paid out of our current or accumulated earnings and profits will not be included in our income. The amount of additional income created from a non-dividend distribution is equal to the lesser of our base year reserve and supplemental reserve for losses on loans or an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, in some situations, approximately one and one-half times the non-dividend distribution would be includible in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. We do not intend to pay dividends that would result in the recapture of any portion of our bad debt reserves. Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the "Code"), imposes a tax on alternative minimum taxable income at a rate of 20%. Only 90% of alternative minimum taxable income can be offset by alternative minimum tax net operating loss carryovers of which we currently have none. Alternative minimum taxable income is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. We have been subject to a tax on alternative minimum taxable income during the past five years. Elimination of Dividends. Charter Financial may exclude from its income 100% of dividends received from CharterBank as a member of the same affiliated group of corporations. 113 State CharterBank currently files and will continue to file Georgia and Alabama income tax returns. Generally, the income of financial institutions in Georgia and Alabama, which is calculated based on federal taxable income, subject to certain adjustments, is subject to both Alabama and Georgia tax. We are not currently under audit with respect to our Georgia or Alabama income tax returns and our state tax returns have not been audited for the past five years. Charter Financial will be required to file a Georgia income tax return and will generally be subject to a state income tax rate that is the same tax rate as the tax rate for financial institutions in Georgia. MANAGEMENT Shared Management Structure Charter Financial's directors and executive officers will be the same as CharterBank's. Although it has no current plans to do so, CharterBank may choose to appoint additional directors in the future. We expect that Charter Financial and CharterBank will continue to have common executive officers until there is a business reason to establish separate management structures. To date, CharterBank has compensated its directors and executive officers for their services to the bank. Charter Financial and First Charter, MHC will pay additional compensation to these directors for their services to the holding company. To the extent that Charter Financial uses the services of officers and employees of CharterBank and does not pay additional compensation for those individuals, we expect Charter Financial and First Charter, MHC to reimburse CharterBank for a part of the compensation paid to each executive officer that is proportionate to the amount of time which he or she devotes to performing services for Charter Financial. Directors Composition of our Boards. We have seven directors. Each belongs to one of three classes with staggered three-year terms of office. Classes One, Two and Three have directors whose terms expire in 2001, 2002 and 2003, respectively. At each of the annual shareholder meetings of Charter Financial, the shareholders will elect directors to fill the seats of the directors whose terms are expiring in that year and any vacant seats. Directors of CharterBank will be elected by Charter Financial as its sole stockholder. Who Our Directors Are. The following table states our directors' names, their ages as of March 31, 2001, the years when they began serving as directors and the years when their current terms of office as directors will expire: 114
Charterbank Current Director Term Directors Age(1) Position Since Expires - --------------------------------------------------------------------------------------------------------- John W. Johnson, Jr. 80 Chairman of the Board, Director 1954 2001 Robert L. Johnson 47 President, Chief Executive Officer and Director 1986 2002 David Z. Cauble, III 48 Director 1996 2002 Jane W. Darden 51 Director 1988 2003 William B. Hudson 71 Director 1975 2001 Thomas M. Lane 46 Director 1996 2003 R. Terry Taunton 51 Director 1977 2002
(1) At March 31, 2001. Our Directors' Backgrounds. The business experience for the past five years of each of our directors is as follows: John W. Johnson, Jr. Mr. Johnson is the founder of CharterBank and has served as Chairman of the Board since 1954. Mr. Johnson also served as the President of CharterBank from 1954 to 1996. He practiced law in Lanett, Alabama, for over 50 years and served in the Alabama State Senate from 1950 to 1954. Mr. Johnson graduated from the University of Alabama and the University of Alabama School of Law and also served as First Lieutenant in the U.S. Army during World War II. Mr. Johnson is the father of Robert L. Johnson. Robert L. Johnson. Mr. Johnson has been the President and Chief Executive Officer of the Bank since 1996. Prior to that time, he served as Financial Analyst, then Senior Vice President and Chief Financial Officer. He began continuous service with CharterBank in 1984. Mr. Johnson has an undergraduate degree from Vanderbilt University and a Master's Degree in Business Administration with a concentration in Finance from the University of Alabama. He is a graduate of the Graduate School of Community Bank Management. He is also currently on the boards of Chattahoochee Valley Hospital Society and is Chairman of The Charter Foundation. Mr. Johnson is also affiliated with the West Point Rotary Club. Mr. Johnson is the son of John W. Johnson, Jr. David Z. Cauble, III. Mr. Cauble is self-employed as a food service consultant and investor. He was the Owner and President of Vend-All Company in LaGrange, Georgia, until its sale in 1996. Mr. Cauble graduated from Washington & Lee University. Other affiliations of Mr. Cauble include: Chairman of Cobb Foundation, Young Presidents' Organization and First United Methodist Church Foundation. Jane W. Darden. Mrs. Darden is a homemaker and part-time bookkeeper. She was formerly employed in the banking field for 5 years. She has a B.A. in Psychology from Converse College and she also serves on the Staff-Parish Relations Committee at West Point Methodist Church. 115 William B. Hudson. Mr. Hudson is an Account Executive for the Robinson- Humphrey Company, a division of Salomon Smith Barney. He has been employed in the brokerage business for the past 37 years. Mr. Hudson graduated from the University of Georgia with a degree in business with Postgraduate studies at Auburn University. Thomas M. Lane. Mr. Lane has been the Senior Vice President and Treasurer of West Point Stevens, Inc. since March 2000 and previously served as its Treasurer from 1997 to 1999. Prior to that time, he served as Controller of Budgets and Analysis for West Point Pepperell, the predecessor of West Point Stevens, Inc. He has been continuously employed in various financial and accounting positions with West Point Pepperell since June 1976. Mr. Lane received his B.S. in Business Administration from Auburn University in 1976. Currently, he also serves on the board of directors for Junior Achievement. R. Terry Taunton. Mr. Taunton is a self-employed owner of Taunton-Emfinger, Inc., a paint, hardware and building supplies business. He is also the President of Taunton-Johnson Corporation, a real estate development corporation established in 1973. Mr. Taunton graduated from Auburn University with a degree in Business Administration. Meetings of the Board of Directors and Its Committees Our Board of Directors meets on a monthly basis and may hold additional special meetings. During 2000, the Board of Directors of CharterBank held 12 regular meetings and five special meetings. The Board of Directors of Charter Financial did not meet in 2000. The Board of Directors of CharterBank maintains an Executive, Audit, and Personnel and Compensation Committee. The Executive Committee consists of Director Taunton, as the Chair, and two other board members (one of which must be an outside director) who serve on a rotating basis. The Executive Committee meets as needed with the full power of the Board of Directors. The Executive Committee, among other things, is responsible for review, ratification and/or approval of loans that exceed certain threshold amounts. The Executive Committee of CharterBank met 12 times during 2000. The Audit Committee consists of Directors Darden, Hudson, Taunton, Lane and Cauble with Director Darden serving as Chair. The Committee reviews the annual audit prepared by the independent accountants, recommends the appointment of accountants and reviews the work of third parties who function as internal auditors. The Audit Committee of CharterBank met twice during 2000. The Personnel and Compensation Committee consists of Directors Hudson, Darden, Taunton, Lane and Cauble with Director Hudson serving as Chair. The committee provides advice and recommendations to the Board in the areas of employee salaries and benefit programs. The Personnel and Compensation Committee of CharterBank met four times during 2000. 116 Director Compensation Meeting Fees. CharterBank's practice has been to provide each non-employee director an annual retainer of $8,000. Each committee chairman has been provided a $1,000 additional annual retainer for his or her service as chairman. A fee of $500 has been provided to each director for attendance at each board meeting. Non-employee directors have received a fee of $200 for each stand alone committee meeting and $100 per committee meeting if it is held in conjunction with a board meeting. CharterBank paid fees totaling $74,651 to its non-employee directors for the year ended September 30, 2000. CharterBank also provides a $8,000 annual retirement fee to Martha B. Jones who serves as a director emeritus member of the board. Effective as of the reorganization, directors of CharterBank will continue to receive the director's fees discussed above and directors of Charter Financial will receive an annual retainer of $2,000. Directors of Charter Financial and First Charter, MHC will also receive a fee of $500 for each board meeting attended. Executive Officers Who are Not Directors Curtis R. Kollar, 49, is a Certified Public Accountant (CPA) and Certified Management Accountant (CMA). He has been the Vice President & Treasurer of CharterBank since 1991 and was named Chief Financial Officer of CharterBank in January of 2001. He has an undergraduate degree from Ohio Wesleyan and an MS in Accounting from Syracuse University. He is a graduate of the Graduate School of Community Bank Management. Mr. Kollar has 16 years experience in the banking field. Current affiliations of Mr. Kollar include: West Point Rotary Club and Keep Troup Beautiful. William C. Gladden, 49, has been the Vice President and Secretary of the Bank since 1991. He was also a Director of Charter Federal Savings and Loan from 1988 to 1990. He was the Manager of Telecommunications for West Point Pepperell from 1984 to 1990. Mr. Gladden is a graduate of the National School of Banking and has a B.S. in Management from Georgia Tech, 1976. Current affiliations of Mr. Gladden include: Chambers County Library Board, Troup-Chambers Habitat for Humanity and West Point Rotary Club. Bonnie F. Bonner, 44, has been the Assistant Secretary and Secretary to the Board of Directors of the Bank since 1989. She has also served as an Assistant Vice President of CharterBank since 1990. She is a graduate of the National School of Banking. She received her B.S. from Auburn University in 1977. Ms. Bonner's current affiliations include: Historic Chattahoochee Commission, City of Valley Historic Preservation Commission and Sheltering A Vision. Lee Washam, 39, has been a Vice President and Senior Credit Officer of CharterBank since April 2000 and was named Executive Vice President in January of 2001. Mr. Washam is the former Executive Vice President of First Flag Bank, LaGrange, Georgia, and has over 17 years of banking experience. Mr. Washam received his B.S. in Business Administration from LaGrange College in 1983 and is a 1995 graduate of The Graduate School of Banking at Louisiana State University. Mr. Washam's current affiliations include: LaGrange Noon Lions 117 Club, the Georgia Community Bankers Association, Highland Country Club and New Community Church. Executive Officer Compensation Summary Compensation Table. The following table provides information about the compensation paid to CharterBank's Chief Executive Officer and to the other most highly compensated executive officers whose annual salary and bonus for fiscal year 2000 was at least $100,000.
Annual Compensation ----------------------------------------------------------------- Name and Other Annual LTIP All Other Principal Position Year Salary ($) Bonus ($) Compensation ($)/(A)/ Payouts Compensation/(b)/ - --------------------------- ------- ------------ ---------- ------------------------ ----------- -------------------- John W. Johnson, Jr. Chairman 2000 $ 120,000 $ 38,360 - $ 46,313 $ 5,868 Robert L. Johnson, President and Chief Executive Officer 2000 $ 135,000 $ 47,629 - $ 46,313 $ 5,515
___________________________ (a) CharterBank provides its executive officers with non-cash benefits and perquisites, such as the use of employer-owned or leased automobiles. Management of the Bank believes that the aggregate value of these benefits for 2000 did not, in the case of any executive officer, exceed $50,000 or 10% of the aggregate salary and annual bonus reported for him or her in the Summary Compensation Table. (b) Includes the following components: (1) employer matching contributions to the CharterBank 401(k) Plan: Mr. John Johnson, $5,250; Mr. Robert Johnson, $5,250 and (2) dollar value of premium payments for life insurance coverage provided by CharterBank: Mr. John Johnson, $618; Mr. Robert Johnson, $265. Employment Agreements Charter Financial and CharterBank each have entered into parallel employment agreements with Mr. Robert Johnson to secure his services as President and Chief Executive Officer. The employment agreements have a fixed term of three years beginning as of the effective date of the reorganization and may be renewed annually after a review of the executive's performance. These agreements provide for a minimum annual salary of $183,000, discretionary cash bonuses, and participation on generally applicable terms and conditions in other compensation and fringe benefit plans. The agreements also guarantee customary corporate indemnification and errors and omissions insurance coverage throughout the employment term and for six years after termination. Charter Financial and CharterBank may terminate the executive's employment, and the executive may resign, at any time with or without cause. However, in the event of termination during the term without cause, they will owe the executive severance benefits generally equal to the value of the cash compensation and fringe benefits that the executive would have received if he had continued working for an additional three years, but not to exceed three times the executive's average annual compensation for the five years preceding the year in which his employment terminates. The same severance benefits would be payable if the executive resigns during the term following: . a loss of title, office or membership on the board of directors; 118 . material reduction in duties, functions or responsibilities; involuntary relocation of the executive's principal place of employment to a location over 35 miles in distance from CharterBank's principal office in West Point, Georgia and over 35 miles from the executive's principal residence; or . other material breach of contract by Charter Financial or CharterBank which is not cured within 30 days. The employment agreements also provide uninsured death and disability benefits. If Charter Financial or CharterBank experiences a change in ownership, a change in effective ownership or control or a change in the ownership of a substantial portion of their assets as contemplated by section 280G of the Internal Revenue Code, a portion of any severance payments under the employment agreements might constitute an "excess parachute payment" under current federal tax laws. Federal tax laws impose a 20% excise tax, payable by the executive, on excess parachute payments. Neither Charter Financial nor CharterBank could claim a federal income tax deduction for an excess parachute payment, excise tax reimbursement payment or gross-up payment. Change of Control Agreements CharterBank will enter into a two-year change of control agreement with Bonnie F. Bonner and one-year change of control agreements with Curtis R. Kollar, William C. Gladden, Linda Drummond and Lee Washam. These agreements will be guaranteed by Charter Financial. The term of these agreements is perpetual until CharterBank gives notice of non-extension, at which time the term is fixed for two years in the case of the two year agreements and one year in the case of the one-year agreements. Generally, CharterBank may terminate the employment of any officer covered by these agreements, with or without cause, at any time prior to a change of control without obligation for severance benefits. However, if CharterBank or Charter Financial signs a merger or other business combination agreement, or if a third party makes a tender offer or initiates a proxy contest, it could not terminate an officer's employment without cause without liability for severance benefits. The severance benefits would generally be equal to the value of the cash compensation and fringe benefits that the officer would have received if he or she had continued working for an additional two years in the case of officers with a two-year agreement, and one year in the case of officers with a one-year agreement. CharterBank would pay the same severance benefits if the officer resigns after a change of control following a loss of title, office or membership on the board of directors, material reduction in duties, functions or responsibilities, involuntary relocation of his or her principal place of employment to a location over 35 miles from CharterBank's principal office on the day before the change of control and over 35 miles from the officer's principal residence or other material breach of contract which is not cured within 30 days. These agreements also provide uninsured death and disability benefits. If CharterBank or Charter Financial experiences a change in ownership, a change in effective ownership or control or a change in the ownership of a substantial portion of their assets as contemplated by section 280G of the Internal Revenue Code, a portion of any severance 119 payments under the change of control agreements might constitute an "excess parachute payment" under current federal tax laws. Any excess parachute payment would be subject to a federal excise tax payable by the officer and would be non-deductible by CharterBank and Charter Financial for federal income tax purposes. Benefit Plans 401 (k) Plan. CharterBank has adopted the 401(k) Plan, a tax-qualified defined contribution plan, for substantially all employees of CharterBank who have completed at least three months of service. Eligible employees may contribute from 1% to 8% of annual compensation to the plan on a pre-tax basis each year, subject to limitations of the Internal Revenue Code (for 2000 the limit was $10,500). Under the 401(k) Plan, CharterBank will make a matching contribution equal to 50% of the first 8% of compensation deferred by the participant. The 401(k) plan has an individual account for each participant's contributions and allows each participant to direct the investment of his or her account. One permitted investment is Charter Financial common stock. The plan itself is not an eligible account holder in this initial stock offering. However, participants who are eligible account holders and supplemental eligible account holders may use their subscription rights to purchase stock for their plan accounts. This plan will purchase common stock for other participants in the initial offering, to the extent that shares are available. After the offering, the plan will purchase in open market transactions. Participants will direct the voting of shares purchased for their plan accounts. Employee Stock Ownership Plan. This plan is a tax-qualified plan that covers substantially all employees who have at least one year of service and will take effect at the completion of the reorganization. Charter Financial intends to lend this plan enough money to purchase up to 8.0% of the shares sold in the offering to persons other than First Charter, MHC. If CharterBank's post-reorganization tangible capital does not exceed 10.0%, purchases by the employee stock ownership plan may be limited to 7.0% of the outstanding common stock of Charter Financial. Although contributions to this plan will be discretionary, CharterBank intends to contribute enough money each year to make the required principal and interest payments on the loan from Charter Financial. It is expected that this loan will be for a term of 30 years and will call for level annual payments of principal and interest. The plan will initially pledge the shares it purchases as collateral for the loan and hold them in a suspense account. The plan will not distribute the pledged shares right away. Instead, it will release a portion of the pledged shares annually. Assuming the plan repays its loan as scheduled over a 30-year term, we expect that 1/30th of the shares will be released annually in years 2001 through 2031. Although the repayment period of the ESOP loan is scheduled over a 30-year term, we anticipate that we may prepay a portion of the principal which would trigger the release of additional ESOP shares. The plan will allocate the shares released each year among the accounts of participants in proportion to their compensation for the year. For example, if a participant's compensation for a year represents 1% of the total compensation of all participants for the year, the plan would allocate to that participant 1% of the shares released for the year. Participants direct the voting of shares allocated to their accounts. Shares in the suspense account will 120 usually be voted in a way that mirrors the votes which participants cast for shares in their individual accounts. This plan may purchase additional shares in the future, and may do so using borrowed funds, cash dividends, periodic employer contributions or other cash flow. The Office of Thrift Supervision has proposed regulations which would permit the ESOP to purchase up to 49.9% of the outstanding shares of Charter Financial common stock, including those shares issued to First Charter, MHC. These proposed regulations have not yet been adopted and may not be adopted for the foreseeable future or at all. However, if the Office of Thrift Supervision adopts these proposed regulations, the ESOP may purchase up to 8% of 49.9% of the outstanding shares of Charter Financial common stock, including those shares issued to First Charter, MHC, or 7.0% of 49.9% of the outstanding common stock of Charter Financial if CharterBank's post-reorganization tangible capital does not exceed 10.0%. Benefit Restoration Plan. CharterBank has also established the Benefit Restoration Plan in order to provide restorative payments to selected executives who are prevented from receiving the full benefits contemplated by the ESOP's benefit formula and the full matching contribution under the 401(k) Plan. Currently, only the Chief Executive Officer has been selected for participation. The restorative payments consist of payments in lieu of shares that cannot be allocated to the participant's account under the ESOP and payments for employer matching contributions that cannot be allocated under the 401(k) Plan due to the legal limitations imposed on tax-qualified plans. Also, in the case of a participant who retires before the repayment in full of the ESOP's loan, the restorative payments include a payment in lieu of the shares that would have been allocated if employment had continued through the full term of the loan. Incentive Compensation Program. CharterBank maintains an incentive compensation plan for employees to earn bonuses based on the achievement of objective, pre-established performance goals. The first part of the plan consists of a short term incentive program which rewards short term performance based on the achievement of key operating goals. All exempt, non-commissioned employees who are not covered under another incentive compensation plan are eligible to participate. These short term incentive payments are made either quarterly or annually depending on the employee's job description. The second feature of the incentive compensation plan is a long-term incentive compensation plan for certain officers of CharterBank. This long term incentive plan grants "phantom stock" units to selected employees. Each unit represents a dollar amount that will be paid under a formula at the end of a three year period. In general, a participant whose employment terminates prior to the payout of the units will forfeit his or her shares. In the case of normal or early retirement, as defined under the plan, stock units will be valued at the quarter end following retirement and paid out within 90 days, if the employee has been employed with CharterBank for more than 5 years and is age 55 or older or if the employee has become permanently disabled. In the event of death, stock units will be valued at the quarter end following death and paid to the employee's estate within 90 days. Finally, under a change in control, all participants become fully vested. Mutual Fund Option Plan. CharterBank maintains the CharterBank Mutual Fund Option Plan under which certain key employees and directors of CharterBank may be granted options to purchase shares of selected mutual funds at a reduced price. Under this plan, a plan 121 participant may elect to reduce the compensation which would otherwise be received by him during the plan year. The amount of a participant's compensation reduction is converted by means of a formula into an option to purchase selected mutual fund shares at a discounted exercise price. The formula provides that the number of shares subject to each participant compensation reduction option shall be (i) the amount of the compensation reduction divided by (ii) 75% of the fair market value of the shares at the time of grant. The exercise price of the compensation reduction options is 25% of the greater of the fair market value at the time of exercise or the time of grant. CharterBank will pay each participant a dividend equivalent payment equal in value to the after-tax net value of dividends or distributions made on the mutual fund shares subject to the options. The plan also allows discretionary grants by CharterBank to eligible employees and directors, the exercise price, vesting, exercise period and other terms of which are determined by the committee under the plan. Upon a change of control (as defined in the plan) all such options vest. Unless otherwise determined in the option agreement, all options granted under the plan are not exercisable until both (i) one year has elapsed since the date of the option grant and (ii) the options have vested. This plan does not require CharterBank to purchase any mutual fund shares subject to these options until the options are exercised. Future Stock Benefit Plans Stock Option Plan. We intend to implement a stock option plan for our directors and officers as part of the reorganization. Applicable regulations prohibit us from implementing this plan until 6 months after the reorganization. If we implement this plan within one year after the reorganization, applicable regulations require that we first obtain the approval of the holders of a majority of the outstanding shares of Charter Financial Corp. held by persons other than First Charter, MHC. We have not decided whether we will implement this plan before or after the one-year anniversary of the reorganization. We expect to adopt a stock option plan that will authorize the Compensation Committee to grant options to purchase up to 10.0% of the shares sold in the offering to persons other than First Charter, MHC, over a period of 10 years. The Compensation Committee will decide which directors and officers will receive options and what the terms of those options will be. However, no stock option will permit its recipient to purchase shares at a price that is less than the fair market value of a share on the date the option is granted, and no option will have a term that is longer than 10 years. If we implement a stock option plan before the first anniversary of the reorganization, applicable regulations will require that we observe the following restrictions: . We must limit the total number of options granted to non-employee directors to 30% of the shares authorized for the plan. . We must also limit the number of options granted to any one non- employee director to 5% of the shares authorized for the plan and the number of options that are granted to any executive officer to 25% of the shares that are authorized for the plan. 122 . We must not permit the options to become vested at a rate more rapid than 20% per year beginning on the first anniversary of stockholder approval of the plan. . We must not permit accelerated vesting for any reason other than death, disability or, if permitted by the Office of Thrift Supervision, change in control. After the first anniversary of the reorganization, we may amend the plan to change or remove these restrictions. In connection with removing this restriction, we expect to amend the plan later to remove these restrictions and to provide for accelerated vesting in cases of retirement. We may obtain the shares needed for this plan by issuing additional shares or through stock repurchases. We expect the stock option plan will permit the Personnel and Compensation Committee to grant either incentive stock options that qualify for special federal income tax treatment or non-qualified stock options that do not qualify for special treatment. Incentive stock options may be granted only to employees and will not create federal income tax consequences when they are granted. If they are exercised during employment or within three months after termination of employment, the exercise will not create federal income tax consequences either. When the shares acquired on exercise of an incentive stock option are resold, the seller must pay federal income taxes on the amount by which the sales price exceeds the purchase price. This amount will be taxed at capital gains rates if the sale occurs at least two years after the option was granted and at least one year after the option was exercised. Otherwise, it is taxed as ordinary income. Non-qualified stock options may be granted to either employees or non- employees such as directors, consultants and other service providers. Incentive stock options that are exercised more than three months after termination of employment are treated as non-qualified stock options. Non-qualified stock options will not create federal income tax consequences when they are granted. When they are exercised, federal income taxes must be paid on the amount by which the fair market value of the shares acquired by exercising the option exceeds the exercise price. When the shares acquired on exercise of a non- qualified stock option are resold, the seller must pay federal income taxes on the amount by which the sales price exceeds the purchase price plus the amount included in ordinary income when the option was exercised. This amount will be taxed at capital gains rates, which will vary depending upon the time that has elapsed since the exercise of the option. When a non-qualified stock option is exercised, Charter Financial and CharterBank may be allowed a federal income tax deduction for the same amount that the option holder includes in his or her ordinary income. When an incentive stock option is exercised, there is no tax deduction unless the shares acquired are resold sooner than two years after the option was granted or one year after the option was exercised. The Office of Thrift Supervision has proposed regulations which would allow us to grant options to purchase up to 10.0% of 49.9% of the outstanding shares of Charter Financial common stock, including those shares issued to First Charter, MHC. These proposed regulations have not yet been adopted and may not be adopted for the foreseeable future or at all. 123 Management Recognition Plan. We intend to implement a management recognition plan for our directors and officers as part of the reorganization. Applicable regulations prohibit us from implementing this plan until 6 months after the reorganization. If we implement this plan within one year after the reorganization, applicable regulations require that we first obtain the approval of the holders of a majority of the outstanding shares of Charter Financial Corp. held by persons other than First Charter, MHC. We have not decided whether we will implement this plan before or after the one-year anniversary of the reorganization. We expect to adopt a management recognition plan that will authorize the Personnel and Compensation Committee to make restricted stock awards of up to 4.0% of the shares sold in the offering to persons other than First Charter, MHC. If CharterBank's post-reorganization tangible capital does not exceed 10.0%, our ability to make restricted stock awards may be limited to 3.0% of the shares sold in the offering to persons other than First Charter, MHC. The Personnel and Compensation Committee will decide which directors and officers will receive restricted stock and the terms of those awards. If we implement a management recognition plan before the first anniversary of the reorganization, applicable regulations will require that we observe the following restrictions: . We must limit the total number of shares that are awarded to outside directors to 30% of the shares authorized for the plan. . We must also limit the number of shares that are awarded to any one outside director to 5% of the shares authorized for the plan and the number of shares that are awarded to any executive officer to 25% of the shares that are authorized for the plan. . We must not permit the awards to become vested at a more rapid rate than 20% per year beginning on the first anniversary of stockholder approval of the plan. . We must not permit accelerated vesting for any reason other than death, disability or, if permitted by the Office of Thrift Supervision, change in control. After the first anniversary of the reorganization, we may amend the plan to change or remove these restrictions and to provide for accelerated vesting in cases of retirement. We expect that any other amendment to this plan (whether adopted before or after the first anniversary of the plan's initial effective date) will be subject to stockholder approval if it would change the class of people eligible to receive benefits, change the price they must pay for stock which they acquire under the plan, or increase the number of shares available under the plan or increase the maximum amount of stock that may be acquired by any one person under the plan. We may obtain the shares needed for this plan by issuing additional shares or through stock repurchases. Restricted stock awards under this plan may feature employment restrictions that require continued employment for a period of time for the award to be vested. They may feature restrictions that require the achievement of specified corporate or individual performance goals for the award to be vested. Or, they may feature a combination of employment and performance restrictions. Awards are not vested unless the specified employment restrictions and performance 124 goals are met. However, pending vesting, the award recipient may have voting and dividend rights. When an award becomes vested, the recipient must include the current fair market value of the vested shares in his income for federal income tax purposes. Charter Financial and CharterBank may be allowed a federal income tax deduction in the same amount. Depending on the nature of the restrictions attached to the restricted stock award, Charter Financial and CharterBank may have to recognize a compensation expense for accounting purposes ratably over the vesting period or in a single charge when the performance conditions are satisfied. The Office of Thrift Supervision has proposed regulations which would permit us to make restricted stock awards for up to 4.0% of 49.9% of the outstanding shares of Charter Financial common stock, including those shares issued to First Charter, MHC, or 3.0% of 49.9% of the outstanding common stock of Charter Financial if CharterBank's post-reorganization tangible capital does not exceed 10.0%. These proposed regulations have not yet been adopted and may not be adopted for the foreseeable future or at all. Transactions with Directors and Executive Officers We make loans to our directors and executive officers. We offer discounted loans to all of our employees through an employee loan program. For the year ended September 30, 2000, loans to executive officers, directors and their associates totaled $883,886. These loans do not involve more than the normal risk of collectability or present other unfavorable features. CharterBank's general counsel is the law firm of Johnson, Caldwell & McCoy. Curt M. Johnson, the brother of Robert L. Johnson and the son of John W. Johnson, Jr., is a partner of this law firm. The firm represents the Bank in real estate and commercial loan closings and other matters, wherein the Bank's borrower typically pays the legal fees and expenses. CharterBank, paid the law firm $136,465 for the year ended September 30, 2000. CharterBank leases its Shawmut branch, which is located at 3500 20/th/ Avenue, Valley, Alabama, from the Taunton-Johnson Corporation which is owned by Robert L. Johnson and Terry Taunton. Director Taunton also serves as the President of the Taunton-Johnson Corporation. CharterBank paid Taunton-Johnson Corporation $40,000 for the year ended September 30, 2000 for the lease of Shawmut Branch. 125 Proposed Purchases of Common Stock by Management The following table presents, for each of our directors and executive officers, the amount of stock they wish to purchase in the offering. We have assumed that a sufficient number of shares will be available to satisfy their subscriptions. The amounts include shares that may be purchased through individual retirement accounts and by associates of the directors and executive officers. Collectively our directors and executive officers expect to purchase a total of 278,000 shares, or approximately 6.2% of shares we sell in the offering and 1.24% of our outstanding common stock (assuming the sale of 4,485,000 shares of common stock). These shares do not include shares expected to be issued under any stock benefit plans of Charter Financial. If all shares issuable under such stock benefit plans were issued to directors and executive officers of Charter Financial, directors and executive officers of Charter Financial would own up to 2,739,816 shares, or 61.1% of the shares sold in the offering and 12.2% of our outstanding common stock (assuming the sale of 4,485,000 shares of the common stock).
Number Percent of Name Amount of Shares Shares Sold ------------------------------------ ------ --------- ----------- Directors and Executive Officers: John W. Johnson, Jr. $ 750,000 75,000 1.67% Robert L. Johnson 500,000 50,000 1.11 David Z. Cauble, III 100,000 10,000 0.22 Jane W. Darden 50,000 5,000 0.11 William B. Hudson 100,000 10,000 0.22 Thomas M. Lane 100,000 10,000 0.22 R. Terry Taunton 100,000 10,000 0.22 Curtis R. Kollar 500,000 50,000 1.11 William C. Gladden 30,000 3,000 0.07 Lee Washam 500,000 50,000 1.11 Bonnie F. Bonner 50,000 5,000 0.11 ---------- ------- Total to be Purchased by Directors $2,780,000 278,000 6.20% and Executives Officers ========== =======
126 THE REORGANIZATION AND THE OFFERING - -------------------------------------------------------------------------------- The Board of Directors of CharterBank has adopted the plan of reorganization, subject to the approval of the Office of Thrift Supervision and members of CharterBank, as well as the satisfaction of certain conditions. Office of Thrift Supervision approval does not constitute an endorsement or recommendation of the plan of reorganization. - -------------------------------------------------------------------------------- General On October 26, 2000, the Board of Directors of CharterBank unanimously adopted the plan of reorganization pursuant to which CharterBank will reorganize into a "two-tiered" mutual holding company. This structure is called a two-tier structure because it will have two levels of holding companies. After the reorganization, Charter Financial will be the mid-tier stock holding company and First Charter, MHC will be the top-tier mutual holding company. Under the terms of the plan of reorganization, Charter Financial will own all of the stock of CharterBank and First Charter, MHC will own at least a majority of Charter Financial. This reorganization to a mutual holding company structure also includes the offering by Charter Financial of up to 49.9% of its outstanding shares to qualifying depositors of CharterBank, tax qualified employee plans of CharterBank and other members of CharterBank in a subscription offering and to certain other persons in a direct community offering and/or syndicated community offering. The reorganization will be effected as described under "--Tax Aspects" or in any other manner that is permitted by the Office of Thrift Supervision and is consistent with the intent of the plan of reorganization. - -------------------------------------------------------------------------------- The following is a brief summary of pertinent aspects of the reorganization. A copy of the plan is available from CharterBank upon request and is available for inspection at the offices of CharterBank and at the Office of Thrift Supervision. The plan is also filed as an exhibit to the Registration Statement of which this prospectus is a part, copies of which may be obtained from the SEC. See "Where You Can Find Additional Information." - -------------------------------------------------------------------------------- Reasons for the Reorganization The reorganization is intended to provide an additional source of capital not available to us as a mutual institution. The reorganization will enable CharterBank to achieve the benefits of a stock company without a loss of control that often follows standard conversions from mutual to stock form. We are committed to being an independent community-oriented institution, and the Board of Directors believes that the mutual holding company structure is best suited for this purpose. 127 The reorganization is also intended to provide an additional source of capital to Charter Financial in order to allow it: . to fund new loans; . to establish or acquire new branches in our targeted market areas within the I-85 corridor; . to diversify products that we offer; . to increase delivery systems, including the expanded use of ATMs and the introduction of Internet banking; . to invest in securities; and . funds for general corporate purposes. CharterBank also wishes to reorganize into a mutual holding company structure to separate the business of running a community-based savings bank from decisions concerning its investment in Freddie Mac stock. As part of the reorganization, Charter Financial and First Charter, MHC will retain approximately 2,100,000 (including 400,000 shares held by Charter Insurance Company) and 400,000 shares of Freddie Mac stock, respectively which will allow CharterBank's management to refocus on core banking activities. The remaining 2,555,000 shares of Freddie Mac stock will be retained by CharterBank. Additionally, after the reorganization, Charter Financial will have the ability to issue additional shares of common stock to raise capital or to support mergers or acquisitions, rather than assuming the risks of raising capital through the sale of Freddie Mac stock. No additional capital issuance or mergers or acquisitions are planned or contemplated at the present time. The ability of Charter Financial to issue common stock will enable Charter Financial to establish stock benefit plans for directors, management and employees, including incentive stock option plans, management recognition plans and an employee stock ownership plan. We also believe that the reorganization will provide local customers and other residents with an opportunity to become equity owners of Charter Financial, and thereby participate in possible stock price appreciation and cash dividends. This is consistent with our objective of being a locally-owned financial institution. We believe that, through expanded local stock ownership, current customers and non-customers who purchase common stock will seek to enhance the financial success of CharterBank through consolidation of their banking business and increased referrals to CharterBank. The proceeds from the sale of common stock of Charter Financial will be invested in order to enhance our profitability and facilitate growth. Additionally, our stronger capital position after the offering will enhance operating flexibility, support desired expansion and provide a cushion for absorbing unanticipated losses. CharterBank will receive approximately 50% of the net proceeds of the reorganization as equity capital, to be used initially to invest in short-term investments and adjustable rate mortgage-backed securities, then later for making loans within our market area. Charter Financial will also use a portion of the cash proceeds from 128 the reorganization to extend a loan to the ESOP, for use in purchasing shares of common stock issued as part of the reorganization. The remainder of the proceeds will be retained by Charter Financial to repurchase common stock, pay dividends to stockholders or for other general purposes. After considering the advantages and risks of the reorganization, as well as applicable fiduciary duties, the Board of Directors of CharterBank unanimously approved the reorganization as being in the best interests of CharterBank, our members and the communities that we serve. Structure of the Reorganization The reorganization will be structured as a "purchase and assumption" transaction. As part of the reorganization, CharterBank will convert to a mutual holding company, First Charter, MHC and will establish Charter Financial and CharterBank as subsidiaries. The reorganization will be effected as follows: 1. CharterBank will establish a federal corporation, Charter Financial as a wholly-owned subsidiary; 2. CharterBank will establish a federally chartered stock savings bank as a wholly-owned subsidiary of Charter Financial; 3. CharterBank will exchange its charter for a federal mutual holding company charter to become First Charter, MHC; 4. First Charter, MHC will transfer all of its assets and liabilities to Charter Financial, including all of the stock of Charter Insurance Company, but excluding 400,000 Freddie Mac shares and approximately $100,000 cash; 5. Charter Financial will transfer 400,000 Freddie Mac shares to Charter Insurance Company; and 6. Charter Financial will transfer the assets and liabilities received from First Charter, MHC under step 4, other than the Charter Insurance Company stock and 1,700,000 Freddie Mac shares, to a newly formed stock bank to be named CharterBank. In addition, as part of the reorganization, Charter Financial will sell up to 20% of its common stock in a subscription and community offering. Approximately 50% of the proceeds of the offering will be retained by Charter Financial and the balance transferred to CharterBank. As a result of these transactions: . CharterBank will become First Charter, MHC, and will own 400,000 Freddie Mac shares, $100,000 cash and at least 80% of Charter Financial; . Charter Financial will own all of the stock of CharterBank and Charter Insurance Company and 1,700,000 Freddie Mac shares; 129 . CharterBank will own 2,555,000 Freddie Mac shares; and . Charter Insurance Company will own 400,000 Freddie Mac shares. Effects of the Reorganization Continuity. While the reorganization is being accomplished, and after its completion, the routine business of CharterBank of accepting deposits and making loans will continue without interruption. CharterBank will continue to be subject to regulation by the Office of Thrift Supervision and the FDIC. After the reorganization, CharterBank will continue to provide services for depositors and borrowers under current policies by its management and staff. The Board of Directors of CharterBank currently consists of seven members. After the reorganization, these seven directors will continue to serve on the Board of Directors of CharterBank and will become the new Board of Directors of Charter Financial and First Charter, MHC. There will be no change in our offices or staff as part of the reorganization. The officers of Charter Financial will be the current executive officers of CharterBank. See "Management." Deposit Accounts and Loans. The reorganization will not affect any deposit accounts or borrower relationships with CharterBank. All deposit accounts in CharterBank will continue to be insured up to the legal maximum by the FDIC the same manner as such deposit accounts were insured immediately before the reorganization. The reorganization will not change the interest rate or the maturity of deposits at CharterBank. Each depositor of CharterBank will have both a deposit account in CharterBank and a pro rata ownership interest in the equity of First Charter, MHC based upon the balance in the depositor's account. This interest may only be realized in the event of a liquidation of First Charter, MHC. However, this ownership interest is tied to the depositor's account and has no tangible market value separate from the deposit account. Any depositor who opens a deposit account obtains a pro rata ownership interest in the equity of First Charter, MHC without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives the balance in the account but receives nothing for his or her ownership interest in the equity of First Charter, MHC, which is lost to the extent that the balance in the account is reduced. Consequently, depositors of First Charter, MHC have no way to realize the value of their ownership interest in First Charter, MHC, except in the unlikely event that First Charter, MHC is liquidated. All loans of CharterBank will retain the same status that they had prior to the reorganization. The amount, interest rate, maturity and security for each loan will remain as they were contractually fixed prior to the reorganization. Voting Rights. After the reorganization, direction of CharterBank will continue to be under the control of the Board of Directors of CharterBank. Charter Financial, as the holder of all of the outstanding common stock of CharterBank, will have exclusive voting rights with respect 130 to any matters concerning CharterBank requiring stockholder approval, including the election of directors of CharterBank. After the reorganization, the holders of the common stock of Charter Financial will have exclusive voting rights with respect to any matters concerning Charter Financial. These voting rights will be exclusive except to the extent Charter Financial in the future issues additional common stock or preferred stock with voting rights. Each holder of common stock will be entitled to vote on any matters to be considered by Charter Financial's stockholders, including the election of directors of Charter Financial, subject to the restrictions and limitations set forth in Charter Financial's federal stock charter discussed below. By virtue of its ownership of a majority of the outstanding shares of common stock of Charter Financial, First Charter, MHC will be able to control the outcome of most matters presented to the stockholders of Charter Financial for resolution by vote. However, current regulations and regulatory policies require that the adoption of a second-step conversion of First Charter, MHC be approved by a majority of the vote of the shares held by the public stockholders (i.e., all stockholders except First Charter, MHC). As a federally-chartered mutual holding company, First Charter, MHC will have no authorized capital stock and, thus, no stockholders. Holders of deposit accounts in and borrowers of CharterBank will become members of First Charter, MHC entitled to vote on all questions requiring action by the members of First Charter, MHC including, without limitation, election of directors of First Charter, MHC. In addition, all persons who become depositors of CharterBank following the reorganization will have membership rights with respect to First Charter, MHC. Borrowers will not receive membership rights in connection with any new borrowings made after the reorganization. Liquidation Rights. In the unlikely event of a complete liquidation of CharterBank prior to the completion of the reorganization, each depositor would receive a pro rata share of any assets of CharterBank remaining after payment of expenses and satisfaction of claims of all creditors. Each depositor's pro rata share of such liquidating distribution would be in the same proportion as the value of such depositor's deposit account was to the total value of all deposit accounts in CharterBank at the time of liquidation. Upon a complete liquidation of CharterBank after the reorganization, each depositor would have a claim as a creditor of the same general priority as the claims of all other general creditors of CharterBank. However, except as described below, a depositor's claim would be solely for the amount of the balance in such depositor's deposit account plus accrued interest. Such depositor would not have an interest in the value or assets of CharterBank above that amount. Instead, the holder of CharterBank's common stock (i.e., Charter Financial) would be entitled to any assets remaining upon a liquidation of CharterBank. Upon a complete liquidation of Charter Financial, each holder of shares of the common stock of Charter Financial, including First Charter, MHC, would be entitled to receive a pro rata share of Charter Financial's assets, following payment of all debts, liabilities and claims of greater priority of or against Charter Financial including the rights of depositors in the liquidation account of CharterBank, if any. 131 If liquidation of First Charter, MHC occurs following completion of the reorganization, all depositors of CharterBank at that time will be entitled, pro rata to the value of their deposit accounts, to a distribution of any assets of First Charter, MHC remaining after payment of all debts and claims of creditors. We have no plans to liquidate CharterBank or First Charter, MHC in the future. Tax Aspects. Although the reorganization may be effected in any manner approved by the Office of Thrift Supervision that is consistent with the purposes of the plan of reorganization and applicable law, regulations and policies, it is intended that the reorganization will be effected through the purchase and assumption method. Under the plan of reorganization, consummation of the reorganization is conditioned upon, among other things, the prior receipt by CharterBank of either a private letter ruling from the IRS and from the Georgia taxing authorities or an opinion of Thacher Proffitt & Wood as to the federal income tax consequences and from Alston & Bird LLP as to the Georgia and Alabama income tax consequences of the reorganization to CharterBank, First Charter, MHC, Charter Financial, eligible account holders and supplemental eligible account holders. Based in part upon representations of CharterBank, Thacher Proffitt & Wood has issued its opinion regarding certain federal income tax consequences of the reorganization. With regard to the reorganization, Thacher Proffitt & Wood has opined that: (1) The conversion of the present CharterBank to mutual holding company form under the name First Charter, MHC will constitute a reorganization under Code section 368(a)(1)(F); (2) The transfer of assets by First Charter, MHC (the present CharterBank) to Charter Financial solely in exchange for common stock of Charter Financial and the assumption by Charter Financial of liabilities of First Charter, MHC will be an exchange described in Code section 351. (3) The transfer of assets by Charter Financial to the new CharterBank solely in exchange for common stock of the new CharterBank and the assumption by the new CharterBank of the liabilities of Charter Financial will be an exchange described in Code section 351. (4) None of First Charter, MHC (the present CharterBank), Charter Financial or the new CharterBank will recognize gain or loss as a result of the reorganization; and (3) Eligible account holders and supplemental eligible account holders will not recognize gain or loss upon their receipt of nontransferable subscription rights to purchase shares of Charter Financial, provided the amount to be paid for such shares is equal to fair market value of such shares. Thacher Proffitt & Wood will not opine as to whether the present CharterBank will be required to include any amount of its bad debt reserve in income as a result of the transfer of its loans to Charter Financial and to the new CharterBank, or as to the effect of the reorganization on any bad debt reserve of the new CharterBank. Unlike private rulings of the IRS, an opinion of counsel is not binding on the IRS and the IRS could disagree with conclusions reached in the 132 opinion. If there is a disagreement, we can not guarantee that the IRS would not prevail in a judicial or administrative proceeding. Accounting Consequences. The reorganization will be accounted for in a manner similar to a pooling-of-interests under generally accepted accounting principles. Accordingly, the carrying value of our assets, liabilities, and capital will be unaffected by the reorganization and will be reflected in Charter Financial's, First Charter, MHC's and CharterBank's financial statements based on their historical amounts. How We Determined the Offering Range and the $10.00 Price Per Share The plan of reorganization requires that the purchase price of the common stock must be based on the appraised pro forma market value of the common stock, as determined on the basis of an independent valuation. CharterBank has retained RP Financial to make the independent valuation. RP Financial's fees for its services in making such appraisal are estimated to be $100,000. CharterBank has not had any prior business dealings with RP Financial, other than preparing CharterBank's business plan for the reorganization and for its previous non- stock mutual holding company reorganization (which was withdrawn from the Office of Thrift Supervision). Charter Financial will indemnify RP Financial and its employees and affiliates against losses (including any losses in connection with claims under the federal securities laws) arising out of its services as appraiser, except where RP Financial's liability results from its negligence or bad faith. An appraisal has been made by RP Financial in reliance upon the information contained in this prospectus, including the financial statements. RP Financial also considered the following factors, among others: . the present and projected operating results and financial condition of CharterBank, and the economic and demographic conditions in CharterBank's existing market area; . historical, financial and other information relating to CharterBank; . a comparative evaluation of the operating and financial statistics of CharterBank with those of other similarly situated savings associations and savings institutions located in the Southeast; . the impact of the reorganization on CharterBank's equity and earnings potential; . dividends that may be paid by Charter Financial; and . the trading market for securities of comparable institutions and general conditions in the market for such securities. On the basis of the foregoing, RP Financial has advised CharterBank that, in its opinion, dated March 2, 2001, the estimated pro forma market value of the common stock of Charter 133 Financial Corp. being offered to persons other than First Charter, MHC ranged from a minimum of $33.2 million to a maximum of $44.9 million with a midpoint of $39.0 million (the estimated valuation range). The Board of Directors of CharterBank held a meeting to review and discuss the appraisal report prepared by RP Financial. Representatives of RP Financial participated in the meeting to explain the contents of the appraisal report. The Board of Directors reviewed the methods that RP Financial used to determine the pro forma market value of the common stock and the appropriateness of the assumptions that RP Financial used in determining this value. The Board of Directors determined that the common stock will be sold at $10.00 per share, which is the price most commonly used in stock offerings involving converting savings institutions. The Board of Directors has approved the independent appraisal of RP Financial which established an estimated valuation range of $33.2 million to $44.9 million, with a midpoint of $39.0 million. Based on the independent appraisal and taking into account that Charter Financial must be at least a majority-owned subsidiary of First Charter, MHC, so long as First Charter, MHC is in mutual form, Charter Financial expects to issue between 3,315,000 and 4,485,000 shares of common stock. The estimated valuation range and the offering range may be amended with the approval of the Office of Thrift Supervision, due to subsequent developments in the financial condition of CharterBank or market conditions generally. - ------------------------------------------------------------------------------- The valuation prepared by RP Financial is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing such shares. RP Financial did not independently verify the financial statements and other information provided by CharterBank, nor did RP Financial value independently the assets or liabilities of CharterBank. The valuation considers CharterBank as a going concern and should not be considered as an indication of the liquidation value of CharterBank. Moreover, because such valuation is necessarily based upon estimates and projections, all of which are subject to change from time to time, no assurance can be given that persons purchasing such shares in the reorganization will thereafter be able to sell such shares at prices at or above the purchase price. ------------------------------------------------------------------------------- The maximum of the estimated valuation range may be increased up to 15% and the number of shares of common stock to be issued in the reorganization may be increased to 5,157,750 shares due to regulatory considerations, changes in the market and general financial and economic conditions without the resolicitation of subscribers. See "- Limitations on Common Stock Purchases" as to the method of distribution and allocation of additional shares that may be issued in the event of an increase in the estimated valuation range. We may not sell any shares of common stock unless RP Financial confirms to CharterBank and the Office of Thrift Supervision that, to the best of its knowledge, nothing of a material nature has occurred which, taking into account all relevant factors, would cause RP Financial to conclude that the appraisal report is incompatible with its estimate of the pro forma market value of the common stock upon the conclusion of the offering. 134 If RP Financial concludes that the pro forma market value of the common stock is either more than 15% above the maximum of the estimated valuation range or less than the minimum of the estimated valuation range, CharterBank and Charter Financial, after consulting with the Office of Thrift Supervision may: (1) terminate the plan of reorganization and return all subscription funds promptly, paying interest at CharterBank's passbook savings rate of interest and cancel all account withdrawal authorizations; (2) establish a new estimated valuation range and either: (a) hold new subscription and community offerings; or (b) provide subscribers the opportunity to change or cancel their orders (a "resolicitation"); or (3) take such other actions as permitted by the Office of Thrift Supervision in order to complete the reorganization. If a resolicitation is commenced, unless an affirmative response is received from a subscriber within a designated period of time, all funds will be promptly returned to the subscriber and account withdrawal authorizations canceled as described above. A copy of the appraisal report of RP Financial, including any amendments made to it, and the detailed memorandum of the appraiser setting forth the method and assumptions for such appraisal are available for inspection at the main office of CharterBank and at the Office of Thrift Supervision. Subscription Offering and Subscription Rights In accordance with the plan of reorganization, rights to subscribe for the purchase of common stock have been granted to the following persons in the following order of priority: (1) Eligible accounts holders. Depositors with deposits in CharterBank with balances aggregating $50 or more as of September 30, 1999. (2) Tax-qualified employee stock benefit plans of CharterBank, including the ESOP. (3) Supplemental eligible account holders. Depositors with deposits in CharterBank with balances aggregating $50 or more on March 31, 2001, other than those depositors who would otherwise qualify as eligible account holders and except for officers, directors and their associates; and (4) Other Members. Other depositors and borrowers of CharterBank on the voting record date, who do not qualify in the preceding categories. All subscriptions received will be subject to the availability of common stock after satisfaction of all subscriptions of all subscribers having prior rights in the subscription offering and to the 135 maximum and minimum purchase limitations set forth in the plan of reorganization and as described below under "-Limitations on Common Stock Purchases." Priority 1: Eligible Account Holders. Each eligible account holder will receive, as first priority and without payment, non-transferable rights to subscribe for common stock in an amount of up to $1,000,000 See "- Limitations on Common Stock Purchases." If there are not sufficient shares available to satisfy all subscriptions by eligible account holders, shares first will be allocated so as to permit each subscribing eligible account holder to purchase a number of shares sufficient to make such eligible account holder's total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares will be allocated among the remaining eligible account holders whose subscriptions remain unfilled in the proportion that the amount of their respective qualifying deposit bears to the total amount of qualifying deposits of all eligible account holders whose subscriptions remain unfilled. However, no fractional shares shall be issued. To ensure a proper allocation of stock, each eligible account holder must list on his or her stock order form all deposit accounts in which such eligible account holder had an ownership interest at September 30, 1999. Failure to list an account or providing incorrect information could result in the loss of all or part of an allocation. The subscription rights of eligible account holders who are also directors or officers of CharterBank or their associates will be subordinated to the subscription rights of other eligible account holders to the extent attributable to increased deposits in the one-year period preceding September 30, 1999. Priority 2: The Tax-Qualified Employee Benefit Plans. On a second priority basis, the tax-qualified employee benefit plans, including the ESOP, will receive, as a second priority and without payment therefor, non-transferable subscription rights to purchase up to 8% of the shares sold in the offering to persons other than First Charter, MHC. As a tax-qualified employee benefit plan, the ESOP expects to purchase up to 8% of the shares sold in the offering to persons other than First Charter, MHC, or up to 265,200 shares, based on the issuance of 3,315,000 shares at the minimum of the offering range or up to 358,800 shares based on the issuance of 4,485,000 at the maximum of the offering range. The Office of Thrift Supervision has proposed regulations which would permit the ESOP to purchase up to 8% of 49.9% of the outstanding shares of Charter Financial common stock, including those shares issued to First Charter, MHC. These proposed regulations have not yet been adopted and may not be adopted for the foreseeable future or at all. However, if the Office of Thrift Supervision adopts these proposed regulations, the ESOP may purchase up to 8% of 49.9% of the outstanding shares of Charter Financial common stock, including those shares issued to First Charter, MHC, or up to 661,674 and 895,206 shares of common stock, respectively, at the minimum and maximum of the offering range. Subscriptions by the ESOP will not be aggregated i.e., shares of common stock purchased directly by or which are otherwise attributable to any other participants in the subscription and community offerings, including subscriptions of any of CharterBank's directors, officers or employees. It has not been determined whether the ESOP will subscribe for shares in the offering or purchase shares in private transactions or on the open market after completion of the offering. 136 Priority 3: Supplemental Eligible Account Holders. To the extent that there are shares remaining after satisfaction of the subscriptions by eligible account holders and tax-qualified employee benefit plans, each supplemental eligible account holder will receive, as a third priority and without payment, non-transferable rights to subscribe for common stock in an amount of up to $1,000,000. See "- Limitations on Common Stock Purchases." If there are not sufficient shares available to satisfy all subscriptions by supplemental eligible account holders, available shares first will be allocated among subscribing supplemental eligible account holders so as to permit each supplemental eligible account holder to purchase a number of shares sufficient to make such supplemental eligible account holder's total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares will be allocated among the remaining supplemental eligible account holders whose subscriptions remain unfilled in the proportion that the amount of their respective qualifying deposit bears to the total amount of qualifying deposits of all supplemental eligible account holders whose subscriptions remain unfilled. However, no fractional shares shall be issued. To ensure proper allocation of stock, each supplemental eligible account holder must list on his or her stock order form all deposit accounts in which such supplemental eligible account holder had an ownership interest at March 31, 2001. Failure to list an account or providing incorrect information could result in the loss of all or part of an allocation. Priority 4: Other Members. On a fourth priority basis, each other member of CharterBank who is not eligible in the preceding priority categories shall receive non-transferable subscription rights to subscribe for common stock in an amount up to $1,000,000. See "- Limitations on Common Stock Purchases." Expiration Date for the Subscription Offering. The subscription offering will expire at 4:00 p.m. Eastern time, on [ ], unless we extend this period to [____]. Persons in Non-qualified States or Foreign Countries. We will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock pursuant to the plan of reorganization reside. However, we are not required to offer stock in the subscription offering to any person who resides in a foreign country. Direct Community Offering and Syndicated Community Offering Direct Community Offering. To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the subscription offering, Charter Financial may offer shares for sale pursuant to the plan of reorganization in a direct community offering to the public with preference given to natural persons residing in our Community Reinvestment Act assessment area, which is comprised of the entirety of Troup and Harris counties, Georgia, and the entirety of Chambers and Lee counties, Alabama. Persons will be deemed to reside in these counties if they occupy a dwelling within these counties and establish an ongoing physical presence within it, together with an indication that such presence is not merely transitory in nature. To the extent the person is a corporation or other business entity, the principal place of business or headquarters shall be in these counties. We may utilize depositor or loan records or 137 such other evidence provided to it to make a determination as to whether a person is a resident. In all cases, the determination of resident status will be made by us in our sole discretion. Stock sold in the direct community offering will be offered and sold in a manner to achieve the widest distribution of the stock. No person may purchase more than $1,000,000 of common stock in the direct community offering. Further, any shares sold in the direct community offering and/or the syndicated community offering must first be filled up to a maximum of 2% of the shares issued in the offering to promote a wide distribution of stock. Thereafter, we must allocate any remaining shares on an equal number of shares per order basis until we fill all orders. Allocation of shares if an oversubscription occurs will be allocated (to the extent shares remain available) so that each person may receive 1,000 shares, and thereafter, on a pro rata basis to such persons based on the amount of their subscriptions. The direct community offering, if any, may commence concurrently with or subsequent to the commencement of the subscription offering and shall terminate no later than 45 days after the expiration of the subscription offering unless extended by Charter Financial, with the approval of the Office of Thrift Supervision, if necessary. We may terminate the direct community offering or the syndicated community offering as soon as we have received orders for at least the minimum number of shares available for purchase in the offering. Syndicated Community Offering. If any stock remains unsold in the subscription and direct community offerings, we may use the services of broker- dealers to sell such shares on a best efforts basis in a syndicated community offering to be managed by Sandler O'Neill & Partners, L.P. No person may purchase more than $1,000,000 of common stock in the syndicated community offering. Sandler O'Neill & Partners, L.P. has not selected any particular broker- dealers to participate in a syndicated community offering. Neither Sandler O'Neill & Partners, L.P. nor any registered broker-dealer shall have any obligation to take or purchase any shares of the common stock in the syndicated community offering. However, Sandler O'Neill & Partners, L.P. has agreed to use its best efforts in the sale of shares in any syndicated community offering. The syndicated community offering may commence during the direct community offering, if any, or after the direct community offering is terminated. The syndicated community offering will terminate no more than 45 days following the expiration of the subscription offering unless extended by Charter Financial with the approval of the Office of Thrift Supervision. Such extensions may not be beyond [____], 2002. - -------------------------------------------------------------------------------- The opportunity to subscribe for shares of common stock in the direct community offering or syndicated community offering is subject to our right, in our sole discretion, to accept or reject any order in whole or in part either at the time of receipt of an order or as soon as practicable following the expiration date. If we reject a subscription in part, the subscriber will not have the right to cancel the remainder of the subscription. - -------------------------------------------------------------------------------- If for any reason a syndicated community offering of unsubscribed shares cannot be effected or is not deemed advisable, we will seek to make other arrangements, subject to the 138 approval of the Office of Thrift Supervision and to compliance with applicable state and federal securities laws. Marketing Arrangements Sandler O'Neill & Partners, L.P. We have engaged Sandler O'Neill & Partners, L.P. as financial and marketing agent in connection with the offering of the common stock. Sandler O'Neill & Partners, L.P. has agreed to use its best efforts to assist us with the solicitation of subscriptions for shares of common stock in the offering. Sandler O'Neill & Partners, L.P. is not obligated to purchase any shares of common stock. Sandler O'Neill & Partners, L.P. will receive fees for services provided in connection with the offering equal to 1.25% of the aggregate purchase price of shares sold in the subscription offering and direct community offering, excluding shares sold to the ESOP and any directors, officers or employees of CharterBank. If there is a syndicated community offering, we will also pay Sandler O'Neill & Partners, L.P. a management fee equal to 1.25% of the aggregate purchase price of common stock sold in the syndicated community offering, sales commissions payable to selected dealers and any sponsoring dealer's fees, provided that fees payable by us to Sandler O'Neill & Partners, L.P. for the shares they sell will not exceed 2.5% of the aggregate purchase price of the common stock sold in the syndicated community offering. Aggregate fees payable by us under a selected dealers agreement will not exceed 7.0% of the aggregate purchase price of the common stock sold in the syndicated community offering. Sandler O'Neill & Partners, L.P. will also be reimbursed for its reasonable out-of-pocket expenses, including legal fees of up to $75,000. We have agreed to indemnify Sandler O'Neill & Partners, L.P. to the extent allowed by law, for reasonable costs and expenses in connection with certain claims and liabilities, including liabilities under the Securities Act of 1933. The following table sets forth the per share and total commissions and expenses to be paid to Sandler O'Neill & Partners, L.P. by us at each level of the offering range (assuming all shares are sold in the subscription offering or direct community offering). Minimum Midpoint Maximum Supermaximum --------- -------- -------- ------------ Commissions: Per share total.......... $ 0.09 $ 0.09 $ 0.09 $ 0.09 Total.................... 296,915 362,945 413,974 481,283 Expenses................. 125,000 125,000 125,000 125,000 Directors, Officers and Employees. Directors and executive officers of CharterBank may participate in the solicitation of offers to purchase common stock. Other employees of CharterBank may participate in the offering in ministerial capacities or provide clerical work in effecting a sales transaction. Such other employees have been instructed not to solicit offers to purchase common stock or provide advice regarding the purchase of common stock. Charter Financial will rely on Rule 3a4-1 under the Exchange Act, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit directors, officers and employees to participate in the sale of common stock. No director, officer or employee of 139 Charter Financial, First Charter, MHC or CharterBank will be compensated in connection with his or her participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in common stock. Offering Expenses. The following table sets forth the estimated expenses that we expect to pay as part of the offering, other than underwriting commissions and expenses: SEC Registration Fee (1)........................................... $ 12,895 OTS application fee and registration............................... 14,400 NASD filing fee.................................................... 5,000 Nasdaq National Market Listing Fee (2)............................. 90,000 Printing, postage and mailing...................................... 100,000 Legal fees and expenses............................................ 400,000 Accounting fees and expenses....................................... 200,000 Appraiser's fees and expenses (including preparing business plan).. 100,000 Conversion agent fees and expenses................................. 15,000 Certificate printing............................................... 10,000 Blue Sky fees and expenses (including fees of counsel)............. 10,000 Miscellaneous...................................................... 17,705 -------- Total.............................................................. $975,000 ======== Procedure for Purchasing Shares in Subscription and Direct Community Offerings Use of Order Forms. To purchase shares in the subscription offering and the direct community offering, an executed order form with the required payment for each share subscribed for, or with appropriate authorization for withdrawal from a subscriber's deposit accounts at CharterBank (which must be given by completing the appropriate blanks on the stock order form), must be received by CharterBank no later than 4:00 p.m., Eastern time, on the indicated expiration date unless extended. You may submit your order form by mail using the return envelope provided, by overnight courier to the indicated address on the order form, or by bringing your order forms to one of our full service branch offices. Stock order forms which are not received by such time or are executed defectively or are received without full payment (or correct withdrawal instructions) are not required to be accepted. In addition, we are not obligated to accept orders submitted on photocopied or facsimiled order forms. We have the power to waive or permit the correction of incomplete or improperly executed forms, but do not represent that we will do so. Once received, an executed order form may not be modified, amended or rescinded without our consent unless the reorganization has not been completed within 45 days of the end of the subscription offering or we conduct a resolicitation of subscribers for some other reason. If resolicitation is commenced, subscribers will have an opportunity to change or cancel their orders. Unless an affirmative response is received from a subscriber within a designated timeframe, all funds will be promptly returned to the subscriber with interest at CharterBank's passbook- savings rate and all account withdrawal authorizations will be canceled. 140 In order to ensure that eligible account holders and supplemental eligible account holders are properly identified as to their stock purchase eligibility, depositors must list on the stock order form all deposit accounts as of the applicable eligibility record date giving all names on each account and the account numbers. To ensure that each purchaser receives a prospectus at least 48 hours prior to the expiration date for the offering, in accordance with Rule 15c2-8 of the Exchange Act, no prospectus will be mailed later than five days prior to such date or hand delivered any later than two days prior to such date. Execution of the stock order form will confirm receipt or delivery in accordance with Rule 15c2-8. Order forms will only be distributed when preceded or accompanied by a prospectus. Payment for Shares. Payment for subscriptions may be made by personal check, bank check, money order or by authorization of withdrawal from your current deposit accounts maintained at CharterBank. Interest will be paid on payments made by check, bank check or money order at our passbook savings rate of interest from the date payment is received until the completion or termination of the reorganization. If payment is made by authorization of withdrawal from deposit accounts, the funds authorized to be withdrawn will remain in the account and continue to accrue interest at the contractual rates until completion or termination of the reorganization, but a hold immediately will be placed on such funds, thereby making them unavailable to the depositor. We may also authorize wire transfers as proper payment. CharterBank will waive any applicable penalties for early withdrawal from certificates of deposit. If the remaining balance in a certificate account is reduced below the applicable minimum balance requirement at the time that the funds are transferred under the authorization, the certificate will be canceled at the time of the withdrawal, without penalty, and the remaining balance will be converted into a statement savings account and will earn interest at the passbook savings rate. The ESOP will not be required to pay for the shares subscribed for at the time it subscribes. Rather, the ESOP may pay for such shares of common stock subscribed for at the purchase price upon completion of the offering; provided, that there is in force from the time of its subscription until such time, a loan commitment acceptable to Charter Financial from an unrelated financial institution or from Charter Financial to lend to the ESOP the aggregate purchase price of the shares for which it subscribed. Charter Financial intends to provide such a loan to the ESOP. Owners of self-directed IRAs may use the assets of such IRAs to purchase shares of common stock in the subscription and community offerings, provided that such IRAs are not maintained at CharterBank. Persons with IRAs maintained at CharterBank must have their accounts transferred to an unaffiliated institution or broker to purchase shares of common stock in the subscription and community offerings. In addition, the provisions of ERISA and IRS regulations require that officers, trustees and ten percent stockholders who use self- directed IRA funds to purchase shares of common stock in the subscription and community offerings make such purchases for the exclusive benefit of the IRAs. Assistance on how to transfer IRAs maintained at CharterBank can be obtained from the Conversion Center. Depositors interested in 141 using funds in an IRA to purchase common stock should contact the Conversion Center as soon as possible. Certificates representing shares of common stock purchased will be mailed to purchasers to the addresses specified in properly completed order forms, as soon as practicable following completion of the offering. Any certificates returned as undeliverable will be disposed of in accordance with applicable law. Conversion Center If you have any questions regarding the offering or the reorganization, please call the Conversion Center at [ ], from 10:00 a.m. to 4:00 p.m., Eastern time, Monday through Friday. Restrictions on Transfer of Subscription Rights and Shares of Common Stock Regulations prohibit any person with subscription rights from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the plan of reorganization or the shares of common stock to be issued upon their exercise. Such rights may be exercised only by the person to whom they are granted and only for such person's account. Each person exercising such subscription rights will be required to certify that such person is purchasing shares solely for such person's own account and that such person has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or an intent to make an offer to purchase such subscription rights or shares of common stock prior to the completion of the reorganization. - -------------------------------------------------------------------------------- We will pursue any and all legal and equitable remedies (including forfeiture) in the event we become aware of the transfer of subscription rights and will not honor orders known by us to involve the transfer of such rights. - -------------------------------------------------------------------------------- Limitations on Common Stock Purchases The plan of reorganization includes the following limitations on the number of shares of common stock which may be purchased during the reorganization: (1) No subscription for fewer than 25 shares will be accepted; (2) No fractional shares will be allocated or issued; (3) Purchasers in the subscription offering may subscribe for and purchase common stock in the subscription offering in an amount up to $1,000,000; 142 (4) The tax-qualified employee benefit plans are permitted to purchase up to 8% of the shares of common stock sold in the offering to persons other than First Charter, MHC. As a tax-qualified employee benefit plan, the ESOP intends to purchase 8% of the shares of common stock sold in the offering to persons other than First Charter, MHC ( or more if the Office of Thrift Supervision adopts proposed regulations permitting mutual holding companies to purchase additional stock for stock benefit plans); (5) The officers and directors of CharterBank and their associates in the aggregate, excluding purchases by the tax-qualified employee benefit plans, may purchase up to 25% of the shares of stock issued in the offering; (6) The aggregate amount of outstanding common stock of Charter Financial owned or controlled by persons other than First Charter, MHC must be less than 50% of Charter Financial's total outstanding stock following the reorganization; (7) Persons purchasing shares of common stock in the direct community offering or the syndicated community offering, may purchase common stock in an amount up to $1,000,000, subject to increase as described below; and (8) Except for the tax-qualified employee benefit plans, the maximum amount of shares of common stock purchased in all categories of the offering by any person, together with associates of, and groups of persons acting in concert with, such person, shall not exceed $1,650,000 subject to increase as described below. Subject to any required regulatory approval and the requirements of applicable laws and regulations, the $1,000,000 and $1,650,000 maximum amounts may be altered by CharterBank, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, to the following amounts: (i) increased to a maximum of 5% of the shares offered in the offering, or (ii) decreased to not less than one-half of one percent (.5%) of the number of shares of stock offered in the reorganization. If the purchase limitations are increased, subscribers for the maximum amount in the subscription offering will be given the opportunity to increase their subscriptions up to the then applicable limit. Requests to purchase additional shares of common stock under this provision will be determined by and in the sole discretion of the Board of Directors of CharterBank and, if necessary, allocated giving priority in accordance with the priorities set forth in the plan of reorganization and described in this prospectus. If we sell more than 4,485,000 shares, the additional shares will be allocated in accordance with the priorities and procedures described in "- Subscription Offering and Subscription Rights" and "-Direct Community Offering and Syndicated Community Offering." 143 The term "associate" of a person is defined to mean: (1) any corporation or organization (other than First Charter, MHC, Charter Financial, CharterBank or any majority-owned subsidiary thereof) of which such person is an officer, director, or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (2) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity (exclusive of any tax-qualified employee stock benefit plan); (3) any person who is related by blood or marriage to such person, and (1) lives in the same home as such person; or (2) is a director or senior officer of CharterBank or any affiliate thereof; and (4) any person "acting in concert" with any of the persons or entities specified in clauses (1) through (3) above; provided, however, that any tax-qualified or non-tax-qualified employee stock benefit plan shall not be deemed to be an associate of any director, or officer of First Charter, MHC, Charter Financial or CharterBank, to the extent provided in the plan of reorganization. We have the sole discretion to determine whether prospective purchasers are "associates" or "acting in concert." Directors and officers are not treated as associates of each other solely by virtue of holding such positions. We have the right in our sole discretion to reject any order submitted by a person whose representations we believe to be false or who we otherwise believe, either alone or acting in concert with others, is violating or circumventing, or intends to violate or circumvent, the terms and conditions of the plan of reorganization. Restrictions on Purchase or Transfer of Shares After the Reorganization All shares of common stock purchased in connection with the reorganization by an officer or director of CharterBank, First Charter, MHC or Charter Financial will be subject to a restriction that the shares not be sold for a period of one year following the date of purchase, except in the event of the death of such officer or director. Each certificate for restricted shares will bear a legend giving notice of this restriction on transfer. The directors and executive officers of Charter Financial and CharterBank will also be subject to the federal insider trading rules and any other applicable requirements of the federal securities laws. Purchases of outstanding shares of common stock of Charter Financial by directors or officers of Charter Financial, First Charter, MHC or CharterBank, and their associates during the three-year period following reorganization may be made only through a broker or dealer registered with the SEC, except with the prior written approval of the Office of Thrift Supervision. This restriction does not apply, however, to negotiated transactions involving more 144 than 1% of the outstanding common stock or purchases of common stock made and held by any tax-qualified or non-tax-qualified employee plan of CharterBank. Interpretation, Amendment and Termination All interpretations of the plan of reorganization by the Board of Directors will be final, subject to the authority of the Office of Thrift Supervision. The plan of reorganization provides that, if deemed necessary or desirable by the Board of Directors of CharterBank, the plan of reorganization may be substantively amended by a majority vote of the Board of Directors as a result of comments from regulatory authorities or otherwise, at any time prior to submission of proxy materials to CharterBank's members. Amendment of the plan of reorganization thereafter requires a majority vote of the Board of Directors, with the concurrence of the Office of Thrift Supervision. The plan of reorganization may be terminated by a majority vote of the Board of Directors of CharterBank at any time prior to the earlier of approval of the plan by the Office of Thrift Supervision and the date of the special meeting of members, and may be terminated at any time thereafter with the concurrence of the Office of Thrift Supervision. The plan of reorganization shall be terminated if the reorganization is not completed within 24 months from the date on which the members of CharterBank approve the plan of reorganization, and may not be extended by CharterBank or the Office of Thrift Supervision. 145 RESTRICTIONS ON ACQUISITION OF CHARTER FINANCIAL AND CHARTERBANK General The plan of reorganization provides for the reorganization of CharterBank into a mutual holding company structure. See "The Reorganization and The Offering - General." The plan of reorganization provides for the adoption of a new federal stock charter and bylaws for CharterBank, as well as for the adoption of a federal stock charter and bylaws of Charter Financial and First Charter, MHC. Certain provisions in CharterBank's and Charter Financial's federal stock charter and bylaws as well as other regulatory restrictions on CharterBank and Charter Financial may have certain anti-takeover effects. Statutory and Regulatory Restrictions on Acquisition Regulatory Restrictions Applicable for Three Years. For three years following a savings association's conversion to stock form, Office of Thrift Supervision regulations prohibit any person, without its prior approval from acquiring or making an offer to acquire more than 10% of the stock of the converted institution or of its holding company if such person is, or after consummation of such acquisition would be, the beneficial owner of more than 10% of such stock. In the event that any person, directly or indirectly, violates this regulation, the shares beneficially owned by such person in excess of 10% shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matter submitted to a vote of stockholders. In the recent past, it has been the Office of Thrift Supervision's general policy to routinely approve acquisitions in excess of 10% of the stock of converted savings associations or their holding companies after the passage of one year from the conversion, especially when such acquisitions are negotiated with the target company. However, the Office of Thrift Supervision has recently stated in the preamble to the proposed rulemaking for its new conversion regulations that the Office of Thrift Supervision intends on taking a very close look at applications to make sure all criteria are fully met before it will give written approval of acquisitions within the first three years following conversion. Therefore, this regulation and change in Office of Thrift Supervision policy may prevent any acquisition of control of CharterBank, whether "friendly" or hostile, for at least three years after the completion of the reorganization. Statutory and Regulatory Change in Control Restrictions. Federal law provides that no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a savings association unless the Office of Thrift Supervision has been given 60 days prior written notice. Federal law provides that no company may acquire control of a savings association or a savings and loan holding company without the prior approval of the Office of Thrift Supervision. Any company that acquires control becomes a "savings and loan holding company" subject to registration, examination and regulation by the Office of Thrift Supervision. Pursuant to federal regulations, control is considered to have been acquired when an entity, among other things, has acquired more than 25 percent of any class of 146 voting stock of the institution or the ability to control the election of a majority of the directors of an institution. Moreover, control is presumed to have occurred, subject to rebuttal, upon the acquisition of more than 10 percent of any class of voting stock, or of more than 25 percent of any class of stock, of a savings institution, where enumerated control factors are also present in the acquisition. The Office of Thrift Supervision may prohibit an acquisition of control if: . it would result in a monopoly or substantially lessen competition; . the financial condition of the acquiring person might jeopardize the financial stability of the institution; or . the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or of the public to permit the acquisition of control by that person. The foregoing restrictions do not apply to the acquisition of stock by one or more tax-qualified employee stock benefit plans, provided that the plan or plans do not have beneficial ownership in the aggregate of more than 25 percent of any class of our equity securities. Mutual Holding Company Structure The mutual holding company structure could restrict the ability of stockholders of Charter Financial to effect a change of control of management because, as long as First Charter, MHC remains in mutual form, it will control at least a majority of Charter Financial's voting stock. First Charter, MHC will be controlled by its board of directors, which will initially consist of the same persons who are members of the board of directors of CharterBank and Charter Financial. First Charter, MHC will be able to elect all members of the board of directors of Charter Financial, and, as a general matter, will be able to control the outcome of all matters presented to Charter Financial's stockholders for approval, except for matters that require a vote greater than a majority. First Charter, MHC, acting through its board of directors, will be able to prevent any challenge to the ownership or control of Charter Financial by minority stockholders. Charter Financial's Charter and Bylaws Charter Financial's federal stock charter and bylaws contain a number of provisions, relating to corporate governance and rights of stockholders, that might discourage future takeover attempts. As a result, stockholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of the Board of Directors or management of Charter Financial more difficult. - -------------------------------------------------------------------------------- The following description is a summary of the provisions of the charter and bylaws. See "Where You Can Find Additional Information" as to how to review a copy of these documents. - -------------------------------------------------------------------------------- 147 Directors. Certain provisions of Charter Financial's bylaws will impede changes in control of the board of directors. Charter Financial's bylaws provide that the board of directors will be divided into three classes. The members of each class will be elected for a term of three years and one class of directors will be elected by ballot annually. Thus, it would take two annual elections to replace a majority of Charter Financial's board. Finally, the bylaws impose notice and information requirements in connection with the nomination by stockholders of candidates for election to the board of directors or the proposal by stockholders of business to be acted upon at an annual meeting of stockholders. Restrictions on Call of Special Meetings. Charter Financial's federal stock charter provides that for a period of five years from the date of the reorganization, special meetings of shareholders relating to changes in control of Charter Financial or amendments to its charter shall be called only by the board of directors. Prohibition of Cumulative Voting. Charter Financial's federal stock charter prohibits cumulative voting for the election of directors. This means that First Charter, MHC will be able to elect all of the directors of Charter Financial and thus prevent a minority stockholder from obtaining representation on the board of directors. Limitation of Voting Rights. Charter Financial's federal stock charter also provides that for five years following the date of the reorganization, no person, other than First Charter, MHC, shall own more than 10% of the outstanding shares of Charter Financial. This limitation does not apply to a transaction in which Charter Financial forms a holding company, the purchase of shares by an underwriter in a public offering, or the purchase of shares by a tax-qualified employee stock benefit plan. If a party acquires in excess of 10% of Charter Financial's shares, those shares will be considered "excess shares" and will not be counted as shares entitled to vote. Authorized but Unissued Shares of Capital Stock. After the reorganization, Charter Financial will have authorized but unissued shares of common and preferred stock. See "Description of Capital Stock." The board of directors could use these shares of common and preferred stock to render more difficult or to discourage an attempt to obtain control of Charter Financial by means of a merger, tender offer or proxy statement. We anticipate, however, that it is unlikely that we will use the shares for this purpose, since First Charter, MHC must always own at least a majority of our common stock. Our federal stock charter also authorizes five million shares of serial preferred stock, no par value per share. Charter Financial is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the Board of Directors is authorized to fix the designations, and relative preferences, limitations, voting rights, if any, including without limitation, offering rights of such shares (which could be multiple or as a separate class). In the event of a proposed merger, tender offer or other attempt to gain control of Charter Financial that the board of directors does not approve, it might be possible for the board of directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede that completion of the transaction. An effect of the possible issuance of 148 preferred stock, therefore may be to deter a future attempt to gain control of Charter Financial. The board of directors has no present plan or understanding to issue any preferred stock. Ownership of Common Stock by Management. We expect our directors and officers to purchase up to 2,780,000 shares of common stock in the offering. Directors and officers are expected to control the voting of 6.2% of the shares of common stock sold in the offering (at the maximum of the offering range), and may control the voting of approximately 19.96% of the shares of common stock issued in the offering through the ESOP. Under the terms of the ESOP, the unallocated shares will be voted by the independent trustees for the ESOP generally in the same proportion as the instructions received by the trustee from participants voting their allocated shares. In addition, the officers and directors of Charter Financial will also be officers and directors of First Charter, MHC which, after the reorganization, will own at least a majority of Charter Financial's common stock. Certain provisions of Charter Financial's stock option plan and other benefit plans provide for benefits and cash payments in the event of a change in control of Charter Financial. The plans provide for accelerated vesting in the event of a change in control. These provisions may have the effect of increasing the cost of, and thereby discouraging, a future attempt to take over Charter Financial and thus generally may serve to perpetuate current management. Indemnification. Charter Financial's bylaws provide that it shall indemnify every person who acts on behalf of Charter Financial, or serves as a director or officer of Charter Financial, provided that such person acted in good faith and in a manner he or she reasonably believed to be in, and not opposed to, the best interest of Charter Financial, and with respect to any criminal proceeding such person had no reason to believe his or her conduct was unlawful. The bylaws also provide that such indemnification shall be to the fullest extent permitted under federal law. DESCRIPTION OF CAPITAL STOCK OF CHARTER FINANCIAL General Charter Financial is authorized to issue sixty million (60,000,000) shares of common stock having a par value of $.01 per share and ten million (10,000,000) shares of preferred stock having no par value per share. Charter Financial currently expects to sell up to 4,485,000 shares of common stock (or 5,157,750 shares of common stock in the event of an increase of 15% in the estimated valuation range) to purchasers of common stock in the offering and to issue up to 17,940,000 shares of common stock to First Charter, MHC (or 20,631,000 shares of common stock in the event of an increase of 15% in the estimated valuation range). Charter Financial will not issue any shares of preferred stock in the offering. Except as discussed above in "Restrictions on Acquisition of Charter Financial and CharterBank," each share of Charter Financial's common stock will have the same relative rights as, and will be identical in all respects with, every other share of common stock. Upon payment of the purchase price for the common stock in accordance with the plan of reorganization, all such stock will be duly authorized, fully paid and non- assessable. Under Office of Thrift Supervision regulations, a 149 majority of the issued and outstanding voting stock of Charter Financial must be held at all times by First Charter, MHC. The shares of common stock: . are not deposit accounts and are subject to investment risk; . are not insured or guaranteed by the FDIC, or any other government agency; and . are not guaranteed by Charter Financial or CharterBank. Common Stock Dividends. The payment of dividends by Charter Financial is subject to limitations which are imposed by law. See "Our Policy Regarding Dividends" and "Regulation of CharterBank and Charter Financial." The owners of common stock of Charter Financial will be entitled to receive and share equally in such dividends as may be declared by the board of directors out of funds legally available therefor. If Charter Financial issues preferred stock, the holders of the preferred stock may have a priority over the holders of the common stock with respect to dividends. Voting Rights. Upon the effective date of the reorganization, the holders of common stock of Charter Financial will possess exclusive voting rights in Charter Financial. They will elect Charter Financial's board of directors and act on such other matters as are required to be presented to them under law or Charter Financial's Charter or as are otherwise presented to them by the board of directors. Each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. Under some circumstances, shares in excess of 10% of Charter Financial's common stock may be considered "excess shares" and may therefore not be entitled to vote. See "Restrictions on Acquisition of Charter Financial and CharterBank." If Charter Financial issues preferred stock, holders of the preferred stock may also possess voting rights. See "Restrictions on Acquisition of Charter Financial and CharterBank." Liquidation. In the event of any liquidation, dissolution or winding up of CharterBank, Charter Financial, as owner of CharterBank's capital stock, would be entitled to receive, after payment or provision for payment of all debts and liabilities of CharterBank (including all deposit accounts and accrued interest thereon) (see "The Reorganization and The Offering - Effects of the Reorganization -Liquidation Rights"), all assets of CharterBank available for distribution. In the event of liquidation, dissolution or winding up of Charter Financial, the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of Charter Financial available for distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of the liquidation or dissolution. Preemptive Rights; Redemption. Holders of the common stock of Charter Financial will not be entitled to preemptive rights with respect to any shares which may be issued. The 150 common stock is not subject to redemption. Therefore, the board of directors may sell share of common stock without first offering those shares to existing stockholders of Charter Financial. Preferred Stock Charter Financial will not issue any shares of its authorized preferred stock in the reorganization. We may issue preferred stock in the future with such preferences and designations as the board of directors may from time to time determine. The board of directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights which could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control. LEGAL AND TAX OPINIONS Thacher Proffitt & Wood, Washington, D.C., will issue its opinion to us of the legality of the issuance of the common stock being offered and certain matters relating to the reorganization and federal taxation. Certain matters relating to state taxation will be passed upon for us by Alston & Bird LLP, Atlanta, Georgia. Certain legal matters will be passed upon for Sandler, O'Neill & Partners, L.P. by Malizia Spidi & Fisch, PC, Washington, D.C. EXPERTS The financial statements of CharterBank as of September 30, 2000 and 1999 and for each of the years in the three-year period ended September 30, 2000, appearing elsewhere in this prospectus have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, which is included herein and upon the authority of said firm as experts in accounting and auditing. RP Financial has consented to the publication in this document of a summary of its letter to CharterBank setting forth its opinion as to the estimated pro forma market value of CharterBank after the reorganization and its opinion setting forth the value of subscription rights and to the use of its name and statements with respect to it appearing in this document. REGISTRATION REQUIREMENTS Our common stock is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the Exchange Act). We are subject to the information, proxy solicitation, insider trading restrictions, tender offer rules, periodic reporting and other requirements of the SEC under the Exchange Act. We may not deregister the common stock under the Exchange Act for a period of at least three years following the reorganization. 151 WHERE YOU CAN FIND ADDITIONAL INFORMATION We are subject to the informational requirements of the Exchange Act and must file reports and other information with the SEC. We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the common stock offered in this document. As permitted by the rules and regulations of the SEC, this document does not contain all the information set forth in the registration statement. You may examine this information without charge at the public reference facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of this material from the SEC at prescribed rates. You may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants, including Charter Financial, that file electronically with the SEC. The address for this web site is "http://www.sec.gov." This document contains a description of the material features of certain exhibits to the Form S-1. The statements as to the contents of such exhibits, however, are, of necessity, brief descriptions and are not necessarily complete; each such statement is qualified by reference to such contract or document. A copy of Charter Financial's federal stock charter and bylaws, as well as a copy of the Federal Stock Charter and Bylaws of CharterBank and First Charter, MHC, are available for review at any of our offices. A copy of the plan of reorganization is available from offices of CharterBank without charge. You may also call the Conversion Center at [ ], Monday through Friday, 10:00 a.m. to 4:00 p.m., Eastern time, to request of a copy of the plan. A copy of the appraisal report of RP Financial, including any amendments made to it, and the detailed memorandum of the appraiser setting forth the method and assumptions for such appraisal are available for inspection at the main office of CharterBank. CharterBank has filed with the Office of Thrift Supervision a Notice of Mutual Holding Company Reorganization on Form MHC-1 and an Application for Approval of a Minority Stock Issuance on Form MHC-2. This prospectus omits some information contained in those applications. You may examine the Office of Thrift Supervision applications at the main office of the Office of Thrift Supervision, 1700 G Street, NW, Washington, DC 20552 and at the office of the Regional Director of the Southeast Regional Office of the Office of Thrift Supervision located at 1475 Peachtree Street, N.E. Atlanta, Georgia 30309. 152 CHARTERBANK Index to Consolidated Financial Statements
Consolidated Statements of Financial Condition at March 31, 2001 (unaudited) and September 30, 2000 and 1999 F-2 Consolidated Statements of Income and Comprehensive Income (Loss) for the Six Months ended March 31, 2001 and 2000 (unaudited) and for Each of the Years in the Three-Year Period ended September 30, 2000 F-4 Consolidated Statements of Equity for the Six Months ended March 31, 2001 (unaudited) and for Each of the Years in the Three-Year Period ended September 30, 2000 F-6 Consolidated Statements of Cash Flows for the Six Months ended March 31, 2001 and 2000 (unaudited) and for Each of the Years in the Three-Year Period ended September 30, 2000 F-7 Notes to Consolidated Financial Statements F-9 Independent Auditors' Report F-45 Other schedules are omitted as they are not required or are not applicable or the required information is shown in the financial statements or related notes. The financial statements for the holding companies Charter Financial and First Charter, MHC are not included as the formation of the companies has not been approved.
F-1 CHARTERBANK Consolidated Statements of Financial Condition March 31, 2001 (unaudited) and September 30, 2000 and 1999
March 31, September 30, --------------- ----------------------------------------- Assets 2001 2000 1999 --------------- ---------------------- ----------------- (Unaudited) (As restated - note 22) Cash and amounts due from depository institutions (note 18) $ 7,501,722 5,662,675 5,033,121 Interest-bearing deposits in other financial institutions 17,465,258 2,629,767 5,209,359 -------------- -------------- ------------ Cash and cash equivalents 24,966,980 8,292,442 10,242,480 -------------- -------------- ------------ Loans held for sale, market value of $412,000, $839,000 and $2,897,000 at March 31, 2001, September 30, 2000 and 1999, respectively 410,000 832,526 2,896,798 Freddie Mac common stock and other equity securities (note 4) 327,715,650 273,285,938 263,135,825 Mortgage-backed securities and collateralized mortgage obligations available for sale (notes 5 and 13) 300,737,770 367,707,904 356,498,633 Other investment securities available for sale (notes 4 and 13) 8,786,014 13,882,374 31,930,108 Federal Home Loan Bank stock (notes 4 and 13) 12,700,000 12,587,500 10,407,500 Loans receivable, gross 252,331,255 259,699,417 214,216,827 Unamortized loan origination costs (fees), net 43,079 113,317 (50,838) Allowance for loan losses (5,375,458) (6,346,001) (5,709,802) -------------- -------------- ------------ Loans receivable, net (notes 6 and 13) 246,998,876 253,466,733 208,456,187 -------------- -------------- ------------ Real estate owned (note 7) 767,779 629,993 222,210 Accrued interest and dividends receivable (note 8) 3,981,595 4,476,844 4,395,153 Premises and equipment, net (note 9) 3,644,185 3,534,071 3,452,429 Goodwill and other intangible assets, net (notes 2 and 3) -- -- 4,533,333 Income taxes receivable -- -- 3,145,376 Other assets (notes 10 and 11) 4,119,438 3,990,493 5,269,722 -------------- -------------- ------------ Total assets $ 934,828,287 942,686,818 904,585,754 ============== ============== ============
F-2
March 31, September 30, ------------ ----------------------------- Liabilities and Equity 2001 2000 1999 ------------ ----------- ----------- (Unaudited) (As restated- note 22) Liabilities: Deposits (note 12) $185,186,759 274,370,643 282,965,378 Borrowings (note 13) 352,304,750 352,218,500 312,866,769 Advance payments by borrowers for taxes and insurance 1,449,892 1,998,777 2,034,702 Deferred income taxes (note 14) 121,625,651 100,247,176 96,677,839 Other liabilities 25,049,090 9,324,980 11,551,783 ------------ ----------- ------------ Total liabilities 685,616,142 738,160,076 706,096,471 ------------ ----------- ------------ Equity (note 18): Retained earnings 54,347,287 51,698,621 50,826,334 Accumulated other comprehensive income - net unrealized holding gains on securities available for sale 194,864,858 152,828,121 147,662,949 ------------ ----------- ------------ Total equity 249,212,145 204,526,742 198,489,283 Commitments and contingencies (notes 6, 15, 16, and 19) ------------ ----------- ------------ Total liabilities and equity $934,828,287 942,686,818 904,585,754 ============ =========== ============
See accompanying notes to consolidated financial statements. F-3 CHARTERBANK Consolidated Statements of Income and Comprehensive Income (Loss) For the Six Months ended March 31, 2001 and 2000 (unaudited) and the Years ended September 30, 2000, 1999, and 1998
March 31, September 30, ----------------------- ----------------------------------- 2001 2000 2000 1999 1998 ----------- ---------- ---------- ---------- ----------- (Unaudited) (As restated - note 22) Interest and dividend income: Investment debt securities $ 480,958 707,533 1,194,033 1,524,095 479,973 Investment equity securities 2,343,614 2,085,133 4,307,513 3,689,704 3,276,080 Mortgage-backed securities and collateralized mortgage obligations 11,861,480 13,344,511 27,476,406 16,592,249 12,162,877 Loans receivable 11,248,324 9,834,694 21,075,913 15,015,066 13,153,429 Interest-bearing deposits in other financial institutions 232,949 60,668 159,089 148,332 103,038 ----------- ----------- ---------- ----------- ----------- Total interest and dividend income 26,167,325 26,032,539 54,212,954 36,969,446 29,175,397 ----------- ----------- ---------- ----------- ----------- Interest expense: Deposits (note 12) 6,164,257 6,879,962 13,932,849 10,423,679 5,978,373 Borrowings (note 13) 11,720,486 10,058,886 22,714,554 12,917,754 13,431,467 ----------- ----------- ---------- ----------- ----------- Total interest expense 17,884,743 16,938,848 36,647,403 23,341,433 19,409,840 ----------- ----------- ---------- ----------- ----------- Net interest income 8,282,582 9,093,691 17,565,551 13,628,013 9,765,557 Provision for loan losses (note 6) 300,000 180,000 1,410,000 240,000 180,000 ----------- ----------- ---------- ----------- ----------- Net interest income after provision for loan losses 7,982,582 8,913,691 16,155,551 13,388,013 9,585,557 ----------- ----------- ---------- ----------- ----------- Noninterest income: Loan servicing fees 217,294 203,263 410,468 290,615 227,997 Service charges on deposit accounts 354,675 332,779 700,568 377,717 327,299 Gain on sale of loans and servicing released loan fees 536,033 300,463 730,457 1,133,051 1,029,640 Gain (loss) on sale of mortgage-backed securities, collateralized mortgage obligations, and other investments (notes 4 and 5) 219,113 (182,477) (127,636) 395,645 766,506 Gain on disposition of Freddie Mac common stock (note 4) -- -- -- 35,865,650 -- Equity in (loss) earnings of limited partnerships (note 11) (71,615) -- (28,602) 448,000 (5,797,145) Other 39,489 179,771 263,787 239,216 139,147 ----------- ----------- ---------- ----------- ----------- Total noninterest income (loss) 1,294,989 833,799 1,949,042 38,749,894 (3,306,556) ----------- ----------- ---------- ----------- ----------- Noninterest expenses: Salaries and employee benefits (notes 15 and 16) 3,209,695 2,511,669 4,956,345 4,193,329 3,498,530 Occupancy 840,102 882,588 1,942,041 1,252,843 1,046,983 Furniture and equipment 195,158 235,640 419,208 379,188 268,094 Net cost of operations of real estate owned 5,474 50,076 106,785 18,718 37,720 Federal insurance premiums and other regulatory fees 113,886 155,019 267,498 259,828 180,103 Marketing 189,916 204,455 375,787 315,327 247,764 Charitable contributions (note 4) 12,328 17,176 61,689 2,181,656 24,599 Legal and professional 340,201 670,089 1,455,120 752,677 373,166 Amortization and impairment of intangibles (note 3) -- 475,000 4,533,333 66,667 -- Other 867,591 918,134 1,824,538 1,328,991 945,045 ----------- ----------- ---------- ----------- ----------- Total noninterest expenses 5,774,351 6,119,846 15,942,344 10,749,224 6,622,004 ----------- ----------- ---------- ----------- ----------- Income (loss) before income taxes, carried forward $ 3,503,220 3,627,644 2,162,249 41,388,683 (343,003) =========== =========== ========== =========== ===========
F-4 CHARTERBANK Consolidated Statements of Income and Comprehensive Income (Loss) For the Six Months ended March 31, 2001 and 2000 (unaudited) and the Years ended September 30, 2000, 1999, and 1998
March 31, September 30, ------------------------ ----------------------------------- 2001 2000 2000 1999 1998 ----------- ----------- ---------- ----------- ---------- (Unaudited) (As restated - note 22) Income (loss) before income taxes, brought forward $ 3,503,220 3,627,644 2,162,249 41,388,683 (343,003) Income tax expense (benefit) - (note 14) 854,554 941,234 1,289,962 14,359,324 (817,916) ----------- ----------- ---------- ----------- ---------- Net income 2,648,666 2,686,410 872,287 27,029,359 474,913 ----------- ----------- ---------- ----------- ---------- Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the period, net of income taxes of $26,511,581, $(16,936,361), $3,197,892, $(899,027), and $31,543,476 for the six months ended March 31, 2001 and 2000 (unaudited) and for the years ended September 30, 2000, 1999, and 1998, respectively 42,171,272 (26,940,222) 5,086,803 (1,466,834) 52,081,857 Less reclassification adjustment for losses (gains) included in net income, net of income taxes of $84,578, $(70,436), $(49,268), $13,996,860, and $289,126, for the six months ended March 31, 2001 and 2000 (unaudited) and for the years ended September 30, 2000, 1999, and 1998, respectively (134,535) 112,041 78,369 (22,264,435) (477,380) ----------- ----------- ---------- ----------- ---------- Total other comprehensive income (loss) 42,036,737 (26,828,181) 5,165,172 (23,731,269) 51,604,477 ----------- ----------- ---------- ----------- ---------- Comprehensive income (loss) $44,685,403 (24,141,771) 6,037,459 3,298,090 52,079,390 =========== =========== ========== =========== ==========
See accompanying notes to consolidated financial statements. F-5 CHARTERBANK Consolidated Statements of Equity For the Six Months ended March 31, 2001 (unaudited) and Years ended September 30, 2000, 1999, and 1998
Accumulated other comprehensive income - net unrealized holding gains on securities Retained available for Total earnings sale equity -------------- ------------- ----------- Balance at September 30, 1997 $ 23,322,062 119,789,741 143,111,803 Net income 474,913 -- 474,913 Change in net unrealized holding gains on securities, net of income taxes of $31,254,350 -- 51,604,477 51,604,477 -------------- ------------- ----------- Balance at September 30, 1998 23,796,975 171,394,218 195,191,193 Net income 27,029,359 -- 27,029,359 Change in net unrealized holding gains on securities, net of income taxes of $10,974,781 -- (23,731,269) (23,731,269) -------------- ------------- ----------- Balance at September 30, 1999 50,826,334 147,662,949 198,489,283 Net income (as restated - note 22) 872,287 -- 872,287 Change in net unrealized holding gains on securities, net of income taxes of $3,247,160 -- 5,165,172 5,165,172 -------------- ------------- ----------- Balance at September 30, 2000 (as restated - note 22) 51,698,621 152,828,121 204,526,742 Net income (unaudited) 2,648,666 -- 2,648,666 Change in net unrealized holding gains on securities, net of income taxes of $26,596,159 (unaudited) -- 42,036,737 42,036,737 -------------- ------------- ----------- Balance at March 31, 2001 (unaudited) $ 54,347,287 194,864,858 249,212,145 ============== ============= ===========
F-6 CHARTERBANK Consolidated Statements of Cash Flows For the Six Months ended March 31, 2001 and 2000 (unaudited) and the Years ended September 30, 2000, 1999, and 1998
March 31, --------------------------- 2001 2000 ------------- ----------- Cash flows from operating activities: Net income $ 2,648,666 2,686,410 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 300,000 180,000 Depreciation and amortization 246,543 724,902 Provision for asset impairment -- -- Deferred income tax (benefit) expense (5,048,529) 161,000 Equity in loss (earnings) of limited partnerships 71,615 -- (Accretion) amortization of premiums and discounts, net (2,355,141) 506,088 Gain on sale of loans held for sale (11,936) (40,464) Proceeds from sale of loans held for sale 21,536,869 16,753,474 Originations and purchases of loans held for sale (21,102,407) (18,996,544) (Gain) loss on sales of mortgage-backed securities, collateralized mortgage obligations, and other investments (219,113) 182,477 Donation of FNMA stock -- -- Gain on disposition of stock -- -- (Gain) loss on sales of real estate owned (11,759) 49,912 Donation of real estate owned -- -- Freddie Mac common stock contributed to charitable organization -- -- Changes in assets and liabilities: Decrease (increase) in accrued interest and dividends receivable 495,249 (92,665) Decrease (increase) in income tax refunds receivable -- 2,998,250 (Increase) decrease in other assets (200,560) 1,796,639 Increase (decrease) in other liabilities 15,724,110 (2,479,160) ------------- ------------- Net cash provided by operating activities 12,073,607 4,430,319 ------------- ------------- Cash flows from investing activities: Proceeds from sales of mortgage-backed securities and collateralized mortgage obligations available for sale 114,532,730 32,205,133 Principal collections on mortgage-backed securities and collateralized mortgage obligations available for sale 13,956,020 16,802,307 Purchases of mortgage-backed securities and collateralized mortgage obligations available for sale (46,378,745) (89,713,490) Purchases of equity securities and other investment securities available for sale (112,500) (2,287,500) Principal collections on other investment securities available for sale -- 15,000,000 Proceeds from sale of other investment securities available for sale 6,564,772 1,982,424 Proceeds from sale of Freddie Mac stock -- -- Net decrease (increase) in loans receivable, exclusive of loan sales 5,535,444 (31,705,944 Proceeds from sale of real estate owned 506,386 869,567 Purchases of premises and equipment, net of dispositions (356,657) (703,487) Purchase of loans -- -- Acquisition of Citizens Bancgroup, Inc., net of cash paid -- -- ------------- ------------- Net cash provided by (used in) investing activities 94,247,450 (57,550,990) ------------- ------------- September 30, ------------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ (As restated - note 22) Cash flows from operating activities: Net income 872,287 27,029,359 474,913 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,410,000 240,000 180,000 Depreciation and amortization 1,378,240 731,851 587,496 Provision for asset impairment 3,803,333 -- -- Deferred income tax (benefit) expense 322,177 7,831,928 (2,025,709) Equity in loss (earnings) of limited partnerships 28,602 (448,000) 5,797,145 (Accretion) amortization of premiums and discounts, net (454,812) 136,024 133,539 Gain on sale of loans held for sale (44,874) (153,346) (620,970) Proceeds from sale of loans held for sale 36,230,650 23,282,129 63,825,430 Originations and purchases of loans held for sale (34,121,504) (22,435,402) (65,727,913) (Gain) loss on sales of mortgage-backed securities, collateralized mortgage obligations, and other investments 127,636 (395,645) (766,506) Donation of FNMA stock 25,633 -- -- Gain on disposition of stock -- (35,865,650) -- (Gain) loss on sales of real estate owned 69,353 15,248 24,584 Donation of real estate owned 17,000 -- -- Freddie Mac common stock contributed to charitable organization -- 2,152,500 -- Changes in assets and liabilities: Decrease (increase) in accrued interest and dividends receivable (81,691) (1,096,608) (1,275,740) Decrease (increase) in income tax refunds receivable 3,145,376 (3,145,376) -- (Increase) decrease in other assets 1,050,627 (223,465) (2,274,747) Increase (decrease) in other liabilities (2,226,803) 2,872,043 2,030,882 ------------ ------------ ------------ Net cash provided by operating activities 11,551,230 527,590 362,404 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sales of mortgage-backed securities and collateralized mortgage obligations available for sale 67,269,563 260,278,302 224,913,926 Principal collections on mortgage-backed securities and collateralized mortgage obligations available for sale 40,206,702 41,812,636 24,734,025 Purchases of mortgage-backed securities and collateralized mortgage obligations available for sale (120,209,208) (422,174,802) (369,569,242) Purchases of equity securities and other investment securities available for sale (3,892,500) (52,103,423) (17,644,339) Principal collections on other investment securities available for sale 16,712,500 -- 176,284 Proceeds from sale of other investment securities available for sale 3,135,170 28,149,121 22,352,291 Proceeds from sale of Freddie Mac stock -- 34,468,568 -- Net decrease (increase) in loans receivable, exclusive of loan sales (47,698,339) (9,694,763) (31,413,858) Proceeds from sale of real estate owned 783,655 303,487 245,054 Purchases of premises and equipment, net of dispositions (529,882) (459,310) (182,151) Purchase of loans -- (8,271,000) -- Acquisition of Citizens Bancgroup, Inc., net of cash paid -- 1,404,425 -- ------------ ------------ ------------ Net cash provided by (used in) investing activities (44,222,339) (126,286,760) (146,388,010) ------------ ------------ ------------ (Continued)
F-7 CHARTERBANK Consolidated Statements of Cash Flows For the Six Months ended March 31, 2001 and 2000 (unaudited) and the Years ended September 30, 2000, 1999, and 1998
March 31, -------------------------------------- 2001 2000 --------------- ---------------- (Unaudited) Cash flows from financing activities: Net increase in savings and demand deposit accounts $ 4,657,988 1,508,986 Net (decrease) increase in time deposits (93,841,872) (12,525,280) Proceeds from Federal Home Loan Bank advances 273,000,000 276,750,000 Principal payments on advances from Federal Home Loan Bank (271,000,000) (244,900,000) Proceeds from other borrowings 35,094,000 31,995,607 Principal payments on other borrowings (37,007,750) (2,085,000) Net (decrease) increase in advance payments by borrowers for taxes and insurance (548,885) (525,538) --------------- ---------------- Net cash (used in) provided by financing activities (89,646,519) 50,218,775 --------------- ---------------- Net increase (decrease) in cash and cash equivalents 16,674,538 (2,901,896) Cash and cash equivalents at beginning of period 8,292,442 10,242,480 --------------- ---------------- Cash and cash equivalents at end of period $ 24,966,980 7,340,584 =============== ================ Supplemental disclosures of cash flow information: Interest paid $ 18,641,557 16,303,892 =============== ================ Income taxes paid $ 150,000 -- =============== ================ Detail of acquisitions: Fair value of assets acquired $ -- -- Liabilities assumed -- -- --------------- ---------------- Net cash acquired in acquisition $ -- -- =============== ================ Financing activities: Real estate acquired through foreclosure of the loans receivable $ 632,413 1,023,531 =============== ================ Contribution of real estate acquired for sale to charity $ -- -- =============== ================
September 30, ------------------------------------------------------- 2000 1999 1998 --------------------- ------------- ------------- (As rested - note 23) Cash flows from financing activities: Net increase in savings and demand deposit accounts 175,114 4,521,548 1,782,387 Net (decrease) increase in time deposits (8,769,849) 100,791,763 43,939,755 Proceeds from Federal Home Loan Bank advances 676,853,978 367,600,000 140,865,000 Principal payments on advances from Federal Home Loan Bank (647,753,978) (358,950,000) (113,865,000) Proceeds from other borrowings 1,505,184,509 862,308,219 642,549,985 Principal payments on other borrowings (1,494,932,778) (846,729,450) (567,836,985) Net (decrease) increase in advance payments by borrowers for taxes and insurance (35,925) 292,410 500,664 --------------- ------------ ------------- Net cash (used in) provided by financing activities 30,721,071 129,834,490 147,935,806 --------------- ------------ ------------- Net increase (decrease) in cash and cash equivalents (1,950,038) 4,075,320 1,910,200 Cash and cash equivalents at beginning of period 10,242,480 6,167,160 4,256,960 --------------- ------------ ------------- Cash and cash equivalents at end of period 8,292,442 10,242,480 6,167,160 =============== ============ ============= Supplemental disclosures of cash flow information: Interest paid 36,872,174 25,104,646 18,892,759 =============== ============ ============= Income taxes paid -- 11,192,000 1,020,307 =============== ============ ============= Detail of acquisitions: Fair value of assets acquired -- 41,033,492 -- Liabilities assumed -- (42,437,917) -- --------------- ------------ ------------- Net cash acquired in acquisition -- (1,404,425) -- =============== ============ ============= Financing activities: Real estate acquired through foreclosure of the loans receivable 1,277,793 351,305 129,640 =============== ============ ============= Contribution of real estate acquired for sale to charity 17,002 -- -- =============== ============ =============
See accompanying notes to consolidated financial statements. F-8 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (1) Summary of Significant Accounting Policies CharterBank (the "Company") was organized as a federally chartered mutual savings and loan association in 1954. The Company is primarily regulated by the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"), and undergoes periodic examinations by those regulatory authorities. The Company primarily provides mortgage loans and a full range of deposit products to individual customers through its main office in West Point, Georgia and four full-service branch offices located in LaGrange, Georgia, and Valley, Alabama (three). In addition, the Company operates four loan production offices located in various Georgia and Alabama locations. The Company primarily competes with other financial institutions in its market area within west central Georgia and east central Alabama. The Company considers its primary lending market to be the states of Georgia and Alabama. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to prevailing practices within the financial institutions industry. The following is a summary of the significant accounting policies that the Company follows in presenting its consolidated financial statements. (a) Basis of Presentation In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenue and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and mortgage loan prepayment assumptions used to determine the amount of revenue recognition on mortgage-backed securities and collateralized mortgage obligations. In connection with the determination of the allowance for loan losses and the value of real estate owned, management obtains independent appraisals for significant properties. In connection with the determination of revenue recognition on mortgage-backed securities and collateralized mortgage obligations, management obtains independent estimates of mortgage loan prepayment assumptions, which are based partly on historical prepayments and current interest rates. A substantial portion of the Company's loans are secured by real estate located in its market area. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in the real estate market conditions of this market area. (b) Cash Equivalents Cash equivalents, as presented in the financial statements, include amounts due from other depository institutions and interest-bearing deposits in other financial institutions. Generally, interest-bearing deposits in other financial institutions are for one-day periods. (c) Investments, Mortgage-Backed Securities, and Collateralized Mortgage Obligations Investments, mortgage-backed securities, and collateralized mortgage obligations available for sale are reported at fair value, as determined by independent quotations. Investment in stock of a Federal Home Loan Bank is required of every federally insured financial institution who utilizes F-9 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 its services. Generally, the Federal Home Loan Bank will repurchase excess stock at cost; accordingly, the investment in Federal Home Loan Bank stock is carried at cost which approximates its fair value. Purchase premiums and discounts on investment securities are amortized and accreted to interest income using the interest method 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. Gains and losses on sales of investments, mortgage-backed securities, and collateralized mortgage obligations are recognized on the trade date, based on the net proceeds received and the adjusted carrying amount of the specific security sold. (d) Loans and Interest Income Loans are reported at the principal amounts outstanding, net of unearned income, deferred loan fees/origination costs, and the allowance for loan losses. Loans held for sale are carried at the lower of aggregate cost or market, with market determined on the basis of open commitments for committed loans. For uncommitted loans, market is determined on the basis of current delivery prices in the secondary mortgage market. Interest income is recognized using the simple interest method on the balance of the principal amount outstanding. Unearned income, primarily arising from deferred loan fees, net of certain origination costs, and deferred gains on the sale of the guaranteed portion of Small Business Administration (SBA) loans, is amortized over the lives of the underlying loans using the interest method over the contractual life of the loans. The accrual of interest income is discontinued on loans which become contractually past due by 90 days or when reasonable doubt exists as to the full timely collection of interest or principal. Interest previously accrued but not collected is reversed against current period interest income when such loans are placed on nonaccrual status. Interest on nonaccrual loans which is ultimately collected is credited to income in the period received. In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 114, Accounting by Creditors for Impairment of a Loan. SFAS 114 requires impaired loans to be measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent, beginning in fiscal 1996. In October 1994, the FASB issued SFAS 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, which amends the requirements of SFAS 114 regarding interest income recognition and related disclosure requirements. Under the provisions of SFAS 114 and SFAS 118, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. The provisions of SFAS 114 do not apply to large pools of smaller balance homogeneous loans, such as consumer and installment loans, which are collectively evaluated for impairment. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Cash receipts on impaired loans which are accruing interest are applied to principal and interest under the contractual terms of the loan F-10 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied to reduce the principal amount of such loans until the principal has been recovered and are recognized as interest income thereafter. Gains or losses on the sale of mortgage loans are recognized at settlement dates and are computed as the difference between the sales proceeds received and the net book value of the mortgage loans sold. At the time of sale, a servicing asset is recorded if expected servicing revenues exceed an amount approximating adequate servicing compensation. For sales of the SBA guaranteed portion of loans, the basis in the portion of the loan sold is determined by allocating the loan carrying value to the portion sold, portion retained, and servicing asset, if any, based on their relative fair values. The servicing asset, included in other assets, is amortized using the interest method over the estimated life of the serviced loans considering assumed prepayment patterns. (e) Allowance for Loan Losses The allowance for loan losses is adjusted through provisions for loan losses charged or credited to operations. Loans are charged off against the allowance for loan losses when management believes that the collection of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management has determined to be adequate through its allowance for loan losses methodology to absorb losses inherent in its existing loan portfolio. The allowance is determined through consideration of such factors as changes in the nature and volume of the portfolio, overall portfolio quality, delinquency trends, collateral, loan concentrations, specific problem loans, and economic conditions that may affect the borrowers' ability to pay. To the best of management's ability, all known and inherent losses that are both probable and reasonable to estimate have been recorded. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to adjust the allowance based on their judgment about information available to them at the time of their examination. (f) Real Estate Owned Real estate acquired through foreclosure, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is recognized and charged to the allowance for loan losses. Subsequent write-downs are charged to a separate allowance for losses pertaining to real estate owned, established through provisions for estimated losses on real estate owned charged to operations. Based upon management's evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary. Gains recognized on the disposition of the properties are recorded in other income. Costs of improvements to real estate are capitalized, while costs associated with holding the real estate are charged to operations. F-11 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (g) Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation which is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets range from 20 to 50 years for buildings and improvements and three to 15 years for furniture, fixtures, and equipment. (h) Mortgage Banking Activities In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125 was amended by SFAS No. 127, which deferred the effective date of certain provisions of SFAS No. 125 until January 1, 1998. SFAS No. 125 is to be applied prospectively to transfers and servicing of financial assets and extinguishments of liabilities after December 31, 1996. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, to clarify that a debt security may not be classified as held to maturity if it can be prepaid or otherwise settled in such a way that the holder of the security would not recover substantially all of its recorded investment. SFAS No. 125 also amends and extends to all servicing assets and liabilities the accounting standards for mortgage servicing rights in SFAS No. 65, Accounting for Certain Mortgage Banking Activities, and supersedes SFAS No. 122, Accounting for Mortgage Servicing Rights. Mortgage loan servicing rights are included in other assets. Mortgage servicing rights are stated at cost, less accumulated amortization and impairment valuation allowance. Under SFAS No. 125, the Company recognizes, as separate assets, rights to service mortgage loans for others, either purchased or through Company originations. Prior to the adoption of SFAS No. 125, separate mortgage servicing rights were recognized only when purchased. Mortgage servicing rights which are acquired through either the purchase or origination of mortgage loans are recognized as separate assets when the Company sells or securitizes those loans with servicing rights retained. For originated mortgage loans, the amount of the mortgage servicing rights to be recognized is determined based upon an allocation of the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. Fair value is determined by discounted cash flow analyses using appropriate assumptions for servicing fee income, servicing fee costs, prepayment rates, and discount rates. For mortgage servicing rights acquired separate from the mortgage loans, the Company capitalizes the amount paid. The cost of the mortgage servicing rights is amortized in proportion to and over the period of net servicing income which is estimated to be generated by the underlying mortgage servicing rights. In accordance with SFAS No. 125, the Company periodically assesses its capitalized mortgage servicing rights for impairment based upon the fair value of those rights, including those rights purchased before the adoption of SFAS No. 125. To measure the fair value of its mortgage servicing rights, the Company uses discounted cash flow analyses taking into consideration appropriate assumptions for servicing fee income, servicing fee costs, prepayment rates, and F-12 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 discount rates. The Company stratifies its capitalized mortgage servicing rights for the purpose of evaluating impairment, taking into consideration relevant risk characteristics, including loan type, note rate, and note term. If the recorded amount of the mortgage servicing rights exceeds the fair value, the amount of the impairment is recognized through a valuation allowance, with a corresponding charge to operations. Additionally, the Company will prospectively accelerate future amortization if a reduction in expected future net servicing income is estimated. Fees for servicing loans for investors are based on the outstanding principal balance of the loans serviced and are recognized as income when earned. (i) Insurance At March 31, 2001 (unaudited) and September 30, 2000, the Company was covered under a $5,000,000 banker's blanket bond policy, and a $1,000,000 errors and omissions policy. At March 31, 2001 (unaudited) and September 30, 2000, the Company was also covered with a $10,000,000 umbrella policy. (j) Investment in Limited Partnerships The carrying value of the Company's share (based on its underlying ownership interest) of limited partnerships is based on the Company's original investment adjusted for its pro rata share of the partnerships' net income or losses. (k) Income Taxes The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (l) Comprehensive Income Comprehensive income for the Company consists of net income for the period and unrealized holding gains on investments, mortgage-backed securities, and collateralized mortgage obligations classified as available for sale, net of income taxes. (m) Goodwill and Other Intangible Assets Goodwill and other intangible assets include costs in excess of net assets acquired and deposit premiums recorded in connection with the acquisition of Citizens Bancgroup, Inc. These intangible assets are being amortized using the straight-line method over five years. The Company examines the carrying value of its intangible assets to determine whether there are any impairment losses. If indicators of impairment were present in intangible assets used in operations and undiscounted future cash flows were not expected to be sufficient to recover the assets' carrying amount, an impairment loss would be charged to expense in the period identified. F-13 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (n) 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. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those financial instruments at fair value. 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 amends the accounting and reporting standards of Statement No. 133 for certain derivative instruments and certain hedging activities. The Company adopted SFAS No. 133, as amended, on October 1, 2000. The adoption of SFAS No. 133, as amended, did not have a material impact on the Company's consolidated financial statements. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No. 125 issued in June 1996 and is effective for fiscal years ending after December 15, 2000. SFAS No. 140 addresses implementation issues that were identified in applying SFAS No. 125. SFAS No. 140 is not expected to have a material impact on the Company. (o) Reclassifications Certain reclassifications have been made to the 1999 and 1998 consolidated financial statements to conform to the presentation adopted in 2000. (2) Business Combinations Effective August 18, 1999, the Company acquired all of the issued and outstanding shares of Citizens Bancgroup, Inc. ("CNB"), Valley, Alabama, and its wholly owned banking subsidiary, Citizens National Bank, for a purchase price of approximately $2,250,000 in cash. The acquisition has been accounted for using the purchase method of accounting and, hence, the results of operations of CNB have been included in the consolidated financial statements from the aforementioned effective date. The assets and liabilities of CNB, including purchase accounting adjustments, as of the date of the acquisition, were as follows: Loans, net $ 24,722,000 Other earning assets 10,458,000 Other assets 4,908,000 Goodwill and other intangibles 4,600,000 -------------- 44,688,000 Deposits 42,041,000 Other liabilities 397,000 -------------- Purchase price $ 2,250,000 ============== F-14 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 The following summarizes the unaudited pro forma consolidated results of operations assuming CNB was acquired in a purchase accounting transaction on October 1, 1997:
1999 1998 ------------------ ------------------ Interest income $ 41,787,000 34,408,000 ================== ================== Net interest income $ 16,150,000 12,714,000 ================== ================== Noninterest income (loss) $ 39,404,000 (2,865,000) ================== ================== Net income $ 23,807,000 118,000 ================== ==================
(3) Goodwill and Other Intangible Assets Goodwill and other intangible assets at September 30, 2000 and 1999 consists of the following:
2000 1999 ------------- ------------- Goodwill $ 3,125,000 3,125,000 Deposit premium 1,475,000 1,475,000 ------------- ------------- 4,600,000 4,600,000 Accumulated amortization and allowance for impairment (4,600,000) (66,667) ------------- ------------- Goodwill and other intangible assets, net $ -- 4,533,333 ============= =============
The Company examines the carrying amount of its intangible assets to determine whether there are any impairment losses. The analysis for the year ended September 30, 2000 indicated that undiscounted future cash flows associated with the purchase of assets and assumption of liabilities of CNB would be negative and therefore insufficient to recover the carrying amount of the related intangible assets primarily due to charge-offs of loans purchased. Accordingly, the Company recorded an impairment loss of $3,603,333 in addition to scheduled amortization of $930,000 for the year ended September 30, 2000. F-15 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (4) Investment Securities Investment securities available for sale are summarized as follows:
March 31, 2001 (unaudited) ----------------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value --------------- ----------------- --------------- ------------------ Freddie Mac common stock $ 6,886,116 320,829,534 -- 327,715,650 Other: U.S. Government agencies 7,931,565 -- 180,551 7,751,014 Corporate debt 1,000,000 35,000 -- 1,035,000 --------------- ----------------- --------------- ------------------ 8,931,565 35,000 180,551 8,786,014 --------------- ----------------- --------------- ------------------ $ 15,817,681 320,864,534 180,551 336,501,664 =============== ================= =============== ================== September 30, 2000 ----------------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value --------------- ----------------- --------------- ------------------ Freddie Mac common stock $ 6,886,116 266,399,822 -- 273,285,938 Other: U.S. Government agencies 14,448,989 -- 1,569,115 12,879,874 Corporate debt 1,000,000 2,500 -- 1,002,500 --------------- ----------------- --------------- ------------------ 15,448,989 2,500 1,569,115 13,882,374 --------------- ----------------- --------------- ------------------ $ 22,335,105 266,402,322 1,569,115 287,168,312 =============== ================= =============== ================== September 30, 1999 ----------------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value --------------- ----------------- --------------- ------------------ Freddie Mac common stock $ 6,886,116 255,973,884 -- 262,860,000 Other equity securities 92,541 183,284 -- 275,825 --------------- ----------------- --------------- ------------------ 6,978,657 256,157,168 -- 263,135,825 --------------- ----------------- --------------- ------------------ Other: U.S. Government agencies 31,388,055 -- 1,438,102 29,949,953 Corporate debt 1,951,435 28,720 -- 1,980,155 --------------- ----------------- --------------- ------------------ 33,339,490 28,720 1,438,102 31,930,108 --------------- ----------------- --------------- ------------------ $ 40,318,147 256,185,888 1,438,102 295,065,933 =============== ================= =============== ==================
The Company's investment in Federal Home Loan Bank stock was $12,700,000 (unaudited), $12,587,500 and $10,407,500 at March 31, 2001 (unaudited) and September 30, 2000 and 1999, respectively. Under SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities, the investment in Federal Home Loan Bank stock is carried at cost because it is considered a restricted stock investment. The investment in Federal Home Loan Bank stock was not considered impaired at March 31, 2001 (unaudited) and September 30, 2000 and 1999. F-16 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 The amortized cost and fair value of investments in debt securities available for sale at March 30, 2001 (unaudited) and September 30, 2000, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
March 31, 2001 September 30, 2000 ------------------------------------- ------------------------------------ Amortized cost Estimated Amortized Estimated fair value cost fair value ---------------- ---------------- ---------------- --------------- (unaudited) Due less than one year $ 1,000,000 1,035,000 1,000,000 1,002,500 Due after one year through five years -- -- -- -- Due after five years through ten years -- -- -- -- Due after ten years 7,931,565 7,751,014 14,448,989 12,879,874 ---------------- ---------------- ---------------- --------------- $ 8,931,565 8,786,014 15,448,989 13,882,374 ================ ================ ================ ===============
Proceeds from sales of investment securities for the six months ended March 31, 2001 and 2000 (unaudited) and the years ended September 30, 2000, 1999, and 1998 were $6,564,772 (unaudited), $1,982,424 (unaudited), $3,135,170, $28,149,121, and $22,352,291, respectively. Gross gains of $185,337, $148,097, and $46,388 were realized on sales of investment securities for the years ended September 30, 2000, 1999, and 1998, respectively. There were no gross gains on sales of investment securities for the six months ended March 31, 2001 and 2000 (unaudited). Gross realized losses on sales of investment securities for the six months ended March 31, 2001 and 2000 (unaudited) and for the years ended September 30, 2000, 1999, and 1998 were $42,229 (unaudited), $17,577 (unaudited), $22,072, $12,968, and $8,689, respectively. During the year ended September 30, 2000, the Company donated 425 shares of Fannie Mae stock with a fair value of $25,633 to LaGrange College. The Company recognized a gain on the disposition of the stock of $16,694 and recorded contribution expense for the total fair value in 2000. During the year ended September 30, 1999, the Company donated 35,000 shares of Freddie Mac common stock with a fair value of $2,152,500 to a charitable foundation formed by the Company. The Company recognized a gain on the disposition of the stock of $2,117,365 and recorded contribution expense for the total fair value in 1999. During the year ended September 30, 1999, the Company sold 570,000 shares of Freddie Mac common stock with a fair value of $34,468,568. The Company recognized a gain on the disposition of the stock of $33,748,285. Investment securities with an aggregate carrying amount of $8,786,014 (unaudited), $13,882,374 and $26,841,596 at March 31, 2001 (unaudited) and September 30, 2000 and 1999, respectively, were pledged to secure Federal Home Loan Bank advances and to collateralize securities sold under agreements to repurchase. F-17 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (5) Mortgage-Backed Securities and Collateralized Mortgage Obligations Mortgage-backed securities and collateralized mortgage obligations available for sale are summarized as follows:
March 31, 2001 (unaudited) -------------------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value ----------------- --------------- ---------------- ------------------- Mortgage-backed securities: FNMA certificates $ 43,126,256 129,031 540,064 42,715,223 GNMA certificates 43,473,674 68,310 616,660 42,925,324 FHLMC certificates 4,165,049 25,556 5,301 4,185,304 Collateralized mortgage obligations: FNMA 69,926,921 245,836 319,095 69,853,662 GNMA 3,517,508 22,161 17,719 3,521,950 FHLMC 79,395,842 249,237 470,021 79,175,058 Other 60,447,027 32,217 2,117,995 58,361,249 ----------------- --------------- ---------------- ------------------- $ 304,052,277 772,348 4,086,855 300,737,770 ================= =============== ================ =================== September 30, 2000 ---------------------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value ------------------ --------------- ----------------- ----------------- Mortgage-backed securities: FNMA certificates $ 52,832,211 -- 2,049,108 50,783,103 GNMA certificates 85,700,103 -- 3,529,073 82,171,030 FHLMC certificates 25,043,175 8,313 696,083 24,355,405 Collateralized mortgage obligations: FNMA 78,831,227 107,091 1,160,820 77,777,498 GNMA 3,517,509 -- 211,955 3,305,554 FHLMC 70,512,731 160,124 1,303,632 69,369,223 Other 67,198,421 -- 7,252,330 59,946,091 ----------------- --------------- ----------------- ----------------- $ 383,635,377 275,528 16,203,001 367,707,904 ================= =============== ================= ================= September 30, 1999 -------------------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value ----------------- --------------- ---------------- ------------------- Mortgage-backed securities: FNMA certificates $ 64,839,039 767 2,303,384 62,536,422 GNMA certificates 81,650,700 -- 3,731,214 77,919,486 FHLMC certificates 24,357,067 -- 572,560 23,784,507 Collateralized mortgage obligations: FNMA 61,620,667 13,081 1,105,945 60,527,803 FHLMC 60,493,323 39,976 1,069,519 59,463,780 GNMA 3,504,249 -- 188,360 3,315,889 Other 74,287,972 -- 5,337,226 68,950,746 ----------------- --------------- ---------------- ------------------- $ 370,753,017 53,824 14,308,208 356,498,633 ================= =============== ================ ===================
F-18 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 Proceeds from sales, gross gains, and gross losses on the sales of mortgage-backed securities and collateralized mortgage obligations are as follows:
Gross Gross Proceeds gains losses ----------------- -------------- ------------- Six months ended: March 31: 2001 (unaudited) $ 114,532,730 429,033 167,691 2000 (unaudited) 32,205,133 1,487 166,387 Year ended: September 30: 2000 67,269,563 38,957 346,552 1999 260,278,302 757,275 496,759 1998 224,913,926 995,413 266,606
Mortgage-backed securities and collateralized mortgage obligations with an aggregate carrying amount of $238,112,724 (unaudited), $284,469,404 and $236,913,212 at March 31, 2001 (unaudited) and September 30, 2000 and 1999, respectively, were pledged to secure Federal Home Loan Bank advances and to collateralize securities sold under agreements to repurchase. The FASB has issued SFAS No. 119, Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments, which requires improved disclosures about derivative financial instruments; futures, forward, swap, or option contracts; or other financial instruments with similar characteristics. It also amends existing requirements of SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit Risk, and SFAS No. 107, Disclosures About Fair Value of Financial Instruments. It requires that a distinction be made between financial instruments held or issued for the purposes of trading or for purposes other than trading. For derivative financial instruments held or issued for trading, disclosure of average fair values and of net trading gains or losses is required. At March 31, 2001 (unaudited) and September 30, 2000 and 1999, the Company did not hold any derivative financial instruments for trading purposes. For derivative financial instruments held or issued for purposes other than trading, it requires disclosure about those purposes, about how the instruments are reported in the financial statements, and, if the purpose is hedging anticipated transactions, about the anticipated transactions, the classes of derivative financial instruments used to hedge those transactions, the amounts of hedging gains and losses deferred, and the transactions or other events that result in recognition of the deferred gains or losses in income. At March 31, 2001 (unaudited) and September 30, 2000 and 1999, the Company did not hold any derivative financial instruments with the purpose of hedging transactions. The Company held collateralized mortgage obligations at March 31, 2001 (unaudited) and September 30, 2000 and 1999. These investments are classified as available for sale and are carried at fair value in the Company's consolidated financial statements. F-19 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 The following table shows additional information related to the collateralized mortgage obligations held by the Company:
March 31, 2001 (unaudited) ---------------------------------------------------------------------------- Weighted- Net Fair Average unrealized value Life Yield loss ----------------- ----------------- ----------- --------------- Fixed rate $ 62,211,217 17.60 years 6.596% $ (1,979,062) Variable rate 148,700,700 15.18 years 6.614 (396,379) --------------- -------------- Total $ 210,911,917 $ (2,375,383) =============== ============== September 30, 2000 ---------------------------------------------------------------------------- Weighted- Net Fair average unrealized Value life Yield loss ----------------- ---------------- ------------- ------------- Fixed rate $ 94,888,626 14.86 years 6.937% $ (8,417,676) Variable rate 115,509,740 16.62 years 7.852 (1,243,846) --------------- -------------- Total $ 210,398,366 $ (9,661,522) =============== ============== September 30, 1999 ---------------------------------------------------------------------------- Weighted- Net Fair Average unrealized Value Life Yield loss ----------------- ---------------- ------------- ------------- Fixed rate $ 83,961,705 15.80 years 7.16% $ (5,780,071) Variable rate 108,296,513 17.82 years 6.50 (1,867,922) --------------- -------------- Total $ 192,258,218 $ (7,647,993) =============== ==============
(6) Loans Receivable Loans receivable are summarized as follows:
March 31, September 30, ------------------ ------------------------------------------ 2001 2000 1999 ------------------ ------------------ ------------------ (unaudited) 1-4 family residential real estate mortgage $ 153,319,783 152,821,962 132,035,747 Commercial real estate 59,194,455 60,837,874 46,544,858 Commercial 7,096,270 8,986,583 3,244,785 Real estate construction 6,002,615 7,138,418 8,038,651 Consumer and other 26,718,132 29,914,580 24,352,786 ----------------- ------------------ ------------------ Loans receivable, gross 252,331,255 259,699,417 214,216,827 Unamortized loan origination costs (fees), net 43,079 113,317 (50,838) Allowance for loan losses (5,375,458) (6,346,001) (5,709,802) ----------------- ------------------ ------------------ Loans receivable, net $ 246,998,876 253,466,733 208,456,187 ================= ================== ==================
F-20 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 In addition to the above, the Company was servicing loans for the Federal Home Loan Mortgage Corporation with aggregate principal balances of $141,357,459 (unaudited), $152,777,116, $155,200,029, and $127,862,071, at March 31, 2001 (unaudited) and September 30, 2000, 1999, and 1998, respectively. Loans to certain executive officers, directors, and their associates totaled $1,116,156 (unaudited), $883,886 and $758,245 at March 31, 2001 (unaudited) and September 30, 2000 and 1999, respectively. Such loans were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal credit risk nor present other unfavorable features. The following is a summary of activity with respect to such aggregate loans to these individuals and their associates and affiliated companies: Balance at September 30, 1999 $ 758,245 New loans 378,624 Repayments 252,983 ------------- Balance at September 30, 2000 883,886 New loans (unaudited) 502,767 Repayments (unaudited) 270,497 ------------- Balance at March 31, 2001 (unaudited) $ 1,116,156 ============= At March 31, 2001 (unaudited) and September 30, 2000 and 1999, the Company had $1,661,084 (unaudited), $2,830,774, and $1,989,006, respectively, of nonperforming loans. The following is a summary of interest income relating to nonperforming loans for the six months ended March 31, 2001 and 2000 (unaudited) and the years ended September 30, 2000, 1999, and 1998.
March 31, September 30, -------------------------------- ------------------------------------------ 2001 2000 2000 1999 1998 ------------- -------------- -------------- ------------- ------------- (unaudited) Interest income at contractual rate $ 71,129 83,548 303,990 44,937 35,414 Interest income actually recorded (21,358) (16,773) (127,679) (16,195) (22,975) ------------- -------------- -------------- ------------- ----------- Reduction of interest income $ 49,771 66,775 176,311 28,742 12,439 ============= ============== ============== ============= ===========
The following is a summary of transactions in the allowance for loan losses:
March 31, September 30, ----------------- -------------------------------------------------------------- 2001 2000 1999 1998 ----------------- ----------------- ----------------- --------------- (unaudited) Balance at beginning of year $ 6,346,001 5,709,802 2,054,288 1,845,613 Loan loss reserve of acquired company -- -- 3,751,796 -- Loans charged off (1,616,468) (1,137,938) (420,101) (256,166) Recoveries on loans previously charged off 345,925 364,137 83,819 284,841 Provision for loan losses charged to operations 300,000 1,410,000 240,000 180,000 ------------- -------------- -------------- ------------- Balance at end of year $ 5,375,458 6,346,001 5,709,802 2,054,288 ============= ============== ============== =============
F-21 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 At March 31, 2001 (unaudited) and September 30, 2000 and 1999, pursuant to the definition within SFAS 114, the Company had impaired loans of approximately $400,000 (unaudited), $1,200,000, and $2,000,000 with related amounts included in the allowance for loan losses of approximately $168,000 (unaudited), $715,000, and $560,000, respectively. The average recorded investment in impaired loans for the six months ended March 31, 2001 and 2000 (unaudited) and for the years ended September 30, 2000, 1999, and 1998 was approximately $931,000 (unaudited), $1,355,000 (unaudited), $740,000, $500,000, and $600,000, respectively. Interest income recognized on impaired loans for the six months ended March 31, 2001 and 2000 (unaudited) and for the years ended September 30, 2000, 1999, and 1998, was not significant. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss, in the event of nonperformance by the customer for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded loans. A summary of the Company's financial instruments with off-balance sheet risk at March 31, 2001 (unaudited) and September 30, 2000 and 1999 is as follows:
March 31, September 30, ----------------- ------------------------------------ 2001 2000 1999 ----------------- ---------------- ---------------- (unaudited) Financial instruments whose contract amounts represent credit risk - commitments: Mortgage loans $ 7,556,785 5,109,000 7,444,548 Open-end consumer loans 6,653,437 6,953,873 6,553,796 Open-end commercial loans 2,741,100 456,254 460,000 Construction loans 8,443,242 8,879,948 5,471,856 -------------- ---------------- ---------------- Total commitments $ 25,394,564 21,399,075 19,930,200 ============== ================ ================
The Company was also committed to sell loans of approximately $536,000 (unaudited) and $1,349,000 at March 31, 2001 (unaudited) and September 30, 2000, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but consists primarily of residential real estate. Page F-22 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 The following summarizes the Company's commitments to fund fixed-rate loans at March 31, 2001 (unaudited) and September 30, 2000 and 1999:
Amount Range of rates ------------------- -------------------- March 31, 2001 (unaudited) $ 5,340,785 6.75 - 10.00% ================= ================== September 30, 2000 $ 1,188,000 7.63 - 10.50% ================= ================== September 30, 1999 $ 2,602,346 7.50 - 11.63% ================= ==================
In the origination of mortgage loans, the Company enters into adjustable interest rate contracts with caps and floors written with the intent of managing its interest rate exposure. Interest rate caps and floors enable customers and the Company to transfer, modify, or reduce their interest rate risk. At March 31, 2001 (unaudited) and September 30, 2000 and 1999, adjustable rate mortgage loans with interest rate caps and floors amounted to $108,541,355 (unaudited), $117,758,166, and $89,475,956, respectively. The Company has sold loans and has the obligation to repurchase any loan or loans that become 90 days or more delinquent. At March 31, 2001 (unaudited) and September 30, 2000 and 1999, the balance of these loans was $6,723,732 (unaudited), $7,602,761, and $8,757,542 with a related recourse reserve in other liabilities of $163,454 at March 31, 2001 (unaudited) and September 30, 2000 and 1999. (7) Real Estate Owned At March 31, 2001 (unaudited) and September 30, 2000 and 1999, real estate owned is summarized as follows:
March 31, September 30, ------------------ ---------------------------- 2001 2000 1999 -------------- ------------ ------------ (unaudited) Real estate acquired through foreclosure $ 767,779 629,993 222,210 ============== ============ ============
F-23 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (8) Accrued Interest and Dividends Receivable At March 31, 2001 (unaudited) and September 30, 2000 and 1999, accrued interest and dividends receivable are summarized as follows:
March 31, September 30 ---------------- ---------------------------------- 2001 2000 1999 ---------------- -------------- ---------------- (unaudited) Loans $ 1,718,520 1,791,634 1,585,415 Mortgage-backed securities and collateralized mortgage obligations 1,930,836 2,265,767 2,230,487 Investment securities 105,205 170,011 382,523 Other 227,034 249,432 196,728 ---------------- -------------- ---------------- $ 3,981,595 4,476,844 4,395,153 ================ ============== ================
(9) Premises and Equipment Premises and equipment at March 31, 2001 (unaudited) and September 30, 2000 and 1999 is summarized as follows:
March 31, September 30, ---------------- --------------------------------- 2001 2000 1999 ---------------- -------------- --------------- (unaudited) Land $ 1,152,232 1,152,232 671,868 Buildings and improvements 3,370,151 3,359,995 3,957,224 Furniture, fixtures, and equipment 2,746,846 2,519,319 2,125,290 Construction in progress 191,987 101,035 -- --------------- -------------- --------------- 7,461,216 7,132,581 6,754,382 Less accumulated depreciation 3,817,031 3,598,510 3,301,953 --------------- -------------- --------------- $ 3,644,185 3,534,071 3,452,429 =============== ============== ===============
The Company recorded an impairment allowance of $200,000 during the year ended September 30, 2000 relating to certain buildings and improvements which represent current and former branch sites to be sold. The aggregate fair value of such properties (which are included in other assets) was estimated at $415,870 at March 31, 2001 (unaudited) and September 30, 2000. F-24 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (10) Mortgage Servicing Rights Activity in mortgage servicing rights (which are included in other assets) for the six months ended March 31, 2001 (unaudited) and for the years ended September 30, 2000 and 1999 consists of the following:
March 31, September 30, ------------------ ----------------------------------------- 2001 2000 1999 ------------------ ------------------- ----------------- (unaudited) Balance at beginning of period $ 1,097,284 1,320,840 1,021,995 Capitalized during the period 4,554 107,877 626,797 Amortization expense (149,546) (331,433) (327,952) ---------------- ------------------- ----------------- Balance at end of period $ 952,292 1,097,284 1,320,840 ================ =================== =================
There was no valuation allowance at March 31, 2001 (unaudited) and September 30, 2000 and 1999. (11) Investment in Limited Partnerships During 1997, the Company purchased interests in two limited partnerships, which were formed to acquire mortgage servicing rights, for $7,000,000. The Company is allocated approximately 12% and 21% of the respective earnings or losses of these two partnerships. As discussed in note 1, the Company uses the equity method of accounting for its investment in both of these limited partnerships because it exercises significant influence over the partnerships. Accordingly, the Company recognized equity in the net (loss) earnings of the limited partnerships of $(71,615) during the six months ended March 31, 2001 (unaudited) and $(28,602), $448,000, and $(5,797,145) during the years ended September 30, 2000, 1999, and 1998. An independent valuation of the mortgage servicing rights of the limited partnerships is performed quarterly. During the year ended September 30, 1998, the Company wrote off its entire limited partnership investment of $2 million in the partnership for which it had a previous 12% interest because limited partner equity had been permanently impaired as a result of the declining fair value of mortgage servicing rights owned by the partnership. The Company also recorded a $3.7 million valuation allowance in 1998 relating to its $5 million limited partnership investment in the partnership for which it has a 21% interest because of the declining fair value of mortgage servicing rights owned by the partnership. F-25 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 Financial information (unaudited), including balance sheets as of March 31, 2001 and September 30, 2000 and 1999 for the 21% partnership and income statements for the six months ended March 31, 2001 and 2000 and the years ended September 30, 2000, 1999, and 1998 for both partnerships, is as follows:
March 31, September 30, ---------------- ------------------------------------- 2001 2000 1999 ---------------- ---------------- ---------------- (unaudited) Cash $ 1,000,556 683,534 259,120 Mortgage servicing rights, net 17,526,055 19,324,955 23,001,851 Other assets, primarily current 1,298,367 491,911 1,342,528 ---------------- ---------------- ---------------- $ 19,824,978 20,500,400 24,603,499 ================ ================ ================ Long-term debt $ 10,050,000 10,950,000 14,580,000 Other liabilities 1,050,878 479,076 813,499 Partners' capital: CharterBank 1,799,783 1,871,398 1,900,000 Other partners 6,924,317 7,199,926 7,310,000 ---------------- ---------------- ---------------- $ 19,824,978 20,500,400 24,603,499 ================ ================ ================ For the Six Months ended March 31, ------------------------------------- 2001 2000 ---------------- ---------------- (unaudited) Revenues $ 2,821,397 3,178,427 Expenses 3,168,621 3,178,427 ---------------- ---------------- Net loss $ (347,224) -- ================ ================ CharterBank's equity in net loss $ (71,615) -- ================ ================ For the Years ended September 30, ---------------------------------------------------------- 2000 1999 1998 ---------------- ---------------- ---------------- Revenues $ 6,211,819 7,627,343 21,626,742 Expenses 6,350,495 5,466,224 58,241,077 ---------------- ---------------- ---------------- Net (loss) income $ (138,676) 2,161,119 (36,614,335) ================ ================ ================ CharterBank's equity in net (loss) income $ (28,602) 448,000 (5,797,145) ================ ================ ================
Page F-26 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (12) Deposits At March 31, 2001 (unaudited) and September 30, 2000 and 1999, deposits are summarized as follows:
March 31, 2001 -------------------------------------------------------- (unaudited) -------------------------------------------------------- Weighted- Range of average interest interest Amount rates rate ---------------- ---------------- ---------------- Demand, NOW, and money market accounts $ 38,179,169 0.00-4.37 2.43 Savings deposits 8,327,577 1.99 1.99 Time deposits by original term: Time deposits over $100,000 33,238,166 4.15-8.25 6.42 Other time deposits: 12 months or less 72,604,969 4.15-7.60 6.21 13-36 months 23,855,359 4.28-7.55 5.94 37 months or more 8,981,519 4.55-8.00 5.96 ---------------- ---------------- Total deposits 185,186,759 5.23 ================ Accrued interest payable 788,963 ---------------- $ 185,975,722 ================ September 30, ---------------------------------------------------------------------------------------- 2000 1999 ------------------------------------------ ------------------------------------------- Weighted- Weighted- Range of average Range of average interest interest interest interest Amount rates rate Amount rates rate ----------------- ------------ ------------ --------- ------------ ---------- Demand, NOW, and money market accounts $ 33,462,598 0.00-5.73% 2.66 $ 32,885,036 0.00-4.89% 1.98 Savings deposits 8,386,160 1.99 1.99 8,788,608 0.00-2.50 2.49 Time deposits by original term: Time deposits over $100,000 20,282,757 4.57-8.25 6.09 19,179,956 4.15-7.25 5.13 Other time deposits: 12 months or less 132,630,681 4.15-7.60 6.31 91,773,350 4.04-6.45 4.95 13-36 months 57,547,631 4.23-7.55 5.40 117,991,218 4.35-6.70 5.50 37 months or more 22,060,816 4.15-8.00 5.78 12,347,210 4.55-8.00 5.67 ------------- ------------ ------------- ----------- Total deposits 274,370,643 6.01 282,965,378 4.80 ============ =========== Accrued interest payable 1,710,488 2,053,237 ------------- ------------- $ 276,081,131 $ 285,018,615 ============= =============
Beginning in 1999, the Company actively pursued out of market time deposits from various credit unions and brokers as a source of funds. The balance of the credit union deposits was $40,897,572 (unaudited), $40,533,563, and $41,239,710 and of broker deposits was $-0- (unaudited), $89,355,215, and $87,994,000 at March 31, 2001 (unaudited) and September 30, 2000 and 1999, respectively. Page F-27 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 At September 30, 2000, time deposits based on scheduled maturity dates are as follows: Year ending September 30, ------------------------- 2001 $ 202,240,459 2002 16,777,909 2003 7,085,118 2004 2,041,837 2005 and thereafter 4,376,562 ---------------- $ 232,521,885 ================ Interest expense on deposits is summarized as follows:
March 31, Years ended September 30, ---------------------------------- -------------------------------------------------------- 2001 2000 2000 1999 1998 --------------- --------------- --------------- ----------------- -------------- (unaudited) Demand, NOW, and money market accounts $ 437,045 358,562 765,137 449,325 400,305 Savings deposits 79,289 178,105 274,959 291,947 167,868 Time deposits 5,647,923 6,343,295 12,892,753 9,682,407 5,410,200 -------------- -------------- --------------- ----------------- --------------- $ 6,164,257 6,879,962 13,932,849 10,423,679 5,978,373 ============= ============== ============== ================ ===============
Deposits of certain officers, directors, and their associates totaled $524,365 (unaudited), $1,123,378, and $916,501 at March 31, 2001 (unaudited) and September 30, 2000 and 1999, respectively. Such deposits have substantially the same terms as those for comparable transactions with other persons. Deposits over $100,000 are not federally insured. (13) Borrowings At March 31, 2001 (unaudited) and September 30, 2000 and 1999, borrowings are summarized as follows:
March 31, September 30, ----------------- --------------------------------------- 2001 2000 1999 ----------------- ------------------ ----------------- (unaudited) Federal Home Loan Bank advances $ 236,750,000 234,750,000 205,650,000 Securities sold under agreements to Repurchase 115,554,750 117,468,500 107,216,769 ----------------- ------------------ ----------------- $ 352,304,750 352,218,500 312,866,769 ================= ================== =================
Page F-28 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 Federal Home Loan Bank advances at March 31, 2001 (unaudited) and September 30, 2000 and 1999 are summarized by year of maturity in the table below:
March 31, 2001 (unaudited) --------------------------------------------------------------------- Weighted- Interest average Due Amount rates rate ------------------------------------ --------------------- ------------------- -------------------- Less than one year $ 25,000,000 6.38% 6.38 One to two years -- -- -- Two to three years 56,000,000 4.85-6.49 5.60 Thereafter 155,750,000 5.34-6.33 5.83 --------------------- -------------------- $ 236,750,000 5.83 ===================== ==================== September 30, ------------------------------------------------------------------------------------ 2000 1999 ---------------------------------------- ----------------------------------------- Weighted- Weighted- Interest average Interest average Due Amount rates rate Amount rates rate ------------------------------ ------------- ----------- ---------- ------------ ------------ ----------- Less than one year $ 125,000,000 6.53-6.94% 6.60 $ 125,900,000 5.21-5.75% 5.47 One to two years -- -- -- 25,000,000 5.28 5.28 Two to three years 31,000,000 6.46-6.49 6.46 -- -- -- Thereafter 78,750,000 4.85-6.48 5.83 54,750,000 4.85-6.49 5.09 ------------- ---------- ------------- -------------- $ 234,750,000 6.32 $ 205,650,000 5.34 ============= ========== ============= ==============
The interest rates on $80,000,000 (unaudited) and $155,000,000 of the Federal Home Loan Bank ("FHLB") advances at March 31, 2001 (unaudited) and September 30, 2000 are adjusted periodically, based on short-term interest rate indices. At March 31, 2001 (unaudited) and September 30, 2000, the Company has pledged, under a specific collateral lien with the FHLB, all stock of the FHLB, certain qualifying first mortgage loans with unpaid principal balances totaling $147,083,737 (unaudited) and $135,227,055, respectively, and certain mortgage-backed securities, collateralized mortgage obligations, corporate securities, and U.S. government agency securities with an aggregate fair value of $125,603,119 (unaudited) and $174,758,100, respectively. At March 31, 2001 (unaudited) and September 30, 2000, the Company had available line of credit commitments with the FHLB totaling $280,450,000 (unaudited) and $283,896,000 of which $236,750,000 (unaudited) and $234,750,000 was advanced and $43,700,000 (unaudited) and $49,146,000 was available at March 31, 2001 (unaudited) and September 30, 2000, respectively. As of March 31, 2001 (unaudited) and September 30, 2000, the Company's fixed rate FHLB advances include $83,750,000 (unaudited) and $53,750,000 of advances that are callable by the FHLB under certain circumstances. Of these advances, $25,000,000 are callable prior to September 30, 2001. If called by the FHLB, such advances could be refinanced at prevailing market rates on the date of the call. F-29 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 The securities sold under agreements to repurchase at March 31, 2001 (unaudited) and September 30, 2000 are secured by certain mortgage-backed securities, collateralized mortgage obligations, and U.S. government agency securities with an aggregate fair value, including accrued interest, of $121,987,872 (unaudited) and $124,395,137, respectively. All securities sold under the agreements to repurchase are under the Company's control. The repurchase agreements at March 31, 2001 (unaudited) and September 30, 2000 and 1999 have maturities of less than 45 days, and provide for the purchase of identical securities and specify delivery of the underlying securities to an approved custodian. The aggregate carrying amount of such securities sold under the agreements to repurchase exceeded the amount of repurchase liabilities by approximately $6,433,000 (unaudited) and $6,900,000 at March 31, 2001 (unaudited) and September 30, 2000, respectively. The following summarizes pertinent data related to securities sold under the agreements to repurchase for the six months ended March 31, 2001 and 2000 (unaudited) and years ended September 30, 2000, 1999, and 1998:
March 31, September 30, -------------------------------------------------------------------------- 2001 2000 2000 1999 1998 -------------------------------------------------------------------------- (unaudited) Weighted-average borrowing rate at period-end 5.45% 5.11 6.76 5.54 5.67 ============== =========== =========== ========= ========== Weighted-average borrowing rate during the period 6.49% 6.09 6.64 5.42 5.82 ============== =========== =========== ========= ========== Average daily balance during period $ 130,280,595 107,826,302 122,725,585 60,134,537 59,660,408 ============== =========== =========== ========== ========== Maximum month-end balance during the period $ 157,962,635 137,127,376 153,308,116 111,320,019 127,764,875 ============== =========== =========== =========== ===========
Interest expense on borrowings for the six months ended March 31, 2001 and 2000 (unaudited) and the years ended September 30, 2000, 1999, and 1998 is summarized as follows:
March 31, September 30, -------------------------------------------------------------------- 2001 2000 2000 1999 1998 -------------------------------------------------------------------- (unaudited) Securities sold under agreements to repurchase $ 4,225,118 3,280,791 8,149,449 3,260,558 3,473,310 Federal Home Loan Bank advances 7,495,368 6,778,095 14,565,105 9,657,196 9,958,157 ------------ ----------- ----------- ---------- ---------- $ 11,720,486 10,058,886 22,714,554 12,917,754 13,431,467 ============ =========== =========== ========== ==========
Page F-30 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (14) Income Taxes Income tax expense (benefit) attributable to income from continuing operations for the six months ended March 31, 2001 and 2000 (unaudited) and the years ended September 30, 2000, 1999, and 1998 consists of:
March 31, September 30, ----------------------------------- ------------------------------------------------------ 2001 2000 2000 1999 1998 --------------- --------------- -------------- --------------- ----------------- (unaudited) Federal: Current $ 5,142,388 739,070 926,667 5,594,643 1,107,751 Deferred (4,422,473) 136,900 273,850 6,657,139 (1,814,696) State: Current 760,695 41,164 41,118 932,753 100,042 Deferred (626,056) 24,100 48,327 1,174,789 (211,013) --------------- --------------- -------------- --------------- ----------------- $ 854,554 941,234 1,289,962 14,359,324 (817,916) =============== =============== ============== =============== =================
The difference between the actual total provision for Federal and state income taxes and Federal income taxes computed at the statutory rate of 34% for the six months ended March 31, 2001 and 2000 (unaudited) and 34%, 35%, and 34% for the years ended September 30, 2000, 1999, and 1998, respectively, is summarized as follows:
March 31, ------------------------------------ 2001 2000 ---------------- --------------- (unaudited) Computed "expected" tax expense $ 1,191,095 1,233,399 Increase (decrease) in tax expense resulting from: Dividends received deduction (445,143) (386,524) State income taxes, net of Federal tax effect 88,862 43,074 Change in the deferred tax asset valuation allowance -- (133,000) Goodwill amortization and impairment -- 161,500 Other, net 19,740 22,785 --------------- --------------- $ 854,554 941,234 =============== =============== September 30, -------------------------------------------------------- 2000 1999 1998 ---------------- --------------- --------------- Computed "expected" tax expense (benefit) $ 735,165 14,486,039 (116,621) Increase (decrease) in tax expense resulting from: Dividends received deduction (796,176) (725,117) (621,063) Gain on disposition of stock (5,676) (741,078) -- State income taxes, net of Federal tax effect 59,034 1,369,902 (73,241) Change in the deferred tax asset valuation allowance (266,554) (35,518) -- Goodwill amortization and impairment 1,541,333 -- -- Other, net 22,836 5,096 (6,991) ------------- ------------- ------------- $ 1,289,962 14,359,324 (817,916) ============= ============= =============
F-31 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 The effective tax rate for the six months ended March 31, 2001 and 2000 (unaudited) and for the years ended September 30, 2000, 1999, and 1998 was 24.39% (unaudited), 25.95% (unaudited), 59.66%, 34.69%, and benefit of 238.46%, respectively. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of March 31, 2001 (unaudited) and September 30, 2000 and 1999 are presented below:
March 31, September 30, ---------------- ------------------------------------ 2001 2000 1999 ---------------- ---------------- ---------------- (unaudited) Deferred tax assets: Georgia business credit carryforward $ -- 180,483 -- Allowance for loan losses 1,095,682 1,436,582 1,144,257 Deferred compensation 195,054 195,054 223,430 Alternative minimum tax credit carryforward 175,848 175,848 96,058 Self-insurance reserve 102,563 55,099 23,846 Charitable contributions carryforward 652,225 652,225 828,569 Investment in limited partnership 603,957 603,957 580,925 Pension expenses -- -- 195,327 Real estate acquired through foreclosure 119,525 119,525 200,752 Net operating loss carryforward 877,644 899,684 1,157,628 Other 269,588 148,659 230,798 ---------------- ---------------- ---------------- Total gross deferred tax assets 4,092,086 4,467,116 4,681,590 Less valuation allowance 941,000 941,000 1,207,554 ---------------- ---------------- ---------------- Net deferred tax assets 3,151,086 3,526,116 3,474,036 ---------------- ---------------- ---------------- Deferred tax liabilities: Deferred loan fees, net 522,193 539,482 282,454 Mortgage servicing rights 362,599 413,896 498,221 Net unrealized holding gains on securities available for sale 122,504,617 96,077,613 92,830,453 Investment securities market adjustment for tax reporting 1,265,837 6,598,770 6,108,444 Federal Home Loan Bank stock dividends 45,862 45,862 52,553 Other 75,629 97,669 379,750 ---------------- ---------------- ---------------- Total gross deferred tax liabilities 124,776,737 103,773,292 100,151,875 ---------------- ---------------- ---------------- Net deferred tax liabilities $ 121,625,651 100,247,176 96,677,839 ================ ================ ================
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at March 31, 2001 (unaudited) and September 30, 2000. The Company has net operating loss carryforwards of approximately $2,400,000 which begin to expire in 2018. The F-32 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 valuation allowance of $941,000 at March 31, 2001 (unaudited) and September 30, 2000 relates to a portion of the charitable contributions and net operating loss carryforwards. The charitable contribution carryforward begins to expire in 2002. Prior to January 1, 1996, the Company was permitted under the Internal Revenue Code ("Code") a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. The provisions of the Code permitted the Company to deduct from taxable income an allowance for bad debts based on the greater of a percentage of taxable income before such deduction or actual loss experience. Retained earnings at September 30, 2000 include approximately $2,137,000 for which no deferred Federal income tax liability has been recognized. The amounts represent an allocation of income for bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. On August 20, 1996, President Clinton signed legislation which has eliminated the percentage of taxable income bad debt deduction for thrift institutions for tax years beginning after December 31, 1995. This new legislation also requires a thrift to generally recapture the excess of its current tax reserves over its 1987 base year reserves whereas, the base year reserves are frozen from taxation. As the Company had previously provided deferred taxes on this amount, no additional financial statement tax expense resulted from this legislation. (15) Employee Benefits Prior to December 31, 1999, the Company had a qualified noncontributory defined benefit retirement plan covering substantially all of its employees. Employees covered under the plan were eligible to participate after completion of one year of service. The benefits were based on each employee's years of service up to a maximum of 25 years, and the average of the highest five consecutive annual salaries. An employee became fully vested upon completion of five years of qualifying service. Normal retirement age was 65, but provision was made for earlier retirement. It was the policy of the Company to fund the maximum amount that could be deducted for Federal income tax purposes. Plan assets consisted primarily of listed common stocks and cash. The plan was frozen effective December 31, 1999 and the termination process initiated with disbursements being made to eligible participants following completion of the termination. F-33 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 The following table sets forth the funded status of the plan at September 30, 2000 and 1999:
September 30, ------------------------------------- 2000 1999 ---------------- ---------------- Change in benefit obligation: Projected benefit obligation at beginning of period $ 1,557,877 1,743,882 Service cost 51,322 255,682 Interest cost 76,493 109,215 Amendments 576,498 (123,712) Actuarial loss (gain) 493,970 (375,078) Benefits paid -- (52,112) Curtailment (1,028,063) -- Settlement (1,151,599) -- ---------------- ---------------- Projected benefit obligation at end of period 576,498 1,557,877 ---------------- ---------------- Change in plan assets: Fair value of plan assets at beginning of period 1,493,849 1,240,560 Actual return on plan assets 234,248 305,401 Benefits paid -- (52,112) Settlement (1,151,599) -- ---------------- ---------------- Fair value of plan assets at end of period 576,498 1,493,849 ---------------- ---------------- Funded status Unrecognized net actuarial loss -- (457,692) Unrecognized prior service cost -- (3,944) Unrecognized transition obligation -- (12,310) ---------------- ---------------- Accrued pension cost $ -- (537,974) ================ ================
The components of net pension expense (recovery) for the years ended September 30, 2000, 1999, and 1998 are as follows: 2000 1999 1998 ---------------- --------------- --------------- Service cost for benefits earned during the year $ 51,322 255,682 222,526 Interest cost on projected benefit obligations 76,493 109,215 97,105 Actual return on plan assets (114,439) (99,071) (234,326) Net amortization and deferral (4,610) (1,164) 157,793 Curtailment and settlement (546,740) -- -- ------------ ----------- ------------- Net pension (recovery) expense $ (537,974) 264,662 243,098 ============ =========== ============= Assumptions used to determine the actuarial present value of the accumulated and projected benefit obligations were: Discount rate 7.75% 7.75 7.75 Expected long-term rate of return on assets 8.00 8.00 8.00 Rate of increase in future compensation Levels N/A 4.50 4.50
F-34 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 The Company has a 401(k) Profit Sharing Plan and Trust (Plan) which covers substantially all of its employees. CharterBank matches 50% of employee contributions to the Plan, up to 8% of employee compensation, and may make additional discretionary contributions. The Company made contributions to the Plan of $111,777 (unaudited) and $59,862 (unaudited) in the six months ended March 31, 2001 and 2000 (unaudited), respectively. The Company made contributions to the Plan of $96,934, $27,040, and $33,298 in the years ended September 30, 2000, 1999, and 1998, respectively. During 1996, the Company implemented a short-term incentive plan which covers substantially all employees. The Company also implemented a long- term incentive plan which covers key employees and is based on the Company's comprehensive earnings, as defined. For the six months ended March 31, 2001 and 2000 (unaudited) and the years ended September 30, 2000, 1999, and 1998, the Company expensed $469,709 (unaudited), $431,356 (unaudited), $946,027 (as restated - note 22), $830,325, and $654,000, respectively, related to the incentive plans. (16) Commitments and Contingent Liabilities In the normal course of business, the Company is party (both as plaintiff and defendant) to certain matters of litigation. In the opinion of management and counsel, none of these matters should have a material adverse effect on the Company's financial position. The Company was self-insured for employee medical and health care claims up to a maximum of $10,000 per year per employee until February 28, 2001. Claims above the self-insured maximum amounts were covered under an insurance policy up to a maximum of $990,000. Total employee medical and health care claims paid by the Company were $226,276, $192,956, and $199,438 for the years ended September 30, 2000, 1999, and 1998, respectively. At March 31, 2001 (unaudited) and September 30, 2000 and 1999, the Company has accrued $270,978 (unaudited), $146,074 and $63,219, respectively, for employee medical and health care claims previously reported and not paid as well as medical and health care claims incurred but not reported. (17) Fair Value of Financial Instruments SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments. (a) Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of these instruments. (b) Investment and Mortgage-Backed Securities and Collateralized Mortgage Obligations Available for Sale The fair value of investment and mortgage-backed securities and collateralized mortgage obligations available for sale is estimated based on bid quotations received from securities dealers. In aggregate, the fair value of investment and mortgage-backed securities and collateralized mortgage obligations available for sale at March 31, 2001 (unaudited) and September 30, 2000 and 1999 was $637,239,434 (unaudited), $654,876,216, and $651,564,566, respectively (see notes 4 and 5). F-35 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (c) Loans Receivable Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit risk inherent in the loan. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of the current economic and lending conditions. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. The following table presents information for loans at March 31, 2001 (unaudited) and September 30, 2000 and 1999:
March 31, 2001 ------------------------------------------- Carrying Estimated amount fair value ------------------- ------------------ (unaudited) 1-4 family residential real estate $ 153,319,783 155,454,644 Commercial real estate 59,194,455 59,312,878 Commercial 7,096,270 6,796,518 Real estate construction 6,002,615 6,021,888 Other loans 26,718,132 26,696,161 Unamortized loan origination costs, net 43,079 42,131 Allowance for loan losses (5,375,458) (5,375,458) ---------------- --------------- $ 246,998,876 248,948,762 ================ =============== Loans held for sale $ 410,000 411,995 ================ ===============
September 30, --------------------------------------------------------------------------------------- 2000 1999 ------------------------------------------ --------------------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------------------ ------------------ ------------------- -------------- 1-4 family residential real estate $ 152,821,962 150,438,834 132,035,747 125,433,959 Commercial real estate 60,837,874 59,889,168 46,544,858 44,217,615 Commercial 8,986,583 8,698,016 3,244,785 3,082,546 Real estate construction 7,138,418 7,027,102 8,038,651 8,038,651 Other loans 29,914,580 30,169,131 24,352,786 24,509,000 Unamortized loan origination costs (fees), net 113,317 113,317 (50,838) (50,838) Allowance for loan losses (6,346,001) (6,346,001) (5,709,802) (5,709,802) ------------------ ------------------ ------------------- ------------------ $ 253,466,733 249,989,567 208,456,187 199,521,131 ================== ================== =================== ================== Loans held for sale $ 832,526 839,000 2,896,798 2,897,000 ================== ================== =================== ==================
Page F-36 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (d) Mortgage Servicing Rights The fair value of mortgage servicing rights approximates its carrying value due to the Company's evaluation of the underlying loan portfolio and subsequent adjustment for loan prepayments and other market conditions. (e) Deposits Under SFAS No. 107, the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts, and money market and checking accounts, is equal to the amount payable on demand as of March 31, 2001 (unaudited) and September 30, 2000 and 1999. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The following table presents information for deposits at March 31, 2001 (unaudited) and September 30, 2000 and 1999:
March 31, 2001 ------------------------------------------ Carrying Estimated amount fair value ------------------ ------------------ (unaudited) Demand, NOW, and money market accounts $ 38,179,169 38,179,169 Savings deposits 8,327,577 8,327,577 Time deposits 138,680,013 140,131,712 ----------------- ----------------- $ 185,186,759 186,638,458 ================= ================= September 30, ------------------------------------------------------------------------------------ 2000 1999 ------------------------------------------ -------------------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value -------------------- ----------------- ----------------- ----------------- Demand, NOW, and money market accounts $ 33,462,598 33,462,598 32,885,036 32,885,036 Savings deposits 8,386,160 8,386,160 8,788,608 8,788,608 Time deposits 232,521,885 233,066,063 241,291,734 240,053,000 ----------------- ----------------- ----------------- ----------------- $ 274,370,643 274,914,821 282,965,378 281,726,644 ================= ================= ================= =================
F-37 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 (f) Borrowings The fair value of the Company's borrowings is estimated based on the discounted value of contractual cash flows. The discount rate is estimated using rates quoted for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The following presents information for borrowings at March 31, 2001 (unaudited) and September 30, 2000 and 1999:
March 31, 2001 ------------------------------------ Carrying Estimated amount fair value ---------------- ---------------- (unaudited) Federal Home Loan Bank advances $ 236,750,000 236,751,651 Securities sold under agreements to repurchase 115,554,750 115,597,903 ---------------- -------------- $ 352,304,750 352,349,554 ================ ============== September 30, --------------------------------------------------------------------------------- 2000 1999 --------------------------------------- -------------------------------------- Carrying Estimated Carrying Estimated Amount fair value amount fair value ----------------- ----------------- ----------------- ----------------- Federal Home Loan Bank advances $ 234,750,000 233,557,186 205,650,000 204,022,000 Securities sold under agreements to repurchase 117,468,500 117,466,938 107,216,769 107,216,769 ---------------- ----------------- ----------------- ----------------- $ 352,218,500 351,024,124 312,866,769 311,238,769 ================ ================= ================= =================
(g) Accrued Interest and Dividends Receivable and Payable The carrying amount of accrued interest and dividends receivable and payable approximate their fair values (see notes 8 and 12). (h) Commitments The fair value of commitments to extend credit to fund home equity, real estate construction, and real estate mortgage loans is immaterial because the underlying interest rates on such commitments approximate market rates. (i) Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. F-38 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. (18) Regulatory Matters The Company is required to maintain noninterest-bearing cash reserve balances. The aggregate average cash reserve balances maintained at March 31, 2001 (unaudited) and September 30, 2000 and 1999 to satisfy the regulatory requirement were $530,852, $512,634, and $549,796, respectively. Under OTS regulations, the Company is required to measure its interest rate risk and maintain the interest rate risk within limits the Company establishes. Based on its asset/liability structure at March 31, 2001 (unaudited) and September 30, 2000, the Company's earnings may be negatively impacted if interest rates rise significantly. Under provisions of the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") of 1989, the Company is required to meet certain core, tangible, and risk-based capital ratios. The regulations require institutions to have a minimum regulatory tangible capital ratio equal to 1.5% of total assets, a minimum 3% core capital ratio, and 8% risk-based capital ratio. The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") was signed into law on December 19, 1991. Regulations implementing the prompt corrective action provisions of FDICIA became effective on December 19, 1992. In addition to the prompt corrective action requirements, FDICIA includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the Federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning internal controls, accounting, and operations. The prompt corrective action regulations define specific capital categories based on an institution's capital ratios. The capital categories, in declining order, are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Institutions categorized as "undercapitalized" or worse are subject to certain restrictions, including the requirement to file a capital plan with its primary Federal regulator, prohibitions on the payment of dividends and management fees, restrictions on executive compensation, and increased supervisory monitoring, among other things. Other restrictions may be imposed on the institution either by its primary Federal regulator or by the FDIC, including requirements to raise additional capital, sell assets, or sell the entire institution. Once an institution becomes "critically undercapitalized," it must generally be placed in receivership or conservatorship within 90 days. F-39 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 To be considered "adequately capitalized," an institution must generally have a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at least 4%, and a total risk-based capital ratio of at least 8%. An institution is deemed to be "critically undercapitalized" if it has a tangible equity ratio of 2% or less. As of September 30, 2000, the most recent notification from the OTS categorized the Company as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and core/leverage ratios as set forth in the following table. Management is not aware of the existence of any conditions or events occurring subsequent to September 30, 2000, which would affect the Company's well- capitalized classification. The table of compliance with minimum capital requirements is presented below at March 31, 2001 (unaudited) and September 30, 2000 and 1999 (in thousands):
March 31, 2001 --------------------------------------------------- Tier 1 Total Core/ risk- risk- Tangible leverage based based capital capital capital capital ---------- ---------- ------------ -------- (unaudited) Total equity $ 249,212 249,212 249,212 249,212 General valuation allowances -- -- -- 4,794 Allowable unrealized gains -- -- -- 49,553 Accumulated comprehensive income (194,865) (194,865) (194,865) (194,865) ---------- ---------- ---------- -------- Regulatory capital $ 54,347 54,347 54,347 108,694 ========== ========== ========== ======== Total assets $ 934,828 934,828 934,828 934,828 ========== ========== ========== ======== Regulatory total assets $ 617,464 617,464 ========== ========== Risk-weighted assets $ 383,139 383,139 ========== ======== Capital ratio 8.80% 8.80 14.18 28.37 Regulatory capital category: Adequately capitalized or minimum FIRREA requirement equal to or greater than 1.50 3.00 N/A 8.00 Capital exceeding requirement $ 45,085 35,823 N/A 78,043 ========== ========== ========== ======== Adequately capitalized or minimum FDICIA requirement equal to or greater than 4.00% 4.00 8.00 Capital exceeding requirement $ 29,648 39,021 78,043 ========== ========== ======== Well capitalized, equal to or greater than 5.00% 6.00 10.00 Capital exceeding requirement $ 23,474 31,359 70,380 ========== ========== ========
F-40 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999
September 30, 2000 --------------------------------------------------- Tier 1 Total Core/ risk- risk- Tangible leverage based based capital capital capital capital ---------- ---------- ----------------------- Total equity $ 204,527 204,527 204,527 204,527 General valuation allowances -- -- -- 4,905 Allowable unrealized gains -- -- -- 46,794 Accumulated comprehensive income (152,828) (152,828) (152,828) (152,828) ----------- ---------- ---------- --------- Regulatory capital $ 51,699 51,699 51,699 103,398 =========== ========== ========== ========= Total assets $ 942,687 942,687 942,687 942,687 =========== ========== ========== ========= Regulatory total assets $ 690,412 690,412 =========== ========== Risk-weighted assets $ 390,982 390,982 =========== ========= Capital ratio 7.49% 7.49 13.22 26.45 Regulatory capital category: Adequately capitalized or minimum FIRREA requirement equal to or greater than 1.50 3.00 N/A 8.00 Capital exceeding requirement $ 41,343 30,987 N/A 72,119 =========== ========== ========== ========= Adequately capitalized or minimum FDICIA requirement equal to or greater than 4.00% 4.00 8.00 Capital exceeding requirement $ 24,083 36,060 72,119 =========== ========== ========= Well capitalized, equal to or greater than 5.00% 6.00 10.00 Capital exceeding requirement $ 17,178 28,240 64,300 =========== ========== =========
F-41 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999
September 30, 1999 --------------------------------------------------- Tier 1 Total Core/ risk- risk- Tangible leverage based based capital capital capital capital ---------- ---------- ---------- --------- Total equity $ 198,489 198,489 198,489 198,489 General valuation allowances -- -- -- 3,178 Allowable unrealized gains -- -- -- 42,961 Accumulated comprehensive income (147,662) (147,662) (147,662) (147,662) Goodwill (4,533) (4,533) (4,533) (4,533) ---------- ---------- ---------- --------- Regulatory capital $ 46,294 46,294 46,294 92,433 ========== ========== ========== ========= Total assets $ 904,586 904,586 904,586 904,586 ========== ========== ========== ========= Regulatory total assets $ 659,666 659,666 ========== ========== Risk-weighted assets $ 252,144 252,144 ========== ========= Capital ratio 7.02% 7.02 18.36 36.66 Regulatory capital category: Adequately capitalized or minimum FIRREA requirement equal to or greater than 1.50% 3.00 N/A 8.00 Capital exceeding requirement $ 36,399 26,504 N/A 72,261 ========== ========== ========== ========= Adequately capitalized or minimum FDICIA requirement equal to or greater than 4.0% 4.00 8.00 Capital exceeding requirement $ 19,907 36,208 72,261 ========== ========== ========= Well capitalized, equal to or greater than 5.00% 6.00 10.00 Capital exceeding requirement $ 13,311 31,165 67,219 ========== ========== =========
(19) Lease Commitments The Company assumed leases of a branch facility and parking lot in connection with the Citizens National Bank acquisition. The leases are from a partnership in which a Company executive, a Board Member, and other related parties are partners. The facility lease expires July 31, 2008 and the parking lot lease expired as of January 31, 1998. The parking lot lease is presently being paid month-to-month and is in the process of being renewed. For the six months ended March 31, 2001 and 2000 (unaudited) and the years ended September 30, 2000 and 1999, lease expense relating to these leases was $27,881 (unaudited), $16,000 (unaudited), $40,000, and $8,000, respectively. F-42 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 Future minimum lease payments for the branch facility lease are as follows: Year ending September 30, ------------------------- 2001 $ 42,000 2002 42,000 2003 42,000 2004 42,000 2005 42,000 Thereafter 119,000 -------------- $ 329,000 ============== (20) Formation of Insurance Subsidiary On November 18, 1999, the Company submitted an application to the OTS to obtain approval for the proposed formation of a service corporation subsidiary to engage in the reinsurance of mortgage guaranty insurance. On September 1, 2000, the Company received approval from the OTS to invest in a service corporation established to form the chartered reinsurance company. On November 30, 2000, the Company capitalized this wholly owned subsidiary with a capital contribution of $450,000. Operations commenced in December 2000. (21) Subsequent Event On October 26, 2000, the Company announced that its Board of Directors had approved a Plan of Reorganization from Mutual Savings Bank to Mutual Holding Company and Stock Issuance (the "Plan"). As part of the reorganization, the bank will organize a mid-tier stock holding company to be known as Charter Financial Corp. that will own 100% of the bank's common stock. Charter Financial Corp. will issue a majority of its shares to a mutual holding company to be known as First Charter, MHC. The remaining shares of Charter Financial Corp.'s common stock, which will be no more than 49% of the total shares, will be offered in a subscription offering to certain current and former members of the bank. The amount and pricing of the stock will be based on an independent appraisal of the organization. The transaction is subject to approval by the OTS, the bank's Federal banking regulator. If approved by the OTS, the Plan will also be submitted to the bank's eligible members for approval. Although it is not possible to predict when such approvals will be received, the bank presently expects to commence the stock offering during the second quarter of 2001. The common stock will be offered on a priority basis in a Subscription Offering to eligible customers of the bank. Shares not sold in the Subscription Offering may be offered to the general public in a Community Offering. A liquidation account will not be established since the Company members retain their rights as members of the mutual holding company. After the reorganization, the Company will be limited in the amount of dividends it can pay to Charter Financial Corp. The Company can pay its current year income and any undistributed income from the two prior years. The Company may apply to the OTS to pay distributions in amounts larger than such restriction. The Company must also remain well capitalized after any capital distribution. F-43 CHARTERBANK Notes to Consolidated Financial Statements - (Continued) March 31, 2001 (unaudited) and September 30, 2000 and 1999 Reorganization costs will be treated as reductions in the offering proceeds and thus as a reduction of the capital raised. If the offering is not successfully completed, the costs will be expensed in the period the reorganization is terminated. Reorganization costs through March 31, 2001 totaled $483,960 (unaudited). (22) Restatement of Previously Reported Financial Statements For the year ended September 30, 2000, the Company's Board of Directors approved a special management incentive bonus accrual of $1,200,000 to compensate management for past performance. Prior to approval by the Board of Directors, the Chairman of the Board of Directors discussed the matter with the regulatory authorities and, based on that discussion, the Board of Directors and the Company did not anticipate regulatory objection to payment of this bonus. In March 2001, the Company was informed by the regulatory authorities that further review by them and additional actions by the Company would be required before payment of the bonus would be permitted. In light of these circumstances, on March 22, 2001, the Board of Directors rescinded its approval of such special management incentive bonus accrual. Accordingly, the Board of Directors of the Company has determined to restate its consolidated financial statements at and for the year ended September 30, 2000 for the effects of the clarification regarding the regulatory authorities' position. The effects of the adjustments to the September 30, 2000 consolidated financial statements are as follows: . Reductions in both salaries and benefits expense and other liabilities of $1,200,000; and . Increases in both income tax expense and deferred income tax liability of $450,000 to reflect the income tax effect of the above adjustment. The aggregate effect of such adjustments was to increase previously reported income before income taxes by $1,200,000, net income by $750,000, comprehensive income by $750,000, deferred income taxes by $450,000, retained earnings by $750,000, and to decrease previously recorded other liabilities by $1,200,000. F-44 Independent Auditors' Report The Board of Directors CharterBank: We have audited the accompanying consolidated statements of financial condition of CharterBank (the "Company") as of September 30, 2000 and 1999, and the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the years in the three-year period ended September 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CharterBank at September 30, 2000 and 1999, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America. As discussed in note 22, the consolidated statement of financial condition as of September 30, 2000, and the related consolidated statements of income and comprehensive income, equity, and cash flows for the year ended September 30, 2000 have been restated. /s/ KPMG LLP Atlanta, Georgia December 1, 2000, except as to note 22, as to which the date is March 22, 2001 F-45 ________________________________________________________________________________ You should rely only on the information contained in this document or that to which we have referred you. We have not authorized anyone to provide you with information that is different. This document does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful. The affairs of CharterBank or Charter Financial may change after the date of this prospectus. Delivery of this document and the sales of shares made hereunder does not mean otherwise. [Logo] (Proposed Stock Holding Company for CharterBank) Up to 5,157,750 Shares of Common Stock ______ PROSPECTUS Sandler O'Neill & Partners, L.P. [ ] Until the later of [ ] or 25 days after commencement of the offering, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ________________________________________________________________________________ PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution. SEC Registration Fee (1)........................................... $ 12,895 OTS application fee and registration............................... 14,400 NASD filing fee.................................................... 5,000 Nasdaq National Market Listing Fee (2)............................. 90,000 Printing, postage and mailing...................................... 100,000 Legal fees and expenses............................................ 400,000 Placement Agent's fees and commissions (3)......................... 450,000 Placement Agent's expenses (excluding counsel fees)................ 50,000 Placement Agent's counsel fees and expenses........................ 75,000 Accounting fees and expenses....................................... 200,000 Appraiser's fees and expenses (including preparing business plan).. 100,000 Conversion agent fees and expenses................................. 15,000 Certificate printing............................................... 10,000 Blue Sky fees and expenses (including fees of counsel)............. 10,000 Miscellaneous...................................................... 17,705 ---------- TOTAL.............................................................. $1,550,000 ==========
_____________ (1) Expenses based upon the registration and sale of 5,157,750 shares each at $10.00 per share. (2) Based total shares outstanding of 19,500,000. (3) Assumes 2.5% commission paid on sale of 3,900,000 shares and excluding ESOP shares and shares purchased by management. Item 14. Indemnification of Directors and Officers. 12 C.F.R. Section 545.121 of OTS Regulations sets forth the ability of a federal savings & loan association to indemnify its officers and directors. This section provides that a savings association shall indemnify any person against whom an action is brought or threatened because that person is or was a director, officer or employee of the association for: (1) any amount for which that person become liable under a judgment if such action; and (2) reasonable costs and expenses, including reasonable attorney's fees paid or incurred by that person in defending or settling such action, or in enforcing his or her rights under such section if he or she attains a favorable judgment in such enforcement action. Indemnification shall be made to such individuals if (1) final judgments on the merits is in the individual's favor; or (2) in case of (i) settlement; (ii) Final judgment against the individual, or (iii) final judgment in the individual's favor, other than on the merits, if a majority of the disinterested directors determine that the individual was acting in good faith within the scope of his or her employment or authority as he or she could have reasonably perceived it under the circumstances and for a purpose he or she could reasonably have believed under the circumstances was in the best interests of the savings association or its members. The section also provides that no indemnification may be made unless the association gives the OTS 60 days notice of its intention to make such indemnification. In addition to providing indemnification, under OTS Regulations, a savings association may obtain insurance to protect it and its officers, directors and employees from potential losses arising from claims against any of them for alleged wrongful acts, or wrongful acts, committed in their capacity as directors, officers or employees. However, the savings association may not obtain insurance which provides for payment of losses of any person incurred as a consequence of his or her willful or criminal misconduct. Section 545.121 of OTS regulations is subject to and qualified by 12 U.S.C (S) 1821(k) which provides in general that a director or officer of an insured depository institution may be held personally liable for monetary damages by, on behalf of, or at the request or direction of the Federal Deposit Insurance Corporation in certain circumstances. Article XII of both the Charter Financial Corp.'s and CharterBank's Bylaws provide that it shall indemnify any person against whom an action is brought or threatened because that person is or was a director, officer or employee of the Charter Financial Corp. or CharterBank for: (a) any amount for which that person becomes liable under a judgment in such action; and (b) reasonable costs and expenses, including reasonable attorneys' fees, actually paid or incurred by that person in defending or settling such action, or in enforcing his or her rights under the indemnification section of the bylaws if he or she attains a favorable judgment in such enforcement action. These bylaw sections mirror OTS regulations as set forth above. Section 19 of the Bylaws of the First Charter, MHC provide that the mutual holding company shall indemnify its officers, directors and employees to the fullest extent permitted by the rules and regulations of the OTS at 12 C.F.R. (S) 545.121. CharterBank and Charter Financial Corp. have each entered into a separate Employment Agreement with Robert L. Johnson. The Agreements each provide for indemnification to be provided to Mr. Johnson to the fullest extent permitted under federal law. CharterBank is also a party to Change of Control Agreements with certain officers of CharterBank which provide for indemnification for attorneys' fees in some instances. These Change of Control Agreements are guaranteed by Charter Financial Corp. Item 15. Recent Sales of Unregistered Securities. Not Applicable. Item 16. Exhibits and Financial Statement Schedules. The exhibits and financial statement schedules filed as a part of this Registration Statement are as follows: (a) List of Exhibits. 1.1 Engagement Letter dated March 1, 2001, between CharterBank and Sandler O'Neill & Partners, L.P.* 1.2 Form of Agency Agreement, between CharterBank and Sandler O'Neill & Partners, L.P.* 2.1 CharterBank Amended Plan of Reorganization from Mutual Savings Bank to Mutual Holding Company and Stock Issuance* 3.1 Federal Stock Charter of Charter Financial Corp.* 3.2 Bylaws of Charter Financial Corp.* 3.3 Federal Stock Charter of CharterBank 3.4 Bylaws of CharterBank* 3.5 Federal Stock Charter of First Charter, MHC* 3.6 Bylaws of First Charter, MHC* 4.1 Federal Stock Charter of Charter Financial Corp. (See Exhibit 3.1)* 4.2 Bylaws of Charter Financial Corp. (See Exhibit 3.2)* 4.3 Form of Stock Certificate of Charter Financial Corp.* 5.1 Opinion of Thacher Proffitt & Wood regarding legality of securities to be registered 8.1 Opinion of Thacher Proffitt & Wood regarding federal tax matters 8.2 Opinion of Alston & Bird regarding Georgia state and local tax matters 8.3 Opinion of Alston & Bird regarding Alabama state and local tax matters 8.4 Letter from RP Financial, LC. regarding subscription rights* 10.1 Form of Employee Stock Ownership Plan of Charter Financial Corp.* 10.2 Form of Benefit Restoration Plan of Charter Financial Corp.* 10.3 Form of Employment Agreement by and among Robert L. Johnson and Charter Financial Corp. 10.4 Form of One Year Change in Control Agreement by and among certain officers, Charter Financial Corp. and CharterBank 10.5 Form of Two Year Change in Control Agreement by and among certain officers, Charter Financial Corp. and CharterBank 10.6 Form of Charter Financial Corp. 2001 Recognition and Retention Plan 10.7 Form of Charter Financial Corp. 2001 Stock Option Plan 21.1 Form of Subsidiaries of the Registrant* 23.1 Consent of Thacher Proffitt & Wood (included in Exhibits 5.1 and 8.1 to this Registration Statement) 23.2 Consent of KPMG LLP 23.3 Consent of RP Financial, LC. 23.4 Consent of Alston & Bird (included in Exhibits 8.2 and 8.3 to this Registration Statement) 24.1 Powers of Attorney (included in Signature Page of this Registration Statement)* 99.1 Appraisal Report of RP Financial, LC. (Tables filed in paper format only) 99.2 Updated Appraisal Report of RP Financial, LC. (Tables filed in paper format only) 99.3 Form of marketing materials to be used in connection with the offering - ----------- *Previously filed with the initial filing of the Registration Statement on Form S-1 on March 27, 2001. (b) Financial Statement Schedules. All schedules have been omitted as not applicable or not required under the rules of Regulation S-X. Item 17. Undertakings. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any Prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Offering. The undersigned Registrant hereby undertakes to furnish stock certificates to or in accordance with the instructions of the respective purchasers of the Common Stock, so as to make delivery to each purchaser promptly following the closing under the Plan of Reorganization. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of West Point, Georgia on May 17, 2001. Charter Financial Corp. /s/ Robert L. Johnson -------------------------------------- By: Robert L. Johnson President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, and any rules and regulations promulgated thereunder, this Registration Statement, has been signed by the following persons in the capacities and on the dates indicated. Name Title Date ---- ----- ---- * Chairman of the Board May 17, 2001 - ---------------------- John W. Johnson, Jr. * President, Chief Executive Officer May 17, 2001 - ---------------------- and Director (principal executive Robert L. Johnson officer) * Director May 17, 2001 - ---------------------- David Z. Cauble, III * Director May 17, 2001 - ---------------------- Jane W. Darden * Director May 17, 2001 - ---------------------- William B. Hudson * Director May 17, 2001 - ---------------------- Thomas M. Lane * Director May 17, 2001 - ---------------------- R. Terry Taunton * Chief Financial Officer, Vice May 17, 2001 - ---------------------- President and Treasurer (principal Curtis R. Kollar accounting officer) */s/ Robert L. Johnson as attorney-in-fact by power of attorney dated March 22, 2001, as filed on March 27, 2001. EX-3.3 2 dex33.txt EXHIBIT 3.3 EXHIBIT 3.3 CharterBank Charter Section 1. Corporate Title. The full corporate title of the association is CharterBank (the "Bank"). Section 2. Office. The home office shall be located in West Point, Georgia. Section 3. Duration. The duration of the Bank is perpetual. Section 4. Purpose and Powers. The purpose of the Bank is to pursue any or all of the lawful objectives of a Federal savings association chartered under section 5 of the Home Owners' Loan Act and to exercise all of the express, implied, and incidental powers conferred thereby and by all acts amendatory thereof and supplemental thereto, subject to the Constitution and laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Office of Thrift Supervision (the "Office"). Section 5. Capital Stock. The total number of shares of all classes of the capital stock that the Bank has the authority to issue is 6,000,000 of which 5,000,000 shares shall be common stock, par value $.01 per share, and of which 1,000,000 shares shall be serial preferred stock, no par value per share. The shares may be issued from time to time as authorized by the board of directors without the approval of the shareholders, except as otherwise provided in this Section 5 or to the extent that such approval is required by governing law, rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the Bank. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted to the Bank), labor, or services actually performed for the Bank, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor, or services, as determined by the board of directors of the Bank, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the retained earnings of the Bank that is transferred to common stock or paid-in capital accounts upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. Except for the shares issued in the initial organization of the Bank or in connection with the conversion of the Bank from the mutual to stock form of capitalization, no shares of capital stock (including shares issuable upon conversion, exchange or exercise of other securities) shall be issued, directly or indirectly, to officers, directors, or controlling persons of the Bank other than as part of a general public offering or as qualifying shares to a director, unless their issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting. -1- Nothing contained in this Section 5 (or in any supplementary sections hereto) shall entitle the holders of any class or series of capital stock to vote as a separate class or series or to more than one vote per share, except as to the cumulation of votes for the election of directors (unless the charter otherwise provides that there shall be no such cumulative voting); Provided, that this restriction on voting separately by class or series shall not apply: (i) To any provision which would authorize the holders of preferred stock, voting as a class or series, to elect some members of the board of directors, less than a majority thereof, in the event of default in the payment of dividends on any class or series of preferred stock; (ii) To any provision which would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the Bank with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of properties or business in exchange for securities of a corporation other than the Bank if the preferred stock is exchanged for securities of such other corporation; Provided, That no provision may require such approval for transactions undertaken with the assistance or pursuant to the direction of the Office, or the Federal Deposit Insurance Corporation; (iii) To any amendment which would adversely change the specific terms of any class or series of capital stock as set forth in this Section 5 (or in any supplementary sections hereto), including any amendment which would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment which increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving savings bank in a merger or consolidation for the Bank, shall not be considered to be such an adverse change. A description of the different classes and series (if any) of the Bank's capital stock and a statement of the designations, and the relative rights, preferences, and limitations of the shares of each class of and series (if any) of capital stock are as follows: A. Common Stock. Except as provided in this Section 5 (or in any supplementary sections hereto) the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by each holder, except as to the cumulation of votes for the election of directors, unless the charter otherwise provides that there shall be no such cumulative voting. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to payment of dividends, the full amount of dividends and of sinking fund, retirement fund, or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends out of any assets legally available for the payment of dividends. In the event of any liquidation, dissolution, or winding up of the Bank, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the -2- common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Bank available for distribution remaining after: (i) Payment or provision for payment of the Bank's debts and liabilities; (ii) distributions or provision for distributions in settlement of its liquidation account; and (iii) distributions or provision for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution, or winding up of the Bank. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock. B. Preferred Stock. The Bank may provide in supplementary sections to its charter for one or more classes of preferred stock, which shall be separately identified. The shares of any class may be divided into and issued in series, with each series separately designated so as to distinguish the shares thereof from the shares of all other series and classes. The terms of each series shall be set forth in a supplementary section to the charter. All shares of the same class shall be identical except as to the following relative rights and preferences, as to which there may be variations between different series: (a) The distinctive serial designation and the number of shares constituting such series; (b) The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s), the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends; (c) The voting powers, full or limited, if any, of shares of such series; (d) Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed; (e) The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Bank; (f) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund; (g) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the Bank and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (h) The price or other consideration for which the shares of such series shall be issued; and -3- (i) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock. Each share of each series of serial preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series. The board of directors shall have authority to divide, by the adoption of supplementary charter sections, any authorized class of preferred stock into series and, within the limitations set forth in this section and the remainder of this charter, fix and determine the relative rights and preferences of the shares of any series so established. Prior to the issuance of any preferred shares of a series established by a supplementary charter section adopted by the board of directors, the Bank shall file with the Secretary of the Office a dated copy of that supplementary section of this charter establishing and designating the series and fixing and determining the relative rights and preferences thereof. Section 6. Preemptive Rights. Holders of the capital stock of the Bank shall not be entitled to preemptive rights with respect to any shares of the Bank which may be issued. Section 7. Directors. The Bank shall be under the direction of a board of directors. The authorized number of directors, as stated in the Bank's bylaws, shall not be fewer than five nor more than fifteen, except when a greater or lesser number is approved by the Director of the Office, or his or her delegate. Section 8. Beneficial Ownership Limitation. Notwithstanding anything contained in the Bank's charter or bylaws to the contrary, for a period of five years from the date of this charter no person (other than the holding company established by the Bank to acquire and hold all of the capital stock of the Bank to be issued upon its conversion to stock form) shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10 percent of any class of an equity security of the Bank. This limitation shall not apply to First Charter, MHC, a transaction in which the Bank forms a holding company without change in the respective beneficial ownership interests of its stockholders other than pursuant to the exercise of any dissenter and appraisal rights, the purchase of shares by underwriters in connection with a public offering, or the purchase of shares by a tax-qualified employee stock benefit plan which is exempt from the approval requirements under 574.3(c)(l)(vii) of the Office's regulations. In the event shares are acquired in violation of this Section 8, all shares beneficially owned by any person in excess of 10% shall be considered "excess shares" and shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matters submitted to the stockholders for a vote. -4- For the purposes of this Section 8, the following definitions apply: (1) The term "person" includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of the equity securities of the Bank. (2) The term "offer" includes every offer to buy or otherwise acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or interest in a security for value. (3) The term "acquire" includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise. (4) The term "acting in concert" means (a) knowing participation in a joint activity or conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (b) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangements, whether written or otherwise. Section 9. Cumulative Voting Limitation. Stockholders shall not be permitted to cumulate their votes for election of directors. Section 10. Call for Special Meetings. Special meetings of stockholders relating to changes in control of the Bank or amendments to its charter shall be called only upon direction of the board of directors. Section 11. Deposit Accounts. In any situation in which the priority of the accounts of the Bank is in controversy, all such accounts shall, to the extent of their withdrawable value, be debts of the Bank having at least as high a priority as the claims of general creditors of the Bank not having priority (other than any priority arising or resulting from consensual subordination) over other general creditors of the Bank. Section 12. Amendment of Charter. Except as provided in Section 5 hereof, no amendment addition, alteration, change, or repeal of this charter shall be made, unless such is first proposed by the board of directors of the Bank, approved by the stockholders by a majority of the total votes eligible to be cast at a legal meeting unless a higher vote is otherwise required, and approved or preapproved by the Office. -5- CHARTERBANK Attest:___________________________ By:_________________________________ William Gladden Robert L. Johnson Secretary of the Bank President and Chief Executive Officer OFFICE OF THRIFT SUPERVISION Attest:___________________________ By:_________________________________ Secretary of the Office of Director of the Office of Thrift Thrift Supervision Supervision Effective Date:___________________ -6- EX-5.1 3 dex51.txt EXHIBIT 5.1 EXHIBIT 5.1 [LETTERHEAD OF THACHER PROFFITT & WOOD] May 17, 2001 Charter Financial Corp. 600 Third Avenue West Point, Georgia, 31833 Re: Charter Financial Corp. ----------------------- Ladies and Gentlemen: We have acted as special counsel to Charter Financial Corp., a federal corporation (the "Company"), in connection with the proposed registration under the Securities Act of 1933, as amended, by the Company of an aggregate of 5,157,750 shares of common stock, $0.01 par value per share, of the Company (the "Shares"), and the related preparation and filing by the Company with the Securities and Exchange Commission of a Registration Statement on Form S-1 (the "Registration Statement") pursuant to the Amended Plan of Reorganization from Mutual Savings Bank to Mutual Holding Company and Stock Issuance (the "Plan"). In rendering the opinion set forth below, we do not express any opinion concerning law other than the federal law of the United States. We have examined originals or copies, certified or otherwise identified, of such documents, corporate records and other instruments, and have examined such matters of law, as we have deemed necessary or advisable for purposes of rendering the opinion set forth below. As to matters of fact, we have examined and relied upon the factual representations of the Company contained in the Registration Statement and, where we have deemed appropriate, representations or certificates of officers of the Company or public officials. We have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures, the legal capacity of natural persons and the conformity to the originals of all documents submitted to us as copies. In making our examination of any documents, we have assumed that all parties, other than the Company, had the corporate power and authority to enter into and perform all obligations thereunder, and, as to such parties, we have also assumed the due authorization by all requisite action, the due execution and delivery of such documents, and the validity and binding effect and enforceability thereof. Charter Financial Corp. May 17, 2001 Page 2. Based on the foregoing, we are of the opinion that the Shares have been duly authorized and, when issued and exchanged as contemplated in the Registration Statement and the Plan, will be validly issued and outstanding, fully paid and non-assessable. In rendering the opinion set forth above, we have not passed upon and do not purport to pass upon the application of securities or "blue-sky" laws of any jurisdiction (except federal securities laws). This opinion is given solely for the benefit of the Company and investors who purchase Shares of common stock of the Company pursuant to the Registration Statement, and may not be relied upon by any other person or entity, nor quoted in whole or in part, or otherwise referred to in any document without our express written consent. We consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to our name in the Prospectus contained in the Registration Statement under the heading "Legal and Tax Opinions." Very truly yours, Thacher Proffitt & Wood By: /s/ V. Gerard Comizio ---------------------------------- V. Gerard Comizio EX-8.1 4 dex81.txt EXHIBIT 8.1 Exhibit 8.1 [Thacher Proffitt and Wood Opinion Letterhead] May 16, 2001 CharterBank 600 Third Avenue West Point, GA 31833 Dear Ladies and Gentlemen: You have requested our opinion regarding certain federal income tax consequences of the proposed transactions (collectively, the "Reorganization"), more fully described below, pursuant to which CharterBank (the "Bank") will reorganize from a mutual savings association into a mutual holding company structure. The Reorganization will be effected pursuant to the Amended Plan of Reorganization From Mutual Savings Association to Mutual Holding Company and Stock Issuance, adopted by the Board of Directors of the Bank on March 8, 2001 (the "Plan"). The Reorganization and its component and related transactions are described in the Plan. We are rendering this opinion pursuant to Section 5(E) of the Plan. All capitalized terms used but not defined in this letter shall have the meanings assigned to them in the Plan. The Reorganization will be effected, pursuant to the Plan, as follows: (1) The Bank will establish a federal corporation ("Holding Company") as a wholly-owned subsidiary of the Bank; (2) Holding Company will establish a federally chartered stock savings bank ("New Stock Bank") as its wholly-owned subsidiary. (3) The Bank will exchange its charter for a federal mutual holding company charter to become First Charter, MHC ("MHC"); (4) Immediately following step (3), the MHC will transfer all of its assets and liabilities, other than 400,000 shares of Federal Home Loan Mortgage Corporation ("Freddie Mac") stock and approximately $100,000 in cash, to Holding Company in exchange solely for common stock of Holding Company and the assumption by the Holding Company of the liabilities of MHC; and CharterBank May 16, 2001 Page 2. (5) Immediately following steps (3) and (4), Holding Company will transfer all of its assets and liabilities, including all the assets and liabilities transferred to Holding Company pursuant to step (3) but excluding 2,500,000 shares of Freddie Mac stock, to New Stock Bank in exchange solely for common stock of New Stock Bank and the assumption by New Stock Bank of the liabilities of the Holding Company. Immediately following steps (3) through (5), or as soon as practicable thereafter, Holding Company will sell up to 20% of its authorized common stock in one or more Minority Stock Offerings. As a result of the Reorganization, and after the Minority Stock Offerings, MHC will own at least 80% of the issued and outstanding shares of Holding Company common stock, and New Stock Bank will be the wholly-owned subsidiary of Holding Company and will conduct the banking business previously conducted by the Bank. Pursuant to the Reorganization, each deposit in the Bank as of the Effective Date will become a deposit in New Stock Bank in the same amount and upon the same terms and conditions, and members of the Bank will become members of MHC. As a mutual entity, MHC will not have any authorized capital stock, and the members of MHC will have exclusive voting authority as to all matters requiring a vote of members under the MHC Charter, and will otherwise hold membership interests in MHC that are substantially similar to those held by them in the Bank. In connection with the opinions expressed below, we have examined and relied upon originals, or copies certified or otherwise identified to our satisfaction, of the Plan and of such corporate records of the parties to the Reorganization as we have deemed appropriate. We have also relied, without independent verification, upon the representations of the Bank contained in its letter to us dated May 16, 2001. We have assumed the absence of changes at the Effective Time of facts existing on the date of the filing of Form MHC-1 with the Office of Thrift Supervision, that the parties will act, and that the Reorganization will be effected in accordance with the Plan, and that the representations made by the Bank in the foregoing letter are true, correct and complete, and will be true, correct and complete at the Effective Time, without regard to any qualification as to knowledge and belief. In addition, we have made such investigations of law as we have deemed appropriate to form a basis for the opinions expressed below. Based on and subject to the foregoing, it is our opinion that for federal income tax purposes, under current law: (1) The conversion of the Bank to mutual holding company form under the name First Charter, MHC will constitute a reorganization under Code section 368(a)(1)(F); (2) The transfer of assets by the Bank to Holding Company solely in exchange for common stock of Holding Company and the assumption by Holding Company of liabilities of the Bank will be an exchange described in Code section 351. (3) The transfer of assets by Holding Company to New Stock Bank solely in exchange for common stock of New Stock Bank and the assumption by New Stock Bank of liabilities of Holding Company will be an exchange described in Code section 351. (4) None of the Bank, Holding Company, New Stock Bank or the Members will recognize gain or loss as a result of the Reorganization; CharterBank May 16, 2001 Page 3. (5) Participants in the Subscription Offering will not recognize gain or loss upon their receipt of nontransferable subscription rights to purchase shares of Holding Company, provided the amount to be paid for such shares is equal to fair market value of such shares; (6) MHC's basis in the stock of Holding Company that is received in the Reorganization will be the same as the basis of the property transferred in exchange therefor, reduced by the amount of liabilities assumed by Holding Company; and (7) Holding Company's basis in the stock of New Stock Bank that is received in the Reorganization will be the same as the basis of the property transferred in exchange therefor, reduced by the amount of liabilities assumed by New Stock Bank. For purposes of opinions (6) and (7), a transferee of assets shall be treated (i) as having assumed a recourse liability of its transferor (or portion thereof) if the transferee has agreed to, and is expected to, satisfy such liability (or portion), whether or not the transferor has been relieved of such liability, and (ii) as having assumed a nonrecourse liability if any asset transferred to the transferee is subject to such liability, provided that the amount of any such nonrecourse liability shall be reduced by the lesser of (i) the amount thereof that the owner of other assets not transferred to the transferee and also subject to such liability has agreed with the transferee to, and is expected to, satisfy or (ii) the fair market value of such other assets. Except as set forth above, we express no opinion to any party as to the tax consequences, whether federal, state, local or foreign, of the Reorganization or of any transaction related thereto or contemplated by the Plan. We consent to the filing of this opinion as an exhibit to the Form MHC-1 filed with the Office of Thrift Supervision in connection with the Reorganization, and to the Prospectus included in the Bank's Registration Statement on Form S-1 filed with the Securities and Exchange Commission in connection with the Reorganization (the "Prospectus") and to the reference thereto under the headings "The Reorganization and The Offering - Tax Aspects" and "Legal and Tax Opinions" in the Prospectus. Very truly yours, THACHER PROFFITT & WOOD By: /s/ Albert J. Cardinali ------------------------------------ EX-8.2 5 dex82.txt EXHIBIT 8.2 Exhibit 8.2 Alston & Bird LLP One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 404-881-7000 Fax: 404-881-4777 www.alston.com May 17, 2001 CharterBank 600 Third Avenue West Point, Georgia 31833 Re: Amended Plan of Reorganization From Mutual Savings Association to Mutual Holding Company and Stock Issuance - Georgia Tax Matters Ladies and Gentlemen: We have acted as special Georgia tax counsel to CharterBank (the "Bank"), a mutual savings association located in West Point, Georgia, in connection with the transactions contemplated by the Amended Plan of Reorganization From Mutual Savings Association to Mutual Holding Company and Stock Issuance, adopted by the Board of Directors of the Bank on March 8, 2001 (the "Plan"). Pursuant to the Plan, the Bank will reorganize from a mutual savings association to a mutual holding company structure (the "Reorganization"), to be effected as follows: (i) the Bank will establish a federal corporation ("Holding Company") as its wholly-owned subsidiary; (ii) Holding Company will establish a federally chartered stock savings bank ("New Stock Bank") as its wholly-owned subsidiary; (iii) the Bank will exchange its charter for a federal mutual holding company charter to become First Charter, MHC ("MHC"); (iv) immediately following step (iii), MHC will transfer all of its assets and liabilities (excluding some cash and stock), to Holding Company in exchange solely for common stock of Holding Company and the assumption by the Holding Company of the liabilities of MHC ("Contribution One"); (v) immediately following step (iv), Holding Company will transfer all of its assets and liabilities, including all of the assets and liabilities transferred to Holding Company pursuant to step (iv) but excluding some stock, to New Stock Bank in exchange solely for common stock of New Stock Bank and the assumption by New Stock Bank of the liabilities of the Holding Company ("Contribution Two"); and (vi) immediately following step (v), or as soon as practicable thereafter, Holding Company will sell up to 20% of its authorized common stock in one or more Minority Share Offerings. Pursuant to Section 5(F) of the Plan, you have requested our opinion as to the Georgia tax consequences of the Plan to the parties to the Reorganization. Bank of America Plaza 90 Park Avenue 3605 Glenwood Avenue 601 Pennsylvania Avenue, N.W. 101 South Tryon Street, Suite 4000 New York, NY 10016 Suite 310 North Building, 11th Floor Charlotte, NC 28280-4000 212-210-9400 Raleigh, NC 27612-4957 Washington, DC 20004-2601 704-444-1000 Fax: 212-210-9444 919-420-2200 202-756-3300 Fax: 704-444-1111 Fax: 919-420-2260 Fax: 202-756-3333
CharterBank May 2, 2001 Page 2 For purposes of rendering this opinion, we have examined the Plan and have also relied, with your consent and without independent verification, upon the statements and opinions provided in the opinion letter of Thacher Proffitt & Wood rendered on DATE (the "Federal Opinion"). In addition, we have assumed, with your consent and without independent verification, that (i) the Bank, MHC, the Holding Company, and New Stock Bank each do (or will do) business both within and without the state of Georgia; (ii) New Stock Bank will be authorized to accept deposits in Georgia; and, (iii) neither MHC nor the Holding Company will be authorized to accept deposits in Georgia. As the basis for rendering this opinion, we have examined the applicable statutory provisions of the Georgia Corporate Income, Sales and Use, Real Estate Transfer, Ad Valorem, Corporate Net Worth, and Financial Institution Gross Receipts Taxes, regulations promulgated thereunder by the Georgia Department of Revenue (the "Department"), rulings issued by the Department, pertinent judicial authorities, and other relevant authorities, which are subject to change, and which changes could apply retroactively. In addition, our opinion is not binding upon the courts or the Department, and there can be no assurance that positions contrary to those stated in our opinion would not be taken by the Department or that any such contrary position would not be sustained by the courts. Based on the foregoing, we are of the opinion that: (1) The Georgia income tax treatment will conform to and be consistent with the federal income tax treatment as described in the Federal Opinion. In particular, (i) no gain or loss will be recognized by any of the Bank, Holding Company, New Stock Bank, and MHC as a result of the Reorganization, and (ii) no gain or loss will be recognized by any Member (as defined in the Plan) as a result of the Reorganization. (2) Any transfers of tangible personal property pursuant to Contribution One or Contribution Two (collectively, the "Contributions") will not be subject to Georgia sales or use tax. These Contributions constitute "business reorganizations" for purposes of Georgia sales and use tax, and Georgia exempts transfers of tangible personal property as a result of a business reorganization when the stockholders/owners "of the business being reorganized maintain the same proportionate interest or share in the newly formed business reorganization." O.C.G.A. (S) 48-8-3(21). (3) To the extent any real estate (or any interest therein) is transferred by MHC to the Holding Company, or by the Holding Company to New Stock Bank, such transfers shall be subject to the real estate transfer tax, imposed at a rate of $1.00 on the first $1,000 of value and $0.10 for each additional $100 or fraction thereof. See O.C.G.A. (S) 48-6-1 et seq. --- 2 CharterBank May 17, 2001 Page 3 (4) The Reorganization will have no legal consequences on the imposition of ad valorem taxes, which are assessed based on fair market value. (5) Going forward, the Holding Company, New Stock Bank and MHC will each be subject to the corporate net worth tax. The maximum tax is $5,000 for apportioned net worth in excess of $22,000,000. See --- O.C.G.A. (S) 48-13-70 et seq. (6) Going forward, New Stock Bank will be subject to the tax on financial institutions because New Stock Bank shall be authorized to accept deposits in Georgia and shall therefore qualify as a "depository financial institution." The tax is levied at both the state and local level, each at a rate of 0.25 percent of Georgia gross receipts. MHC and the Holding Company are not "depository financial institutions" because they are not authorized to receive deposits in Georgia. Thus, MHC and the Holding Company will not be subject to the tax on financial institutions. See --- O.C.G.A. (S) 48-6-90 et seq. This opinion is limited to the matters expressly opined on herein, and no opinion may be implied or inferred beyond those expressly stated. This opinion is rendered as of the date hereof based on the law and facts in existence on the date hereof, and we do not undertake, and hereby disclaim, any obligation to advise you of any changes in law or facts, whether or not material, which may be brought to our attention at a later date. This opinion is being furnished to you solely for your benefit in connection with the consummation of the transactions contemplated by the Plan and is not to be used, circulated, quoted or otherwise referred to or relied upon for any purpose without our prior express written consent. Except as provided in this paragraph, this opinion is being furnished to you solely for your benefit in connection with the consummation of the transactions contemplated by the Plan and is not to be used, circulated, quoted or otherwise referred to or relied upon for any purpose without our prior express written consent. We consent to the filing of this opinion as an exhibit to the Form MHC-1 filed with the Office of Thrift Supervision in connection with the Reorganization, and to the Prospectus included in the Bank's Registration Statement on Form S-1 filed with the Securities and Exchange Commission in connection with the Reorganization (the "Prospectus") and to the references thereto under the headings "The Reorganization and The Offering - Tax Aspects" and "Legal and Tax Opinions." Very truly yours, ALSTON & BIRD LLP By: /s/ Michael T. Petrik ---------------------- Michael T. Petrik A Partner of the Firm 3 EX-8.3 6 dex83.txt EXHIBIT 8.3 Exhibit 8.3 Alston & Bird LLP One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 404-881-7000 Fax: 404-881-4777 www.alston.com May 17, 2001 CharterBank 600 Third Avenue West Point, Georgia 31833 Re: Amended Plan of Reorganization From Mutual Savings Association to Mutual Holding Company and Stock Issuance - Alabama Tax Matters Ladies and Gentlemen: We have acted as special Alabama tax counsel to CharterBank (the "Bank"), a mutual savings association located in West Point, Georgia, in connection with the transactions contemplated by the Amended Plan of Reorganization From Mutual Savings Association to Mutual Holding Company and Stock Issuance, adopted by the Board of Directors of the Bank on March 8, 2001 (the "Plan"). Pursuant to the Plan, the Bank will reorganize from a mutual savings association to a mutual holding company structure (the "Reorganization"), to be effected as follows: (i) the Bank will establish a federal corporation ("Holding Company") as its wholly- owned subsidiary; (ii) Holding Company will establish a federally chartered stock savings bank ("New Stock Bank") as its wholly-owned subsidiary; (iii) the Bank will exchange its charter for a federal mutual holding company charter to become First Charter, MHC ("MHC"); (iv) immediately following step (iii), MHC will transfer all of its assets and liabilities (excluding some cash and stock), to Holding Company in exchange solely for common stock of Holding Company and the assumption by the Holding Company of the liabilities of MHC; (v) immediately following step (iv), Holding Company will transfer all of its assets and liabilities, including all of the assets and liabilities transferred to Holding Company pursuant to step (iv) but excluding some stock, to New Stock Bank in exchange solely for common stock of New Stock Bank and the assumption by New Stock Bank of the liabilities of the Holding Company; and (vi) immediately following step (v), or as soon as practicable thereafter, Holding Company will sell up to 20% of its authorized common stock in one or more Minority Share Offerings. Pursuant to Section 5(F) of the Plan, you have requested our opinion as to the Alabama tax consequences of the Plan to the parties to the Reorganization. Bank of America Plaza 90 Park Avenue 3605 Glenwood Avenue 601 Pennsylvania Avenue, N.W. 101 South Tryon Street, Suite 4000 New York, NY 10016 Suite 310 North Building, 11th Floor Charlotte, NC 28280-4000 212-210-9400 Raleigh, NC 27612-4957 Washington, DC 20004-2601 704-444-1000 Fax: 212-210-9444 919-420-2200 202-756-3300 Fax: 704-444-1111 Fax: 919-420-2260 Fax: 202-756-3333
CharterBank May 17, 2001 Page 2 For purposes of rendering this opinion, we have examined the Plan and have also relied, with your consent and without independent verification, upon the statements and opinions provided in the opinion letter of Thacher Proffitt & Wood rendered on DATE (the "Federal Opinion"). In addition, we have assumed, with your consent and without independent verification, that the Bank, MHC, the Holding Company, and New Stock Bank each do (or will do) business both within and without the state of Alabama. As the basis for rendering this opinion, we have examined the applicable statutory provisions of the Alabama Corporate Income, Sales and Use, Recordation, Ad Valorem, Business Privilege, and Financial Institution Excise Taxes, regulations promulgated thereunder by the Alabama Department of Revenue (the "Department"), rulings issued by the Department, pertinent judicial authorities, and other relevant authorities, which are subject to change, and which changes could apply retroactively. In addition, our opinion is not binding upon the courts or the Department, and there can be no assurance that positions contrary to those stated in our opinion would not be taken by the Department or that any such contrary position would not be sustained by the courts. Based on the foregoing, we are of the opinion that: (1) The treatment of the transactions contemplated by the Plan under the Alabama income tax and Alabama financial institution excise tax (as the case may be) will conform to and be consistent with the federal income tax treatment as described in the Federal Opinion. In particular, (i) no gain or loss will be recognized by any of the Bank, Holding Company, New Stock Bank, and MHC as a result of the Reorganization, and (ii) no gain or loss will be recognized by any Member (as defined in the Plan) as a result of the Reorganization. (2) The Reorganization will not be subject to Alabama sales or use tax because any transfers of tangible personal property contemplated by the Plan will qualify as exempt casual or isolated sales. See Ala. --- Reg. (S) 810-6-1-.33. (3) To the extent any real estate (or any interest therein) is transferred by MHC to the Holding Company, or by the Holding Company to New Stock Bank, such transfers shall be subject to the recordation tax upon recording the deed or other instrument of transfer. See Ala. Code (S) --- 40-22-1 et seq. The recordation tax is imposed at a rate of $0.50 on the first $500 of value and $0.50 for each additional $500 or fraction thereof. Ala Code (S) 40-22-1. (4) The Reorganization will have no legal consequences on the imposition of ad valorem taxes, which are assessed based on fair market value. CharterBank May 17, 2001 Page 3 (5) Going forward, the Holding Company, New Stock Bank and MHC will each be subject to the business privilege tax. See Ala. Code (S) 40-14A-1 --- et seq. This opinion is limited to the matters expressly opined on herein, and no opinion may be implied or inferred beyond those expressly stated. This opinion is rendered as of the date hereof based on the law and facts in existence on the date hereof, and we do not undertake, and hereby disclaim, any obligation to advise you of any changes in law or facts, whether or not material, which may be brought to our attention at a later date. This opinion is being furnished to you solely for your benefit in connection with the consummation of the transactions contemplated by the Plan and is not to be used, circulated, quoted or otherwise referred to or relied upon for any purpose without our prior express written consent. Except as provided in this paragraph, this opinion is being furnished to you solely for your benefit in connection with the consummation of the transactions contemplated by the Plan and is not to be used, circulated, quoted or otherwise referred to or relied upon for any purpose without our prior express written consent. We consent to the filing of this opinion as an exhibit to the Form MHC-1 filed with the Office of Thrift Supervision in connection with the Reorganization, and to the Prospectus included in the Bank's Registration Statement on Form S-1 filed with the Securities and Exchange Commission in connection with the Reorganization (the "Prospectus") and to the references thereto under the headings "The Reorganization and The Offering - Tax Aspects" and "Legal and Tax Opinions." Very truly yours, ALSTON & BIRD LLP By: /s/ Michael T. Petrik ---------------------- Michael T. Petrik A Partner of the Firm EX-10.3 7 dex103.txt EXHIBIT 10.3 EXHIBIT 10.3 Employment Agreement This Employment Agreement (the "Agreement") is made and entered into as of ________, 2001 by and between Charter Financial Corp., a federally- chartered corporation having an office at 600 Third Avenue, West Point, GA 31833 (the "Company") and Robert L. Johnson, an individual residing at 3345 Barnes Mill Road, Hamilton, GA 31811 (the "Executive"). Introductory Statement CHARTERBANK, a federally-chartered savings bank having an office at 600 Third Avenue, West Point, GA 31833 (the "Bank") has reorganized from a federally-chartered mutual savings bank to a federally-chartered stock savings bank and has become a wholly-owned subsidiary of the Company, a mid-tier stock holding company, which is majority owned by First Charter MHC, a mutual holding company (the "Reorganization"). In connection with the Reorganization, certain shares of the Company's common stock were sold in an initial public stock offering. The Executive has served the Bank in an executive capacity for many years and is familiar with the Bank's operations. The Board of Directors of the Company has concluded that it is in the best interests of the Company and their prospective shareholders to secure a continuity in management following the Reorganization. They also consider it desirable to establish a working environment for the Executive which minimizes the personal distractions that might result from possible business combinations in which the Company or the Bank might be involved. For these reasons, the Board of Directors of the Company has decided to offer to enter into a contract with the Executive for his future services. The Executive has accepted this offer. The terms and conditions which the Company and the Executive have agreed to are as follows. Agreement Section 1. Employment. ---------- The Company hereby continues to employ the Executive, and the Executive hereby accepts such continued employment, during the period and upon the terms and conditions set forth in this Agreement. Section 2. Employment Period; Remaining Unexpired Employment ------------------------------------------------- Period. - ------ (a) The Company shall employ the Executive during an initial period of three (3) years beginning on the effective date of the Reorganization (the "Employment Commencement Date") and ending on the day before the third (3/rd/) anniversary of the Employment Commencement Date, and during the period of any additional extensions described in section 2(b) (the "Employment Period"). (b) The Board of Directors of the Company shall conduct an annual review of the Executive's performance on or about each anniversary of the Employment Commencement Date (each, an "Anniversary Date") and may, on the basis of such review and by written notice to the Executive, offer to extend the Employment Period through the day before the third (3/rd/) anniversary of the relevant Anniversary Date. In such event, the Employment Period shall be deemed extended in the absence of objection from the Executive by written notice to the Company given within ten (10) business days after his receipt of the Company's offer of extension. (c) Except as otherwise expressly provided in this Agreement, any reference in this Agreement to the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on the day before the third (3/rd/) anniversary of the Employment Commencement Date or, if later, on the day before the third (3/rd/) anniversary of the last Anniversary Date as of which the Employment Period was extended pursuant to section 2(b). (d) Nothing in this Agreement shall be deemed to prohibit the Company from terminating the Executive's employment before the end of the Employment Period with or without notice for any reason. This Agreement shall determine the relative rights and obligations of the Company and the Executive in the event of any such termination. In addition, nothing in this Agreement shall require the termination of the Executive's employment at the expiration of the Employment Period. Any continuation of the Executive's employment beyond the expiration of the Employment Period shall be on an "at-will" basis unless the Bank, the Company and the Executive agree otherwise. Section 3. Duties. ------ The Executive shall serve as Chief Executive Officer and President of the Company and as Chief Executive Officer and President of the Bank, having such power, authority and responsibility and performing such duties as are prescribed by or under their respective By-Laws and as are customarily associated with such positions. The Executive shall devote his full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Company and shall use his best efforts to advance their respective best interests. Section 4. Cash Compensation. ----------------- In consideration for the services to be rendered by the Executive hereunder, the Company shall pay to him a salary at an initial annual rate of ____________ ($_______), payable in approximately equal installments in accordance with their respective customary payroll practices for senior officers. The Company's Board of Directors shall review the Executive's annual rate of salary at such times during the Employment Period as it deems appropriate, but not less frequently than once every twelve (12) months, and may, at its discretion, approve a salary increase. In addition to salary, the Executive may receive other cash compensation from the Company or the Bank for services hereunder at such times, in such amounts and on such terms and conditions as the Boards of Directors the Company may determine. -2- Section 5. Employee Benefit Plans and Programs. ----------------------------------- During the Employment Period, the Executive shall be treated as an employee of the Company and shall be entitled to participate in and receive benefits under any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long-term disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Company in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Company's customary practices. Section 6. Indemnification and Insurance. ----------------------------- (a) During the Employment Period and for a period of six years thereafter, the Company shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by them to insure their directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Company or the Bank or service in other capacities at their request. The coverage provided to the Executive pursuant to this section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Company. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six years thereafter, the Company shall indemnify the Executive against and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Company or any subsidiary or affiliate thereof. Section 7. Outside Activities. ------------------ The Executive may serve as a member of the boards of directors of such business, community and charitable organizations as he may disclose to and as may be approved by the Board of Directors of the Company (which approval shall not be unreasonably withheld); provided, however, that such service shall not materially interfere with the performance of his duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially interfere with the performance of his duties hereunder; provided, however, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Company and generally applicable to all similarly situated executives. -3- Section 8. Working Facilities and Expenses. ------------------------------- The Executive's principal place of employment shall be at the Company's executive offices at the address first above written, or at such other location as the Company and the Executive may mutually agree upon. The Company shall provide the Executive at his principal place of employment with a private office, secretarial services and other support services and facilities suitable to his positions with the Company and necessary or appropriate in connection with the performance of his assigned duties under this Agreement. The Company shall provide to the Executive for his exclusive use an automobile owned or leased by the Company and appropriate to his position, to be used in the performance of his duties hereunder, including commuting to and from his personal residence. The Company shall reimburse the Executive for his ordinary and necessary business expenses, including, without limitation, all expenses associated with his business use of the aforementioned automobile, fees for memberships in such clubs and organizations as the Executive and the Company shall mutually agree are necessary and appropriate for business purposes, and his travel and entertainment expenses incurred in connection with the performance of his duties under this Agreement, in each case upon presentation to the payer of an itemized account of such expenses in such form as the payer may reasonably require. Section 9. Termination Due to Death. ------------------------ The Executive's employment with the Company shall terminate, automatically and without any further action on the part of any party to this Agreement, on the date of the Executive's death. In such event: (a) The Company shall pay to the Executive's estate his earned but unpaid compensation (including, without limitation, salary and all other items which constitute wages under applicable law) as of the date of his termination of employment. This payment shall be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than thirty (30) days after the date of the Executive's termination of employment. (b) The Company shall provide the benefits, if any, due to the Executive's estate, surviving dependents or his designated beneficiaries under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the officers and employees of the Company. The time and manner of payment or other delivery of these benefits and the recipients of such benefits shall be determined according to the terms and conditions of the applicable plans and programs. The payments and benefits described in sections 9(a) and (b) shall be referred to in this Agreement as the "Standard Termination Entitlements." -4- Section 10. Termination Due to Disability. ----------------------------- The Company may terminate the Executive's employment upon a determination, by vote of a majority of the members of the Board of Directors of the Company, acting in reliance on the written advice of a medical professional acceptable to them, that the Executive is suffering from a physical or mental impairment which, at the date of the determination, has prevented the Executive from performing his assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year ending with the date of the determination or is likely to result in death or prevent the Executive from performing his assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year beginning with the date of the determination. In such event: (a) The Company shall pay and deliver to the Executive (or in the event of his death before payment, to his estate and surviving dependents and beneficiaries, as applicable) the Standard Termination Entitlements. (b) In addition to the Standard Termination Entitlements, the Company shall continue to pay the Executive his base salary, at the annual rate in effect for him immediately prior to the termination of his employment, during a period ending on the earliest of: (i) the expiration of one hundred and eighty (180) days after the date of termination of his employment; (ii) the date on which long-term disability insurance benefits are first payable to him under any long-term disability insurance plan covering employees of the Company (the "LTD Eligibility Date"); (iii) the date of his death; and (iv) the expiration of the Remaining Unexpired Employment Period (the "Initial Continuation Period"). If the end of the Initial Continuation Period is neither the LTD Eligibility Date nor the date of his death, the Company shall continue to pay the Executive his base salary, at an annual rate equal to sixty percent (60%) of the annual rate in effect for him immediately prior to the termination of his employment, during an additional period ending on the earliest of the LTD Eligibility Date, the date of his death and the expiration of the Remaining Unexpired Employment Period. A termination of employment due to disability under this section 10 shall be effected by joint notice of termination given to the Executive by the Company and shall take effect on the later of the effective date of termination specified in such notice or the date on which the notice of termination is deemed given to the Executive. Section 11. Discharge with Cause. -------------------- (a) The Company may terminate the Executive's employment during the Employment Period, and such termination shall be deemed to have occurred with "Cause", only if: (i) The Board of Directors of the Company, by majority vote of their entire membership, determine that the -5- Executive should be discharged because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement; and (ii) at least forty-five (45) days prior to the votes contemplated by section 11(a)(i), the Company has provided the Executive with notice of its intent to discharge the Executive for Cause, detailing with particularity the facts and circumstances which are alleged to constitute Cause (the "Notice of Intent to Discharge"); and (iii) after the giving of the Notice of Intent to Discharge and before the taking of the votes contemplated by section 11(a)(i), the Executive (together with his legal counsel, if he so desires) is afforded a reasonable opportunity to make both written and oral presentations before the Board of Directors of the Company for the purpose of refuting the alleged grounds for Cause for his discharge; and (iv) after the votes contemplated by section 11(a)(i), the Company has furnished to the Executive a notice of termination which shall specify the effective date of his termination of employment (which shall in no event be earlier than the date on which such notice is deemed given) and include a copy of a resolution or resolutions adopted by the Board of Directors of the Company, certified by its corporate secretary and signed by each member of the Board of Directors voting in favor of adoption of the resolution(s), authorizing the termination of the Executive's employment with Cause and stating with particularity the facts and circumstances found to constitute Cause for his discharge (the "Final Discharge Notice"). (b) If the Executive is discharged during the Employment Period with Cause, the Company shall pay and provide to him (or, in the event of his death, to his estate, his surviving beneficiaries and his dependents) the Standard Termination Entitlements only. Following the giving of a Notice of Intent to Discharge, the Company may temporarily suspend the Executive's duties and authority and, in such event, may also suspend the payment of salary and other cash compensation, but not the Executive's participation in retirement, insurance and other employee benefit plans. If the Executive is not discharged, or is discharged without Cause, within forty-five (45) days after the giving of a Notice of Intent to Discharge, payments of salary and cash compensation shall resume, and all payments withheld during the period of suspension shall be -6- promptly restored. If the Executive is discharged with Cause not later than forty-five (45) days after the giving of the Notice of Intent to Discharge, all payments withheld during the period of suspension shall be deemed forfeited and shall not be included in the Standard Termination Entitlements. If a Final Discharge Notice is given later than forty-five (45) days, but sooner than ninety (90) days, after the giving of the Notice of Intent to Discharge, all payments made to the Executive during the period beginning with the giving of the Notice of Intent to Discharge and ending with the Executive's discharge with Cause shall be retained by the Executive and shall not be applied to offset the Standard Termination Entitlements. If the Company does not give a Final Discharge Notice to the Executive within ninety (90) days after giving a Notice of Intent to Discharge, the Notice of Intent to Discharge shall be deemed withdrawn and any future action to discharge the Executive with Cause shall require the giving of a new Notice of Intent to Discharge. Section 12. Discharge without Cause. ----------------------- The Bank and the Company may discharge the Executive at any time during the Employment Period and, unless such discharge constitutes a discharge with Cause: (a) The Company shall pay and deliver to the Executive (or in the event of his death before payment, to his estate and surviving dependents and beneficiaries, as applicable) the Standard Termination Entitlements. (b) In addition to the Standard Termination Entitlements: (i) During the Remaining Unexpired Employment Period, the Company shall provide for the Executive and his dependents continued group life, health (including hospitalization, medical and major medical), dental, accident and long-term disability insurance benefits on substantially the same terms and conditions (including any required premium-sharing arrangements, co-payments and deductibles) in effect for them immediately prior to the Executive's termination. The coverage provided under this section 12(b)(i) may, at the election of the Company, be secondary to the coverage provided as part of the Standard Termination Entitlements and to any employer-paid coverage provided by a subsequent employer or through Medicare, with the result that benefits under the other coverages will offset the coverage required by this section 12(b)(i). (ii) The Company shall make a lump sum payment to the Executive (or, in the event of his death before payment, to his estate), in an amount equal to the estimated present value of the salary that Executive would have earned if he had continued working for the Company during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during that portion of the Employment Period which is prior to Executive's termination of employment with the Company, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Internal Revenue Code of 1986 ("Code"), compounded using the compounding period -7- corresponding to the Company's regular payroll periods for its officers. Such lump sum shall be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination. (iii) The Company shall make a lump sum payment to the Executive (or, in the event of his death before payment, to his estate), in an amount equal to the payments that would have been made to Executive under any cash bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Company if he had continued working for the Company during the Remaining Unexpired Employment Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Remaining Unexpired Employment Period, such payments to be equal to the product of: (A) the maximum percentage rate at which an award was ever available to Executive under such incentive compensation plan; multiplied by (B) the salary that would have been paid to Executive during each such calendar year at the highest annual rate of salary achieved during that portion of the Employment Period which is prior to Executive's termination of employment with the Company. Such payment shall be made (without discounting for early payment) within thirty (30) days following the Executive's termination of employment. The payments and benefits described in section 12(b) are referred to in this Agreement as the "Additional Termination Entitlements". Section 13. Resignation. ----------- (a) The Executive may resign from his employment with the Company at any time. A resignation under this section 13 shall be effected by notice of resignation given by the Executive to the Company and shall take effect on the later of the effective date of termination specified in such notice or the date on which the notice of termination is deemed given by the Executive. The Executive's resignation of any of the positions within the Bank or the Company to which he has been assigned shall be deemed a resignation from all such positions. (b) The Executive's resignation shall be deemed to be for "Good Reason" if the effective date of resignation occurs within ninety (90) days after any of the following: (i) the failure of the Company (whether by act or omission of its Board of Directors, or otherwise) to appoint or re-appoint or elect or re- elect the Executive to the position(s) with the Company specified in section 3 of this Agreement or to a more senior office; -8- (ii) if the Executive is or becomes a member of the Board of Directors of the Company or the Bank, the failure of their respective shareholders (whether in an election in which the Executive stands as a nominee or in an election where the Executive is not a nominee) to elect or re-elect the Executive to membership at the expiration of his term of membership, unless such failure is a result of the Executive's refusal to stand for election; (iii) a material failure by the Company, whether by amendment of its certificate of incorporation or organization, by-laws, action of its Board of Directors or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in section 3 of this Agreement; provided that the Executive shall have given notice of such failure to the Company, and the Company has not fully cured such failure within thirty (30) days after such notice is deemed given; (iv) any reduction of the Executive's rate of base salary in effect from time to time, whether or not material, or any failure (other than due to reasonable administrative error that is cured promptly upon notice) to pay any portion of the Executive's compensation as and when due; (v) any change in the terms and conditions of any compensation or benefit program in which the Executive participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation package; provided that the Executive shall have given notice of such material adverse effect to the Company, and the Company has not fully cured such failure within thirty (30) days after such notice is deemed given; (vi) any material breach by the Company of any material term, condition or covenant contained in this Agreement; provided that the Executive shall have given notice of such material adverse effect to the Company, and the Company has not fully cured such failure within thirty (30) days after such notice is deemed given; or (vii) a change in the Executive's principal place of employment to a place that is not the principal executive office of the Company, or a relocation of the Company's principal executive office to a location that is both more than thirty-five (35) miles away from the Executive's principal residence and more than twenty-five (25) miles away from the location of the Company's principal executive office on the date of this Agreement. In all other cases, a resignation by the Executive shall be deemed to be without Good Reason. -9- (c) In the event of the Executive's resignation before the expiration of the Employment Period, the Company shall pay and deliver the Standard Termination Entitlements. In addition, if the Executive's resignation is deemed to be a resignation with Good Reason, the Company shall also pay and deliver the Additional Termination Entitlements. Section 14. Terms and Conditions of the Additional Termination Entitlements. -------------------------------------------------- The Company and the Executive hereby stipulate that the damages which may be incurred by the Executive following any termination of employment are not capable of accurate measurement as of the date first above written and that the Additional Termination Entitlements constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Company and the Executive further agree that the Company may condition the payment and delivery of the Additional Termination Entitlements on the receipt of the Executive's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Company, the Bank or any subsidiary or affiliate of either of them. Section 15. Termination Upon or Following a Change of Control. ------------------------------------------------- (a) A "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: (i) the consummation of a reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; -10- (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert; (iii) a complete liquidation or dissolution of the Company; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of the Company do not belong to any of the following groups: (A) individuals who were members of the Board of Directors of the Company on the date of this Agreement; or (B) individuals who first became members of the Board of Directors of the Company after the date of this Agreement either: (1) upon election to serve as a member of the Board of Directors of the Company by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or (2) upon election by the shareholders of the Board of Directors of the Company to serve as a member of such board, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of Directors of the Company; provided, however, that this section 15(a)(iv) shall only apply if the Company is not majority owned by First Charter MHC; or (v) any event which would be described in section 15(a)(i), (ii), (iii) or (iv) if the term "Bank" were substituted for the term "Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of (i) any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them or (ii) the conversion of First Charter, MHC to a stock form company and the issuance of additional shares of the Company in connection therewith. For purposes of this section 15(a), the -11- term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) For purposes of this Agreement, a "Pending Change of Control" shall mean: (i) the signing of a definitive agreement for a transaction which, if consummated, would result in a Change of Control; (ii) the commencement of a tender offer which, if successful, would result in a Change of Control; or (iii) the circulation of a proxy statement seeking proxies in opposition to management in an election contest which, if successful, would result in a Change of Control. (c) Notwithstanding anything in this Agreement to the contrary, for purposes of computing the Additional Termination Entitlements due upon a termination of employment that occurs, or is deemed to have occurred, after a Change of Control, the Remaining Unexpired Employment Period shall be deemed to be three (3) full years. Section 16. Covenant Not To Compete. ----------------------- The Executive hereby covenants and agrees that, in the event of his termination of employment with the Company prior to the expiration of the Employment Period, for a period of one year following the date of his termination of employment with the Company, he shall not, without the written consent of the Company, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, any other entity engaged in the business of accepting deposits or making loans or any direct or indirect subsidiary or affiliate of any such entity, that entails working within the State of Georgia or any city or county in any other state in which the Company or the Bank maintains -12- an office; provided, however, that this section 16 shall not apply if the Executive is entitled to the Additional Termination Entitlements. Section 17. Confidentiality. --------------- Unless he obtains the prior written consent of the Company, the Executive shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Company or any entity which is a subsidiary of the Company or of which the Company is a subsidiary, any material document or information obtained from the Company, or from its parent or subsidiaries, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this section 17 shall prevent the Executive, with or without the Company's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. Section 18. Solicitation. ------------ The Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Company or the Bank, he shall not, without the written consent of the Company, either directly or indirectly: (a) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company, the Bank or any of their respective subsidiaries or affiliates to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 16; (b) provide any information, advice or recommendation with respect to any such officer or employee of any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 16; that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company, the Bank, or any of their respective subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 16; -13- (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Company or the Bank to terminate an existing business or commercial relationship with the Company or the Bank. Section 19. No Effect on Employee Benefit Plans or Programs. ----------------------------------------------- The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Company or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Company's or the Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Company or the Bank from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any agreement, plan or program covering the Executive to which the Company is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. Section 20. Successors and Assigns. ---------------------- This Agreement will inure to the benefit of and be binding upon the Executive, his legal representatives and testate or intestate distributees, and the Company and their respective successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company may be sold or otherwise transferred. Failure of the Company to obtain from any successor its express written assumption of the Company's obligations hereunder at least sixty (60) days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. Section 21. Notices. ------- Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: Robert L. Johnson 3345 Barnes Mill Road Hamilton, GA 31833 -14- If to the Company: Charter Financial Corp. 600 Third Avenue West Point, GA 31833 Attention: Chairman, Personnel & Compensation Committee of the Board of Directors Section 22. Waiver. ------ Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 23. Counterparts. ------------ This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Section 24. Governing Law. ------------- This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, accordance with the laws of Georgia applicable to contracts entered into and to be performed entirely within the State of Georgia. Section 25. Headings and Construction. ------------------------- The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 26. Entire Agreement; Modifications. ------------------------------- This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. -15- Section 27. Non-duplication. --------------- In the event that the Executive shall perform services for the Bank or any other direct or indirect subsidiary or affiliate of the Company or the Bank, any compensation or benefits provided to the Executive by such other employer shall be applied to offset the obligations of the Company hereunder, it being intended that this Agreement set forth the aggregate compensation and benefits payable to the Executive for all services to the Company, the Bank and all of their respective direct or indirect subsidiaries and affiliates. Section 28. Survival -------- The provisions of sections 6, 16, 17, 18 and 19 shall survive the expiration of the Employment Period or termination of the Agreement. Section 29. Indemnification for Attorneys' Fees. ------------------------------------ The Company shall indemnify, hold harmless and defend Executive against reasonable costs, including legal fees, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement; provided, however, that Executive shall have substantially prevailed on the merits pursuant to a judgment, decree or order of a court of competent jurisdiction or of an arbitrator in an arbitration proceeding. The determination whether the Executive shall have substantially prevailed on the merits and is therefore entitled to such indemnification, shall be made by the court or arbitrator, as applicable. In the event of a settlement pursuant to a settlement agreement, any indemnification payment under this section 29 shall be made only after a determination by the members of the Board (other than the Executive and any other member of the Board to which the Executive is related by blood or marriage) that the Executive has acted in good faith and that such indemnification payment is in the best interests of the Company. -16- Section 30. Required Regulatory Provisions. ------------------------------ The following provisions are included for the purposes of complying with various laws, rules and regulations applicable to the Company: (a) Notwithstanding anything herein contained to the Company, in no event shall the aggregate amount of compensation payable to the Executive under section 12(b) hereof exceed the three times the Executive's average annual compensation (within the meaning of OTS Regulatory Bulletin 27a or any successor thereto) for the last five consecutive calendar years to end prior to his termination of employment with the Company (or for his entire period of employment with the Company if less than five calendar years). The compensation payable to the Executive hereunder shall be further reduced (but not below zero) if such reduction would avoid the assessment of excise taxes on excess parachute payments (within the meaning of section 280G of the Code). (b) Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. (S)1828(k), and any regulations promulgated thereunder. (c) Notwithstanding anything herein contained to the contrary, if the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the affairs of the Company pursuant to a notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C. (S)1818(e)(3) or 1818(g)(1), the Company's obligations under this Agreement shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in such notice are dismissed, the Company, in its discretion, may (i) pay to the Executive all or part of the compensation withheld while the Company's obligations hereunder were suspended and (ii) reinstate, in whole or in part, any of the obligations which were suspended. (d) Notwithstanding anything herein contained to the contrary, if the Executive is removed and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. (S)1818(e)(4) or (g)(1), all prospective obligations of the Company under this Agreement shall terminate as of the effective date of the order, but vested rights and obligations of the Company and the Executive shall not be affected. (e) Notwithstanding anything herein contained to the contrary, if the Company is in default (within the meaning of section 3(x)(1) of the FDI Act, 12 U.S.C. (S)1813(x)(1), all prospective obligations of the Company under this Agreement shall terminate as of the date of default, but vested rights and obligations of the Company and the Executive shall not be affected. (f) Notwithstanding anything herein contained to the contrary, all prospective obligations of the Company hereunder shall be terminated, except to the extent that a continuation of this Agreement is necessary for the continued operation of the Company: (i) by the Director of the OTS or his designee or the Federal Deposit Insurance Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in section 13(c) of the FDI Act, 12 U.S.C. (S)1823(c); (ii) by the Director of the OTS or his designee at the time such Director or designee approves a supervisory merger to resolve problems related to the -17- operation of the Company or when the Company is determined by such Director to be in an unsafe or unsound condition. The vested rights and obligations of the parties shall not be affected. If and to the extent that any of the foregoing provisions shall cease to be required or by applicable law, rule or regulation, the same shall become inoperative as though eliminated by formal amendment of this Agreement. Section 31. Guarantee; Non-Duplication. -------------------------- The Company hereby agrees to guarantee the payment by the Bank of any benefits and compensation to which the Executive is or may be entitled to under the terms and conditions of the employment agreement of even date herewith between the Bank and the Executive. In the event that the Executive shall perform services for the Bank or any other direct or indirect subsidiary of the Company, any compensation or benefits provided to the Executive by such other employer shall be applied to offset the obligations of the Company hereunder, it being intended that this Agreement set forth the aggregate compensation and benefits payable to the Executive for all services to the Company and all of its direct or indirect subsidiaries. Section 32. Effective Date. -------------- This Agreement shall become effective (the "Effective Date") upon the later of the following two dates: (a) the effective date of the Bank's conversion from a federally chartered mutual savings bank to a stock form savings bank pursuant to the Reorganization or (b) the date the OTS advises the Bank in writing that it either approves or has no objection to the terms and conditions of this Agreement. The Company and the Executive each hereby acknowledge and agree that the terms of this Agreement shall have no force or effect prior to such Effective Date. In Witness Whereof, the Company has caused this Agreement to be executed and the Executive has hereunto set his hand, all as of the day and year first above written. __________________________________ Robert L. Johnson Charter Financial Corp. Attest: By____________________________ By________________________________ Name: Name: Title: Title: [Seal] -18- EX-10.4 8 dex104.txt EXHIBIT 10.4 EXHIBIT 10.4 One-Year Change of Control Agreement This Change of Control Agreement (the "Agreement") is made and entered into as of [______________], 2001 by and among CharterBank, a federally- chartered savings bank having an office at 600 Third Avenue, West Point, GA 31833 (the "Bank"), Charter Financial Corp., a federally-chartered corporation having an office at 600 Third Avenue, West Point, GA 31833 (the "Company") and[__________________________] (the "Officer"). Introductory Statement The Bank has reorganized from a federally-chartered mutual savings bank to a federally-chartered stock savings bank and has become a wholly-owned subsidiary of the Company, a mid-tier stock holding company, which is majority owned by First Charter MHC, a mutual holding company (the "Reorganization"). In connection with the Reorganization, certain shares of the Company's common stock were sold in an initial public stock offering. The Officer has served the Bank in an executive capacity for many years and is familiar with the Bank's operations. The Board of Directors of the Bank has concluded that it is in the best interests of the Bank, the Company and their prospective shareholders to establish a working environment for the Officer which minimizes the personal distractions that might result from possible business combinations in which the Company or the Bank might be involved following the Reorganization. To this end, the Bank has decided to provide the Officer with assurance that his compensation will be continued for a minimum period of one (1) year following termination of employment (the "Assurance Period") if his employment terminates under specified circumstances related to a business combination. The Board of Directors of the Bank has decided to formalize this assurance by entering into this Change of Control Agreement with the Officer. The Board of Directors of the Company has authorized the Company to guarantee the Bank's obligations under this Agreement. The terms and conditions which the Bank, the Company and the Officer have agreed to are as follows. Agreement Section 1. Effective Date; Term; Change of Control and Pending Change of Control Defined. ---------------------------------------------------------- (a) This Agreement shall take effect on the effective date of the Reorganization (the "Effective Date") and shall be in effect during the period (the "Term") beginning on the Effective Date of the Reorganization and ending on the first anniversary of the date on which the Bank notifies the Executive of its intent to discontinue the Agreement (the "Initial Expiration Date") or, if later, the first anniversary of the latest Change of Control or Pending Change of Control, as defined below, that occurs after the Effective Date and before the Initial Expiration Date. -2- (b) For all purposes of this Agreement, a "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: (i) the consummation of a reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert; (iii) a complete liquidation or dissolution of the Company; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of the Company do not belong to any of the following groups: (A) individuals who were members of the Board of Directors of the Company on the date of this Agreement; or (B) individuals who first became members of the Board of Directors of the Company after the date of this Agreement either: (1) upon election to serve as a member of the Board of Directors of the Company by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or -3- (2) upon election by the shareholders of the Board of Directors of the Company to serve as a member of such board, but only if nominated for election by affirmative vote of three- quarters of the members of the Board of Directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of Directors of the Company; provided, however, that this section 1(b)(iv) shall only apply if the Company is not majority owned by First Charter, MHC; or (v) any event which would be described in section 1(b)(i), (ii), (iii) or (iv) if the term "Bank" were substituted for the term "Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of (i) any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them or (ii) the conversion of First Charter, MHC to a stock form company and the issuance of additional shares of the Company in connection therewith. For purposes of this section 1(b), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (c) For purposes of this Agreement, a "Pending Change of Control" shall mean: (i) the signing of a definitive agreement for a transaction which, if consummated, would result in a Change of Control; (ii) the commencement of a tender offer which, if successful, would result in a Change of Control; or (iii) the circulation of a proxy statement seeking proxies in opposition to management in an election contest which, if successful, would result in a Change of Control; provided, however, that the change in control contemplated does, in fact, occur. Section 2. Discharge Prior to a Pending Change of Control. ---------------------------------------------- The Bank may discharge the Officer at any time prior to the occurrence of a Pending Change of Control for any reason or for no reason. In such event: (a) The Bank shall pay to the Officer (or, in the event of his death, his estate) his earned but unpaid compensation (including, without limitation, salary and all other items which constitute wages under applicable law) as of the date of his termination of employment. This payment shall be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after the date of the Officer's termination of employment. (b) The Bank shall provide the benefits, if any, due to the Officer (or, in the event of his death, his estate, surviving dependents or his designated beneficiaries) under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the -4- officers and employees of the Bank. The time and manner of payment or other delivery of these benefits and the recipients of such benefits shall be determined according to the terms and conditions of the applicable plans and programs. The payments and benefits described in sections 2(a) and (b) shall be referred to in this Agreement as the "Standard Termination Entitlements." Section 3. Termination of Employment Due to Death. -------------------------------------- The Officer's employment with the Bank shall terminate, automatically and without any further action on the part of any party to this Agreement, on the date of the Officer's death. In such event, the Bank shall pay and deliver to his estate and surviving dependents and beneficiaries, as applicable, the Standard Termination Entitlements. Section 4. Termination Due to Disability after Change of Control or Pending Change of Control. -------------------------------------------------------- The Bank may terminate the Officer's employment during the Term and after the occurrence of a Change of Control or a Pending Change of Control upon a determination, by a majority vote of the members of the Board of Directors of the Bank, acting in reliance on the written advice of a medical professional acceptable to it, that the Officer is suffering from a physical or mental impairment which, at the date of the determination, has prevented the Officer from performing his assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year ending with the date of the determination or is likely to result in death or prevent the Officer from performing his assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year beginning with the date of the determination. In such event: (a) The Bank shall pay and deliver to the Officer (or in the event of his death before payment, to his estate and surviving dependents and beneficiaries, as applicable) the Standard Termination Entitlements. (b) In addition to the Standard Termination Entitlements, the Bank shall continue to pay the Officer his base salary, at the annual rate in effect for him immediately prior to the termination of his employment, during a period ending on the earliest of: (i) the expiration of one hundred and eighty (180) days after the date of termination of his employment; (ii) the date on which long-term disability insurance benefits are first payable to him under any long- term disability insurance plan covering employees of the Bank (the "LTD Eligibility Date"); (iii) the date of his death; and (iv) the expiration of the Assurance Period (the "Initial Continuation Period"). If the end of the Initial Continuation Period is neither the LTD Eligibility Date nor the date of his death, the Bank shall continue to pay the Officer his base salary, at an annual rate equal to sixty percent (60%) of the annual rate in effect for him immediately prior to the termination of his employment, during an additional period ending on the earliest of the LTD Eligibility Date, the date of his death and the expiration of the Assurance Period. -5- A termination of employment due to disability under this section 4 shall be effected by a notice of termination given to the Officer by the Bank and shall take effect on the later of the effective date of termination specified in such notice or the date on which the notice of termination is deemed given to the Officer. Section 5. Discharge with Cause after Change of Control or Pending Change of Control. ------------------------------------------------------- (a) The Bank may terminate the Officer's employment with "Cause" during the Term and after the occurrence of a Change of Control or Pending Change of Control, but a termination shall be deemed to have occurred with "Cause" only if: (i) the Board of Directors of the Bank and the Board of Directors of the Company, by separate majority votes of their entire membership, determine that the Executive should be discharged because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement; and (ii) at least forty-five (45) days prior to the vote contemplated by section 1(b)(i), the Bank has provided the Officer with notice of its intent to discharge the Officer for Cause, detailing with particularity the facts and circumstances which are alleged to constitute Cause (the "Notice of Intent to Discharge"); and (iii) after the giving of the Notice of Intent to Discharge and before the taking of the vote contemplated by section 5(a)(i), the Officer (together with his legal counsel, if he so desires) is afforded a reasonable opportunity to make both written and oral presentations before the Board of Directors of the Bank for the purpose of refuting the alleged grounds for Cause for his discharge; and (iv) after the vote contemplated by section 5(a)(i), the Bank has furnished to the Officer a notice of termination which shall specify the effective date of his termination of employment (which shall in no event be earlier than the date on which such notice is deemed given) and include a copy of a resolution or resolutions adopted by the Board of Directors of the Bank, certified by its corporate secretary and signed by each member of the Board of Directors voting in favor of adoption of the resolution(s), authorizing the termination of the Officer's employment with Cause and stating with particularity the facts and circumstances found to constitute Cause for his discharge (the "Final Discharge Notice"). -6- (b) If the Officer is discharged with Cause during the Term and after a Change of Control or Pending Change of Control, the Bank shall pay and provide to him (or, in the event of his death, to his estate, his surviving beneficiaries and his dependents) the Standard Termination Entitlements only. Following the giving of a Notice of Intent to Discharge, the Bank may temporarily suspend the Officer's duties and authority and, in such event, may also suspend the payment of salary and other cash compensation, but not the Officer's participation in retirement, insurance and other employee benefit plans. If the Officer is not discharged, or is discharged without Cause, within forty-five (45) days after the giving of a Notice of Intent to Discharge, payments of salary and cash compensation shall resume, and all payments withheld during the period of suspension shall be promptly restored. If the Officer is discharged with Cause not later than forty-five (45) days after the giving of the Notice of Intent to Discharge, all payments withheld during the period of suspension shall be deemed forfeited and shall not be included in the Standard Termination Entitlements. If a Final Discharge Notice is given later than forty- five (45) days, but sooner than ninety (90) days, after the giving of the Notice of Intent to Discharge, all payments made to the Officer during the period beginning with the giving of the Notice of Intent to Discharge and ending with the Officer's discharge with Cause shall be retained by the Officer and shall not be applied to offset the Standard Termination Entitlements. If the Bank does not give a Final Discharge Notice to the Officer within ninety (90) days after giving a Notice of Intent to Discharge, the Notice of Intent to Discharge shall be deemed withdrawn and any future action to discharge the Officer with Cause shall require the giving of a new Notice of Intent to Discharge. Section 6. Discharge without Cause. ----------------------- The Bank may discharge the Officer without Cause at any time after the occurrence of a Change of Control or Pending Change of Control, and in such event: (a) The Bank shall pay and deliver to the Officer (or in the event of his death before payment, to his estate and surviving dependents and beneficiaries, as applicable) the Standard Termination Entitlements. (b) In addition to the Standard Termination Entitlements: (i) During the Assurance Period, the Bank shall provide for the Officer and his dependents continued group life, health (including hospital ization, medical and major medical), dental, accident and long-term disability insurance benefits on substantially the same terms and conditions (including any required premium-sharing arrangements, co-payments and deductibles) in effect for them immediately prior to the Officer's resignation. The -7- coverage provided under this section 6(b)(i) may, at the election of the Bank, be secondary to the coverage provided as part of the Standard Termination Entitlements and to any employer-paid coverage provided by a subsequent employer or through Medicare, with the result that benefits under the other coverages will offset the coverage required by this section 6(b)(i). (ii) The Bank shall make a lump sum payment to the Executive (or, in the event of his death before payment, to his estate), in an amount equal to the estimated present value of the salary that Executive would have earned if he had continued working for the Bank during the Assurance Period at the highest annual rate of salary achieved during that portion of the employment period which is prior to Executive's termination of employment with the Bank, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Internal Revenue Code of 1986 ("Code"), compounded using the compounding period corresponding to the Bank's regular payroll periods for its officers. Such lump sum shall be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination. (iii) The Bank shall make a lump sum payment to the Executive (or, in the event of his death before payment, to his estate), in an amount equal to the payments that would have been made to Executive under any cash bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Bank if he had continued working for the Bank during the Assurance Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Assurance Period, such payment to be equal to the product of: (iv) the maximum percentage rate at which an award was ever available to Executive under such incentive compensation plan; multiplied by (A) the salary that would have been paid to Executive during each such calendar year at the highest annual rate of salary achieved during that portion of the employment period which is prior to Executive's termination of employment with the Bank. Such payment shall be made (without discounting for early payment) within thirty (30) days following the Executive's termination of employment. The payments and benefits described in section 6(b) are referred to in this Agreement as the "Additional Change of Control Entitlements". -8- Section 7. Resignation. ----------- (a) The Officer may resign from his employment with the Bank at any time. A resignation under this section 7 shall be effected by notice of resignation given by the Officer to the Bank and shall take effect on the later of the effective date of termination specified in such notice or the date on which the notice of termination is deemed given to the Officer. The Officer's resignation of any of the positions within the Bank or the Company to which he has been assigned shall be deemed a resignation from all such positions. (b) The Officer's resignation shall be deemed to be for "Good Reason" if the effective date of resignation occurs during the Term, but on or after the effective date of a Change of Control, and is on account of: (i) the failure of the Bank (whether by act or omission of the Board of Directors, or otherwise) to appoint or re-appoint or elect or re-elect the Officer to the position with Bank that he held immediately prior to the Change of Control (the "Assigned Office") or to a more senior office; (ii) a material failure by the Bank, whether by amendment of the certificate of incorporation or organization, by-laws, action of the Board of Directors of the Bank or otherwise, to vest in the Officer the functions, duties, or responsibilities customarily associated with the Assigned Office; provided that the Officer shall have given notice of such failure to the Bank, and the Bank has not fully cured such failure within thirty (30) days after such notice is deemed given; (iii) any reduction of the Officer's rate of base salary in effect from time to time, whether or not material, or any failure (other than due to reasonable administrative error that is cured promptly upon notice) to pay any portion of the Officer's compensation as and when due; (iv) any change in the terms and conditions of any compensation or benefit program in which the Officer participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation package; provided that the Officer shall have given notice of such material adverse effect to the Bank, and the Bank has not fully cured such material adverse effect within thirty (30) days after such notice is deemed given; -9- (v) any material breach by the Bank of any material term, condition or covenant contained in this Agreement; provided that the Officer shall have given notice of such material adverse effect to the Bank, and the Bank has not fully cured such material adverse effect within thirty (30) days after such notice is deemed given; or (vi) a change in the Officer's principal place of employment to a place that is not the principal executive office of the Bank, or a relocation of the Bank's principal executive office to a location that is both more than thirty-five (35) miles away from the Officer's principal residence and more than thirty-five (35) miles away from the location of the Bank's principal executive office on the day before the occurrence of the Change of Control. In all other cases, a resignation by the Officer shall be deemed to be without Good Reason. In the event of resignation, the Officer shall state in his notice of resignation whether he considers his resignation to be a resignation with Good Reason, and if he does, he shall state in such notice the grounds which constitute Good Reason. The Officer's determination of the existence of Good Reason shall be conclusive in the absence of fraud, bad faith or manifest error. (c) In the event of the Officer's resignation for any reason, the Bank shall pay and deliver the Standard Termination Entitlements. In the event of the Officer's resignation with Good Reason, the Bank shall also pay and deliver the Additional Termination Entitlements. Section 8. Terms and Conditions of the Additional Termination Entitlements. -------------------------------------------------- The Bank and the Officer hereby stipulate that the damages which may be incurred by the Officer following any termination of employment are not capable of accurate measurement as of the date first above written and that the Additional Termination Entitlements constitute reason able damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Officer's efforts, if any, to mitigate damages. The Bank and the Officer further agree that the Bank may condition the payment and delivery of the Additional Termination Entitlements on the receipt of: (a) the Officer's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Bank or the Company or any subsidiary or affiliate of either of them; and (b) a release of the Bank and its officers, directors, shareholders, subsidiaries and affiliates, in form and substance satisfactory to the Bank, of any liability to the Officer, whether for compensation or damages, in connection with his employment with the Bank and the termination of such employment except for the Standard Termination Entitlements and the Additional Termination Entitlements. -10- Section 9. No Effect on Employee Benefit Plans or Programs. ----------------------------------------------- The termination of the Officer's employment during the Assurance Period or thereafter, whether by the Bank or by the Officer, shall have no effect on the rights and obligations of the parties hereto under the Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Bank from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any agreement, plan or program covering the Officer to which the Bank or Company is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. Section 10. Successors and Assigns. ---------------------- This Agreement will inure to the benefit of and be binding upon the Officer, his legal representatives and testate or intestate distributees, and the Company and the Bank and their respective successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company or the Bank may be sold or otherwise transferred. Failure of the Bank to obtain from any successor its express written assumption of the Company's or Bank's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall, if such succession constitutes a Change of Control, constitute Good Reason for the Officer's resignation on or at any time during the Term following the occurrence of such succession. Section 11. Notices. ------- Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Officer: [Officer name] [Officer address] [Officer address] -11- If to the Company or the Bank: Charter Financial Corp. 600 Third Avenue West Point, GA 31833 Attention: Chairman, Personnel & Compensation Committee of the Board of Directors Section 12. Indemnification for Attorneys' Fees. ----------------------------------- The Bank shall indemnify, hold harmless and defend the Officer against reasonable costs, including legal fees, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement; provided, however, that the Officer shall have substantially prevailed on the merits pursuant to a judgment, decree or order of a court of competent jurisdiction or of an arbitrator in an arbitration proceeding. The determination whether the Officer shall have substantially prevailed on the merits and is therefore entitled to such indemnification, shall be made by the court or arbitrator, as applicable. In the event of a settlement pursuant to a settlement agreement, any indemnification payment under this section 12 shall be made only after a determination by the members of the Board (other than the Officer and any other member of the Board to which the Officer is related by blood or marriage) that the Officer has acted in good faith and that such indemnification payment is in the best interests of the Bank. Section 13. Severability. ------------ A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 14. Waiver. ------ Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 15. Counterparts. ------------ This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. -12- Section 16. Governing Law. ------------- This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of Georgia applicable to contracts entered into and to be performed entirely within the State of Georgia. Section 17. Headings and Construction. ------------------------- The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 18. Entire Agreement; Modifications. ------------------------------- This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 19. Required Regulatory Provisions. ------------------------------ The following provisions are included for the purposes of complying with various laws, rules and regulations applicable to the Bank: (a) Notwithstanding anything herein contained to the contrary, in no event shall the aggregate amount of compensation payable to the Officer hereunder exceed three times the Officer's average annual compensation (within the meaning of OTS Regulatory Bulletin 27a or any successor thereto) for the last five consecutive calendar years to end prior to his termination of employment with the Bank (or for his entire period of employment with the Bank if less than five calendar years). The compensation payable to the Officer hereunder shall be further reduced (but not below zero) if such reduction would avoid the assessment of excise taxes on excess parachute payments (within the meaning of section 280G of the Code). (b) Notwithstanding anything herein contained to the contrary, any payments to the Officer by the Bank, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. (S)1828(k), and any regulations promulgated thereunder. (c) Notwithstanding anything herein contained to the contrary, if the Officer is suspended from office and/or temporarily prohibited from participating in the conduct of the affairs of the Bank pursuant to a notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C. (S)1818(e)(3) or 1818(g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in such notice are dismissed, the Bank, in its discretion, may (i) pay to the Officer all or part of the compensation withheld while the Bank's obligations hereunder were suspended and (ii) reinstate, in whole or in part, any of the obligations which were suspended. -13- (d) Notwithstanding anything herein contained to the contrary, if the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. (S)1818(e)(4) or (g)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights and obligations of the Bank and the Executive shall not be affected. (e) Notwithstanding anything herein contained to the contrary, if the Bank is in default (within the meaning of section 3(x)(1) of the FDI Act, 12 U.S.C. (S)1813(x)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the date of default, but vested rights and obligations of the Bank and the Officer shall not be affected. (f) Notwithstanding anything herein contained to the contrary, all prospective obligations of the Bank hereunder shall be terminated, except to the extent that a continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the OTS or his designee or the Federal Deposit Insurance Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in section 13(c) of the FDI Act, 12 U.S.C. (S)1823(c); (ii) by the Director of the OTS or his designee at the time such Director or designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is determined by such Director to be in an unsafe or unsound condition. The vested rights and obligations of the parties shall not be affected. If and to the extent that any of the foregoing provisions shall cease to be required or by applicable law, rule or regulation, the same shall become inoperative as though eliminated by formal amendment of this Agreement. Section 20. Guaranty. -------- The Company hereby irrevocably and unconditionally guarantees to the Officer the payment of all amounts, and the performance of all other obligations, due from the Bank in accordance with the terms of this Agreement as and when due without any requirement of presentment, demand of payment, protest or notice of dishonor or nonpayment. Section 21. Effective Date. -------------- This Agreement shall become effective (the "Effective Date") upon the later of the following two dates: (a) the effective date of the Bank's conversion from a federally chartered mutual savings bank to a stock form savings bank pursuant to the Reorganization or (b) the date the OTS advises the Bank in writing that it either approves or has no objection to the terms and conditions of this Agreement. The Bank, the Company and the Officer each hereby acknowledge and agree that the terms of this Agreement shall have no force or effect prior to such Effective Date. -14- In Witness Whereof, the Bank and the Company have caused this Agreement to be executed and the Officer has hereunto set his hand, all as of the day and year first above written. _________________________________________ [__________________] CharterBank Attest: By _____________________________ By ______________________________________ Name: Name: Title: Title: [Seal] Charter Financial Corp. Attest: By _____________________________ By ______________________________________ Name: Name: Title: Title: [Seal] EX-10.5 9 dex105.txt EXHIBIT 10.5 EXHIBIT 10.5 Two-Year Change of Control Agreement This Change of Control Agreement (the "Agreement") is made and entered into as of [______________], 2001 by and among CharterBank, a federally- chartered savings bank having an office at 600 Third Avenue, West Point, GA 31833 (the "Bank"), Charter Financial Corp., a federally-chartered corporation having an office at 600 Third Avenue, West Point, GA 31833 (the "Company") and[__________________________] (the "Officer"). Introductory Statement The Bank has reorganized from a federally-chartered mutual savings bank to a federally-chartered stock savings bank and has become a wholly-owned subsidiary of the Company, a mid-tier stock holding company, which is majority owned by First Charter MHC, a mutual holding company (the "Reorganization"). In connection with the Reorganization, certain shares of the Company's common stock were sold in an initial public stock offering. The Officer has served the Bank in an executive capacity for many years and is familiar with the Bank's operations. The Board of Directors of the Bank has concluded that it is in the best interests of the Bank, the Company and their prospective shareholders to establish a working environment for the Officer which minimizes the personal distractions that might result from possible business combinations in which the Company or the Bank might be involved following the Reorganization. To this end, the Bank has decided to provide the Officer with assurance that his compensation will be continued for a minimum period of two (2) years following termination of employment (the "Assurance Period") if his employment terminates under specified circumstances related to a business combination. The Board of Directors of the Bank has decided to formalize this assurance by entering into this Change of Control Agreement with the Officer. The Board of Directors of the Company has authorized the Company to guarantee the Banks obligations under this Agreement. The terms and conditions which the Bank, the Company and the Officer have agreed to are as follows. Agreement Section 1. Effective Date; Term; Change of Control and Pending Change of Control Defined. ---------------------------------------------------------- (a) This Agreement shall take effect on the effective date of the Reorganization (the "Effective Date") and shall be in effect during the period (the "Term") beginning on the Effective Date of the Reorganization and ending on the first anniversary of the date on which the Bank notifies the Executive of its intent to discontinue the Agreement (the "Initial Expiration Date") or, if later, the first anniversary of the latest Change of Control or Pending Change of Control, as defined below, that occurs after the Effective Date and before the Initial Expiration Date. -2- (b) For all purposes of this Agreement, a "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: (i) the consummation of a reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert; (iii) a complete liquidation or dissolution of the Company; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of the Company do not belong to any of the following groups: (A) individuals who were members of the Board of Directors of the Company on the date of this Agreement; or (B) individuals who first became members of the Board of Directors of the Company after the date of this Agreement either: (1) upon election to serve as a member of the Board of Directors of the Company by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or -3- (2) upon election by the shareholders of the Board of Directors of the Company to serve as a member of such board, but only if nominated for election by affirmative vote of three- quarters of the members of the Board of Directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of Directors of the Company; provided, however, that this section 1(b)(iv) shall only apply if the Company is not majority owned by First Charter, MHC; or (v) any event which would be described in section 1(b)(i), (ii), (iii) or (iv) if the term "Bank" were substituted for the term "Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of (i) any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them or (ii) the conversion of First Charter, MHC to a stock form company and the issuance of additional shares of the Company in connection therewith. For purposes of this section 1(b), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (c) For purposes of this Agreement, a "Pending Change of Control" shall mean: (i) the signing of a definitive agreement for a transaction which, if consummated, would result in a Change of Control; (ii) the commencement of a tender offer which, if successful, would result in a Change of Control; or (iii) the circulation of a proxy statement seeking proxies in opposition to management in an election contest which, if successful, would result in a Change of Control; provided, however, that the change of control contemplated does, in fact, occur. Section 2. Discharge Prior to a Pending Change of Control. ---------------------------------------------- The Bank may discharge the Officer at any time prior to the occurrence of a Pending Change of Control for any reason or for no reason. In such event: (a) The Bank shall pay to the Officer (or, in the event of his death, his estate) his earned but unpaid compensation (including, without limitation, salary and all other items which constitute wages under applicable law) as of the date of his termination of employment. This payment shall be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after the date of the Officer's termination of employment. (b) The Bank shall provide the benefits, if any, due to the Officer (or, in the event of his death, his estate, surviving dependents or his designated beneficiaries) under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the -4- officers and employees of the Bank. The time and manner of payment or other delivery of these benefits and the recipients of such benefits shall be determined according to the terms and conditions of the applicable plans and programs. The payments and benefits described in sections 2(a) and (b) shall be referred to in this Agreement as the "Standard Termination Entitlements." Section 3. Termination of Employment Due to Death. -------------------------------------- The Officer's employment with the Bank shall terminate, automatically and without any further action on the part of any party to this Agreement, on the date of the Officer's death. In such event, the Bank shall pay and deliver to his estate and surviving dependents and beneficiaries, as applicable, the Standard Termination Entitlements. Section 4. Termination Due to Disability after Change of Control or Pending Change of Control. -------------------------------------------------------- The Bank may terminate the Officer's employment during the Term and after the occurrence of a Change of Control or a Pending Change of Control upon a determination, by a majority vote of the members of the Board of Directors of the Bank, acting in reliance on the written advice of a medical professional acceptable to it, that the Officer is suffering from a physical or mental impairment which, at the date of the determination, has prevented the Officer from performing his assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year ending with the date of the determination or is likely to result in death or prevent the Officer from performing his assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year beginning with the date of the determination. In such event: (a) The Bank shall pay and deliver to the Officer (or in the event of his death before payment, to his estate and surviving dependents and beneficiaries, as applicable) the Standard Termination Entitlements. (b) In addition to the Standard Termination Entitlements, the Bank shall continue to pay the Officer his base salary, at the annual rate in effect for him immediately prior to the termination of his employment, during a period ending on the earliest of: (i) the expiration of one hundred and eighty (180) days after the date of termination of his employment; (ii) the date on which long-term disability insurance benefits are first payable to him under any long- term disability insurance plan covering employees of the Bank (the "LTD Eligibility Date"); (iii) the date of his death; and (iv) the expiration of the Assurance Period (the "Initial Continuation Period"). If the end of the Initial Continuation Period is neither the LTD Eligibility Date nor the date of his death, the Bank shall continue to pay the Officer his base salary, at an annual rate equal to sixty percent (60%) of the annual rate in effect for him immediately prior to the termination of his employment, during an additional period ending on the earliest of the LTD Eligibility Date, the date of his death and the expiration of the Assurance Period. -5- A termination of employment due to disability under this section 4 shall be effected by a notice of termination given to the Officer by the Bank and shall take effect on the later of the effective date of termination specified in such notice or the date on which the notice of termination is deemed given to the Officer. Section 5. Discharge with Cause after Change of Control or Pending Change of Control. ------------------------------------------------------- (a) The Bank may terminate the Officer's employment with "Cause" during the Term and after the occurrence of a Change of Control or Pending Change of Control, but a termination shall be deemed to have occurred with "Cause" only if: (i) the Board of Directors of the Bank and the Board of Directors of the Company, by separate majority votes of their entire membership, determine that the Executive should be discharged because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement; and (ii) at least forty-five (45) days prior to the vote contemplated by section 1(b)(i), the Bank has provided the Officer with notice of its intent to discharge the Officer for Cause, detailing with particularity the facts and circumstances which are alleged to constitute Cause (the "Notice of Intent to Discharge"); and (iii) after the giving of the Notice of Intent to Discharge and before the taking of the vote contemplated by section 5(a)(i), the Officer (together with his legal counsel, if he so desires) is afforded a reasonable opportunity to make both written and oral presentations before the Board of Directors of the Bank for the purpose of refuting the alleged grounds for Cause for his discharge; and (iv) after the vote contemplated by section 5(a)(i), the Bank has furnished to the Officer a notice of termination which shall specify the effective date of his termination of employment (which shall in no event be earlier than the date on which such notice is deemed given) and include a copy of a resolution or resolutions adopted by the Board of Directors of the Bank, certified by its corporate secretary and signed by each member of the Board of Directors voting in favor of adoption of the resolution(s), authorizing the termination of the Officer's employment with Cause and stating with particularity the facts and circumstances found to constitute Cause for his discharge (the "Final Discharge Notice"). -6- (b) If the Officer is discharged with Cause during the Term and after a Change of Control or Pending Change of Control, the Bank shall pay and provide to him (or, in the event of his death, to his estate, his surviving beneficiaries and his dependents) the Standard Termination Entitlements only. Following the giving of a Notice of Intent to Discharge, the Bank may temporarily suspend the Officer's duties and authority and, in such event, may also suspend the payment of salary and other cash compensation, but not the Officer's participation in retirement, insurance and other employee benefit plans. If the Officer is not discharged, or is discharged without Cause, within forty-five (45) days after the giving of a Notice of Intent to Discharge, payments of salary and cash compensation shall resume, and all payments withheld during the period of suspension shall be promptly restored. If the Officer is discharged with Cause not later than forty-five (45) days after the giving of the Notice of Intent to Discharge, all payments withheld during the period of suspension shall be deemed forfeited and shall not be included in the Standard Termination Entitlements. If a Final Discharge Notice is given later than forty- five (45) days, but sooner than ninety (90) days, after the giving of the Notice of Intent to Discharge, all payments made to the Officer during the period beginning with the giving of the Notice of Intent to Discharge and ending with the Officer's discharge with Cause shall be retained by the Officer and shall not be applied to offset the Standard Termination Entitlements. If the Bank does not give a Final Discharge Notice to the Officer within ninety (90) days after giving a Notice of Intent to Discharge, the Notice of Intent to Discharge shall be deemed withdrawn and any future action to discharge the Officer with Cause shall require the giving of a new Notice of Intent to Discharge. Section 6. Discharge without Cause. ----------------------- The Bank may discharge the Officer without Cause at any time after the occurrence of a Change of Control or Pending Change of Control, and in such event: (a) The Bank shall pay and deliver to the Officer (or in the event of his death before payment, to his estate and surviving dependents and beneficiaries, as applicable) the Standard Termination Entitlements. (b) In addition to the Standard Termination Entitlements: (i) During the Assurance Period, the Bank shall provide for the Officer and his dependents continued group life, health (including hospital ization, medical and major medical), dental, accident and long-term disability insurance benefits on substantially the same terms and conditions (including any required premium-sharing arrangements, co-payments and deductibles) in effect for them immediately prior to the Officer's resignation. The -7- coverage provided under this section 6(b)(i) may, at the election of the Bank, be secondary to the coverage provided as part of the Standard Termination Entitlements and to any employer-paid coverage provided by a subsequent employer or through Medicare, with the result that benefits under the other coverages will offset the coverage required by this section 6(b)(i). (ii) The Bank shall make a lump sum payment to the Executive (or, in the event of his death before payment, to his estate), in an amount equal to the estimated present value of the salary that Executive would have earned if he had continued working for the Bank during the Assurance Period at the highest annual rate of salary achieved during that portion of the employment period which is prior to Executive's termination of employment with the Bank, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Internal Revenue Code of 1986 ("Code"), com pounded using the compounding period corresponding to the Bank's regular payroll periods for its officers. Such lump sum shall be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination. (iii) The Bank shall make a lump sum payment to the Executive (or, in the event of his death before payment, to his estate), in an amount equal to the payments that would have been made to Executive under any cash bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Bank if he had continued working for the Bank during the Assurance Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Assurance Period, such payment to be equal to the product of: (iv) the maximum percentage rate at which an award was ever available to Executive under such incentive compensation plan; multiplied by (A) the salary that would have been paid to Executive during each such calendar year at the highest annual rate of salary achieved during that portion of the employment period which is prior to Executive's termination of employment with the Bank. Such payment shall be made (without discounting for early payment) within thirty (30) days following the Executive's termination of employment. The payments and benefits described in section 6(b) are referred to in this Agreement as the "Additional Change of Control Entitlements". -8- Section 7. Resignation. ----------- (a) The Officer may resign from his employment with the Bank at any time. A resignation under this section 7 shall be effected by notice of resignation given by the Officer to the Bank and shall take effect on the later of the effective date of termination specified in such notice or the date on which the notice of termination is deemed given to the Officer. The Officer's resignation of any of the positions within the Bank or the Company to which he has been assigned shall be deemed a resignation from all such positions. (b) The Officer's resignation shall be deemed to be for "Good Reason" if the effective date of resignation occurs during the Term, but on or after the effective date of a Change of Control, and is on account of: (i) the failure of the Bank (whether by act or omission of the Board of Directors, or otherwise) to appoint or re-appoint or elect or re-elect the Officer to the position with Bank that he held immediately prior to the Change of Control (the "Assigned Office") or to a more senior office; (ii) a material failure by the Bank, whether by amendment of the certificate of incorporation or organization, by-laws, action of the Board of Directors of the Bank or otherwise, to vest in the Officer the functions, duties, or responsibilities customarily associated with the Assigned Office; provided that the Officer shall have given notice of such failure to the Bank, and the Bank has not fully cured such failure within thirty (30) days after such notice is deemed given; (iii) any reduction of the Officer's rate of base salary in effect from time to time, whether or not material, or any failure (other than due to reasonable administrative error that is cured promptly upon notice) to pay any portion of the Officer's compensation as and when due; (iv) any change in the terms and conditions of any compensation or benefit program in which the Officer participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation package; provided that the Officer shall have given notice of such material adverse effect to the Bank, and the Bank has not fully cured such material adverse effect within thirty (30) days after such notice is deemed given; -9- (v) any material breach by the Bank of any material term, condition or covenant contained in this Agreement; provided that the Officer shall have given notice of such material adverse effect to the Bank, and the Bank has not fully cured such material adverse effect within thirty (30) days after such notice is deemed given; or (vi) a change in the Officer's principal place of employment to a place that is not the principal executive office of the Bank, or a relocation of the Bank's principal executive office to a location that is both more than thirty-five (35) miles away from the Officer's principal residence and more than thirty-five (35) miles away from the location of the Bank's principal executive office on the day before the occurrence of the Change of Control. In all other cases, a resignation by the Officer shall be deemed to be without Good Reason. In the event of resignation, the Officer shall state in his notice of resignation whether he considers his resignation to be a resignation with Good Reason, and if he does, he shall state in such notice the grounds which constitute Good Reason. The Officer's determination of the existence of Good Reason shall be conclusive in the absence of fraud, bad faith or manifest error. (c) In the event of the Officer's resignation for any reason, the Bank shall pay and deliver the Standard Termination Entitlements. In the event of the Officer's resignation with Good Reason, the Bank shall also pay and deliver the Additional Termination Entitlements. Section 8. Terms and Conditions of the Additional Termination Entitlements. -------------------------------------------------- The Bank and the Officer hereby stipulate that the damages which may be incurred by the Officer following any termination of employment are not capable of accurate measurement as of the date first above written and that the Additional Termination Entitlements constitute reason able damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Officer's efforts, if any, to mitigate damages. The Bank and the Officer further agree that the Bank may condition the payment and delivery of the Additional Termination Entitlements on the receipt of: (a) the Officer's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Bank or the Company or any subsidiary or affiliate of either of them; and (b) a release of the Bank and its officers, directors, shareholders, subsidiaries and affiliates, in form and substance satisfactory to the Bank, of any liability to the Officer, whether for compensation or damages, in connection with his employment with the Bank and the termination of such employment except for the Standard Termination Entitlements and the Additional Termination Entitlements. Section 9. No Effect on Employee Benefit Plans or Programs. ----------------------------------------------- The termination of the Officer's employment during the Assurance Period or thereafter, whether by the Bank or by the Officer, shall have no effect on the rights and obligations of the parties hereto under the Bank's qualified or non-qualified retirement, pension, savings, thrift, -10- profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Bank from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any agreement, plan or program covering the Officer to which the Bank or Company is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. Section 10. Successors and Assigns. ---------------------- This Agreement will inure to the benefit of and be binding upon the Officer, his legal representatives and testate or intestate distributees, and the Company and the Bank and their respective successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company or the Bank may be sold or otherwise transferred. Failure of the Bank to obtain from any successor its express written assumption of the Company's or Bank's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall, if such succession constitutes a Change of Control, constitute Good Reason for the Officer's resignation on or at any time during the Term following the occurrence of such succession. Section 11. Notices. ------- Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Officer: [Officer name] [Officer address] [Officer address] If to the Company or the Bank: Charter Financial Corp. 600 Third Avenue West Point, GA 31833 Attention: Chairman, Personnel & Compensation Committee of the Board of Directors -11- Section 12. Indemnification for Attorneys' Fees. ----------------------------------- The Bank shall indemnify, hold harmless and defend the Officer against reasonable costs, including legal fees, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement; provided, however, that the Officer shall have substantially prevailed on the merits pursuant to a judgment, decree or order of a court of competent jurisdiction or of an arbitrator in an arbitration proceeding. The determination whether the Officer shall have substantially prevailed on the merits and is therefore entitled to such indemnification, shall be made by the court or arbitrator, as applicable. In the event of a settlement pursuant to a settlement agreement, any indemnification payment under this section 12 shall be made only after a determination by the members of the Board (other than the Officer and any other member of the Board to which the Officer is related by blood or marriage) that the Officer has acted in good faith and that such indemnification payment is in the best interests of the Bank. Section 13. Severability. ------------ A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 14. Waiver. ------ Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 15. Counterparts. ------------ This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Section 16. Governing Law. ------------- This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of Georgia applicable to contracts entered into and to be performed entirely within the State of Georgia. Section 17. Headings and Construction. ------------------------- The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. -12- Section 18. Entire Agreement; Modifications. ------------------------------- This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 19. Required Regulatory Provisions. ------------------------------ The following provisions are included for the purposes of complying with various laws, rules and regulations applicable to the Bank: (a) Notwithstanding anything herein contained to the contrary, in no event shall the aggregate amount of compensation payable to the Officer hereunder exceed three times the Officer's average annual compensation (within the meaning of OTS Regulatory Bulletin 27a or any successor thereto) for the last five consecutive calendar years to end prior to his termination of employment with the Bank (or for his entire period of employment with the Bank if less than five calendar years). The compensation payable to the Officer hereunder shall be further reduced (but not below zero) if such reduction would avoid the assessment of excise taxes on excess parachute payments (within the meaning of section 280G of the Code). (b) Notwithstanding anything herein contained to the contrary, any payments to the Officer by the Bank, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. (S)1828(k), and any regulations promulgated thereunder. (c) Notwithstanding anything herein contained to the contrary, if the Officer is suspended from office and/or temporarily prohibited from participating in the conduct of the affairs of the Bank pursuant to a notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C. (S)1818(e)(3) or 1818(g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in such notice are dismissed, the Bank, in its discretion, may (i) pay to the Officer all or part of the compensation withheld while the Bank's obligations hereunder were suspended and (ii) reinstate, in whole or in part, any of the obligations which were suspended. (d) Notwithstanding anything herein contained to the contrary, if the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. (S)1818(e)(4) or (g)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights and obligations of the Bank and the Executive shall not be affected. (e) Notwithstanding anything herein contained to the contrary, if the Bank is in default (within the meaning of section 3(x)(1) of the FDI Act, 12 U.S.C. (S)1813(x)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the date of default, but vested rights and obligations of the Bank and the Officer shall not be affected. -13- (f) Notwithstanding anything herein contained to the contrary, all prospective obligations of the Bank hereunder shall be terminated, except to the extent that a continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the OTS or his designee or the Federal Deposit Insurance Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in section 13(c) of the FDI Act, 12 U.S.C. (S)1823(c); (ii) by the Director of the OTS or his designee at the time such Director or designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is determined by such Director to be in an unsafe or unsound condition. The vested rights and obligations of the parties shall not be affected. If and to the extent that any of the foregoing provisions shall cease to be required or by applicable law, rule or regulation, the same shall become inoperative as though eliminated by formal amendment of this Agreement. Section 20. Guaranty. -------- The Company hereby irrevocably and unconditionally guarantees to the Officer the payment of all amounts, and the performance of all other obligations, due from the Bank in accordance with the terms of this Agreement as and when due without any requirement of presentment, demand of payment, protest or notice of dishonor or nonpayment. Section 21. Effective Date. -------------- This Agreement shall become effective (the "Effective Date") upon the later of the following two dates: (a) the effective date of the Bank's conversion from a federally chartered mutual savings bank to a stock form savings bank pursuant to the Reorganization or (b) the date the OTS advises the Bank in writing that it either approves or has no objection to the terms and conditions of this Agreement. The Bank, the Company and the Officer each hereby acknowledge and agree that the terms of this Agreement shall have no force or effect prior to such Effective Date. -14- In Witness Whereof, the Bank and the Company have caused this Agreement to be executed and the Officer has hereunto set his hand, all as of the day and year first above written. _______________________________________ [___________] CharterBank Attest: By ______________________________ By ____________________________________ Name: Name: Title: Title: [Seal] Charter Financial Corp. Attest: By ______________________________ By ____________________________________ Name: Name: Title: Title: [Seal] EX-10.6 10 dex106.txt EXHIBIT 10.6 EXHIBIT 10.6 Charter Financial Corp. 2001 Recognition and Retention Plan ______________________________ Effective as of the Date of the Reorganization
Table of Contents Page Article I Purpose Section 1.1 General Purpose of the Plan.................................... 1 Article II Definitions Section 2.1 Award.......................................................... 1 Section 2.2 Award Notice................................................... 1 Section 2.3 Bank........................................................... 1 Section 2.4 Beneficiary.................................................... 1 Section 2.5 Board.......................................................... 1 Section 2.6 Change of Control.............................................. 1 Section 2.7 Code........................................................... 3 Section 2.8 Committee...................................................... 3 Section 2.9 Company........................................................ 3 Section 2.10 Disability..................................................... 3 Section 2.11 Disinterested Board Member..................................... 3 Section 2.12 Effective Date................................................. 4 Section 2.13 Eligible Director.............................................. 4 Section 2.14 Eligible Employee.............................................. 4 Section 2.15 Employer....................................................... 4 Section 2.16 Exchange Act................................................... 4 Section 2.17 FDIC Regulations............................................... 4 Section 2.18 Fund........................................................... 4 Section 2.19 Funding Agent.................................................. 4 Section 2.20 Funding Agreement.............................................. 4 Section 2.21 Person......................................................... 4 Section 2.22 Plan........................................................... 5 Section 2.23 Retirement..................................................... 5 Section 2.24 Share.......................................................... 5 Article III Shares Available Under Plan Section 3.1 Shares Available Under Plan.................................... 5
Table of Contents Page Article IV Administration Section 4.1 Committee............................................................... 5 Section 4.2 Committee Action........................................................ 6 Section 4.3 Committee Responsibilities.............................................. 6 Article V The Fund Section 5.1 Contributions........................................................... 6 Section 5.2 The Fund................................................................ 7 Section 5.3 Investments............................................................. 7 Article VI Awards Section 6.1 To Eligible Directors................................................... 7 Section 6.2 To Eligible Employees................................................... 7 Section 6.3 Awards in General....................................................... 8 Section 6.4 Share Allocations....................................................... 8 Section 6.5 Dividend Rights......................................................... 8 Section 6.6 Voting Rights........................................................... 9 Section 6.7 Tender Offers........................................................... 9 Section 6.8 Limitations on Awards................................................... 10 Article VII Vesting Section 7.1 Vesting of Awards....................................................... 11 Section 7.2 Designation of Beneficiary.............................................. 11 Section 7.3 Manner of Distribution.................................................. 11 Section 7.4 Taxes................................................................... 12
Table of Contents Page Article VIII Amendment and Termination Section 8.1 Termination............................................................. 13 Section 8.2 Amendment............................................................... 13 Section 8.3 Adjustments in the Event of a Business Reorganization................... 13 Article IX Miscellaneous Section 9.1 Status as an Employee Benefit Plan...................................... 14 Section 9.2 No Right to Continued Employment........................................ 14 Section 9.3 Construction of Language................................................ 14 Section 9.4 Governing Law........................................................... 14 Section 9.5 Headings................................................................ 14 Section 9.6 Non-Alienation of Benefits.............................................. 15 Section 9.7 Notices................................................................. 15 Section 9.8 Required Regulatory Provisions.......................................... 15 Section 9.9 Approval of Shareholders................................................ 15 Article X Additional Provisions Subject to Further Shareholder Approval Section 10.1 Accelerated Vesting Upon Retirement..................................... 16 Section 10.2 No Effect Prior to Stockholder Approval................................. 16
Charter Financial Corp. ----------------------- 2001 Recognition and Retention Plan ----------------------------------- Article I --------- Purpose ------- Section 1.1 General Purpose of the Plan. --------------------------- The purpose of the Plan is to promote the growth and profitability of Charter Financial Corp. and its affiliated companies and to provide eligible directors, certain key officers and employees of Charter Financial Corp. and its affiliated companies with an incentive to achieve corporate objectives, to attract and retain directors, key officers and employees of outstanding competence and to provide such directors, officers and employees with an equity interest in Charter Financial Corp. and its affiliated companies. Article II ---------- Definitions ----------- The following definitions shall apply for the purposes of this Plan, unless a different meaning is plainly indicated by the context: Section 2.1 Award means a grant of Shares to an Eligible Director ----- or Eligible Employee pursuant to section 6.1 or 6.2. Section 2.2 Award Notice means, with respect to a particular Award, ------------ a written instrument signed by the Company and the Awards recipient evidencing the granting of the Award and establishing the terms and conditions thereof. Section 2.3 Bank means CharterBank and any successor thereto. ---- Section 2.4 Beneficiary means the Person designated by an Eligible ----------- Director or Eligible Employee pursuant to section 7.2 to receive distribution of any Shares available for distribution to such Eligible Director or Eligible Employee, in the event such Eligible Director or Eligible Employee dies prior to receiving distribution of such Shares. Section 2.5 Board means the Board of Directors of the Company. ----- -2- Section 2.6 Change of Control means any of the following events: ----------------- (a) the consummation of a reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (i) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (ii) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (b) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert; (c) a complete liquidation or dissolution of the Company; (d) the occurrence of any event if, immediately following such event, at least 50% of the members of the board of directors of the Company do not belong to any of the following groups: (i) individuals who were members of the board of directors of the Company on the Effective Date; or (ii) individuals who first became members of the board of directors of the Company after the Effective Date either: (A) upon election to serve as a member of the board of Directors of the Company by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or (B) upon election by the shareholders of the Company to serve as a member of such board, but only if nominated for election -3- by affirmative vote of three-quarters of the members of the board of directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the board of directors of the Company; provided, however, that this section 2.6(d) shall only apply if the Company is not majority owned by First Charter, MHC; (e) approval by the stockholders of the Company of any agreement, plan or arrangement for the consummation of a transaction which, if consummated, would result in the occurrence of an event described in section 2.6(a), (b), (c) or (d); or (f) any event which would be described in section 2.6(a), (b), (c), (d) or (e) if the term "Bank" were substituted for the term "Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of (i) any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them or (ii) the conversion of First Charter, MHC to a stock form company and the issuance of additional Shares of the Company therewith. For purposes of this section 2.6, the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. Section 2.7 Code means the Internal Revenue Code of 1986 (including ---- the corresponding provisions of any succeeding law). Section 2.8 Committee means the Committee described in section 4.1. --------- Section 2.9 Company means Charter Financial Corp., a corporation ------- organized and existing under the laws of the State of Georgia, and any successor thereto. Section 2.10 Disability means a condition of total incapacity, ---------- mental or physical, for further performance of duty with the Company which the Committee shall have determined, on the basis of competent medical evidence, is likely to be permanent. Section 2.11 Disinterested Board Member means a member of the Board -------------------------- who (a) is not a current employee of the Company or a subsidiary, (b) does not receive remuneration from the Company or a subsidiary, either directly or indirectly, in any capacity other than as a director, except in an amount for which disclosure would not be required pursuant to Item 404(a) of the proxy solicitation rules of the Securities and Exchange Commission and (c) does not possess an interest in any other transaction, and is not engaged in a business relationship, for which disclosure would be required pursuant to Item 404(a) or (b) of the proxy solicitation rules of the Securities and Exchange Commission. The term Disinterested Board Member shall be interpreted in such manner -4- as shall be necessary to conform to the requirements of Rule 16b-3 promulgated under the Exchange Act. Section 2.12 Effective Date means the date on which the Bank -------------- converts from a mutual bank to a stock bank (the "Reorganization"). Section 2.13 Eligible Director means a member of the board of ----------------- directors of an Employer who is not also an employee or an officer of any Employer. Section 2.14 Eligible Employee means any employee whom the Committee ----------------- may determine to be a key officer or employee of an Employer and selects to receive an Award pursuant to the Plan. Section 2.15 Employer means the Company, the Bank and any successor -------- thereto and, with the prior approval of the Board of Directors of the Company, and subject to such terms and conditions as may be imposed by the Board, any other savings bank, savings and loan association, bank, corporation, financial institution or other business organization or institution. With respect to any Eligible Employee or Eligible Director, the Employer shall mean the entity which employs such person or upon whose board of directors such person serves. Section 2.16 Exchange Act means the Securities and Exchange Act of ------------ 1934, as amended. Section 2.17 FDIC Regulations means the rules and regulations of the ---------------- Federal Deposit Insurance Corporation. Section 2.18 Fund means the corpus (consisting of contributions paid ---- over to the Funding Agent, and investments thereof), and all earnings, appreciations or additions thereof and thereto, held by the Funding Agent under the Funding Agreement in accordance with the Plan, less any depreciation thereof and any payments made therefrom pursuant to the Plan. Section 2.19 Funding Agent means the trustee or custodian of the ------------- Fund from time to time in office. The Funding Agent shall serve as Funding Agent until it is removed or resigns from office and is replaced by a successor Funding Agent or Funding Agents appointed by Charter Financial Corp. Section 2.20 Funding Agreement means the agreement between Charter ----------------- Financial Corp. and the Funding Agent therein named or its successor pursuant to which the Fund shall be held in trust or custody. Section 2.21 Person means an individual, a corporation, a bank, a ------ savings bank, a savings and loan association, a financial institution, a partnership, an association, a joint-stock company, a trust, an estate, an unincorporated organization and any other business organization or institution. Section 2.22 Plan means the Charter Financial Corp. 2001 Recognition ---- and Retention Plan, as amended from time to time. -5- Section 2.23 Retirement means with respect to an Eligible Employee, ---------- termination of all service for all Employers as an employee at or after the normal or early retirement date set forth in any tax-qualified retirement plan of the Bank, whether or not the individual in question actually participates in any such tax-qualified plan of the Bank, and in the case of an Eligible Director, termination of all service for all Employers as a voting member of the Employer's board of directors after the attainment of the latest age at which the Eligible Director is eligible for election or appointment as a voting member of the Employer's board of directors under the Employer's charter. Section 2.2 Share means a share of common stock of Charter ----- Financial Corp., par value $.01 per share. Article III ----------- Shares Available Under Plan --------------------------- Section 3.1 Shares Available Under Plan. --------------------------- (a) The maximum number of Shares available for Awards under the Plan shall be 1.96% of the total number of Shares issued in the Reorganization, subject to adjustment pursuant to section 8.3. (b) An aggregate maximum of 0.588% of the total number of Shares issued in the Reorganization (subject to adjustment pursuant to section 8.3) may be granted as Awards to Eligible Directors, and a maximum of 0.098% of the total number of Shares issued in the Reorganization (subject to adjustment pursuant to section 8.3) may be granted as Awards to any one Eligible Director. (c) A maximum of 0.49% of the total number of Shares issued in the Reorganization (subject to adjustment pursuant to section 8.3) may be granted as Awards to any one Eligible Employee. Article IV ---------- Administration -------------- Section 4.1 Committee. --------- The Plan shall be administered by the members of the Compensation Committee of Charter Financial Corp. who are Disinterested Board Members. If the Committee consists of fewer than two Disinterested Board Members, then the Board shall appoint to the Committee such -6- additional Disinterested Board Members as shall be necessary to provide for a Committee consisting of at least two Disinterested Board Members. Section 4.2 Committee Action. ---------------- The Committee shall hold such meetings, and may make such administrative rules and regulations, as it may deem proper. A majority of the members of the Committee shall constitute a quorum, and the action of a majority of the members of the Committee present at a meeting at which a quorum is present, as well as actions taken pursuant to the unanimous written consent of all of the members of the Committee without holding a meeting, shall be deemed to be actions of the Committee. All actions of the Committee shall be final and conclusive and shall be binding upon the Company and all other interested parties. Any Person dealing with the Committee shall be fully protected in relying upon any written notice, instruction, direction or other communication signed by the Secretary of the Committee and one member of the Committee, by two members of the Committee or by a representative of the Committee authorized to sign the same in its behalf. Section 4.3 Committee Responsibilities. -------------------------- Subject to the terms and conditions of the Plan and such limitations as may be imposed by the Board, the Committee shall be responsible for the overall management and administration of the Plan and shall have such authority as shall be necessary or appropriate in order to carry out its responsibilities, including, without limitation, the authority: (a) to interpret and construe the Plan, and to determine all questions that may arise under the Plan as to eligibility for Awards under the Plan, the amount of Shares, if any, to be granted pursuant to an Award, and the terms and conditions of such Award; (b) to adopt rules and regulations and to prescribe forms for the operation and administration of the Plan; and (c) to take any other action not inconsistent with the provisions of the Plan that it may deem necessary or appropriate. -7- Article V --------- The Fund -------- Section 5.1 Contributions. ------------- Charter Financial Corp. shall contribute, or cause to be contributed, to the Fund, from time to time, such amounts of money or property as shall be determined by the Board, in its discretion. No contributions by Eligible Directors or Eligible Employees shall be permitted. Section 5.2 The Fund. -------- The Fund shall be held and invested under the Funding Agreement with the Funding Agent. The provisions of the Funding Agreement shall include provisions conferring powers on the Funding Agent as to investment, control and disbursement of the Trust Fund, and such other provisions not inconsistent with the Plan as may be prescribed by or under the authority of the Board. No bond or security shall be required of any Funding Agent at any time in office. Section 5.3 Investments. ----------- The Funding Agent shall invest the Trust Fund in Shares and in such other investments as may be permitted under the Funding Agreement, including savings accounts, time or other interest bearing deposits in or other interest bearing obligations of the Company, in such proportions as shall be determined by the Committee; provided, however, that in no event shall the Fund be used to purchase more than 1.96% of the total number of Shares issued in the Reorganization (subject to adjustment pursuant to section 8.3). Notwithstanding the immediately preceding sentence, the Funding Agent may temporarily invest the Fund in short-term obligations of, or guaranteed by, the U.S. Government or an agency thereof, or the Funding Agent may retain the Trust Fund uninvested or may sell assets of the Fund to provide amounts required for purposes of the Plan. -8- Article VI ---------- Awards ------ Section 6.1 To Eligible Directors. --------------------- Subject to the limitations of the Plan and such limitations as the Board may from time to time impose, the number of Shares as to which an Eligible Director may be granted an Award shall be determined by the Committee in its discretion; provided, however, that in no event shall the number of Shares allocated to an Eligible Director in an Award exceed the number of Shares then held in the Fund and not allocated in connection with other Awards. Section 6.2 To Eligible Employees. --------------------- Subject to the limitations of the Plan and such limitations as the Board may from time to time impose, the number of Shares as to which an Eligible Employee may be granted an Award shall be determined by the Committee in its discretion; provided, however, that in no event shall the number of Shares allocated to an Eligible Employee in an Award exceed the number of Shares then held in the Trust and not allocated in connection with other Awards. Section 6.3 Awards in General. ----------------- Any Award shall be evidenced by an Award Notice issued by the Committee to the Eligible Director or Eligible Employee, which notice shall: (a) specify the number of Shares covered by the Award; (b) specify the date of grant of the Award; (c) specify the dates on which such Shares shall become vested; and (d) contain such other terms and conditions not inconsistent with the Plan as the Board or Committee may, in its discretion, prescribe. Section 6.4 Share Allocations. ----------------- Upon the grant of an Award to an Eligible Director or Eligible Employee, the Committee shall notify the Funding Agent of the Award and of the number of Shares subject to the Award. Thereafter, until such time as the Shares subject to such Award become vested or are forfeited, the books and records of the Funding Agent shall reflect that such number of Shares have been awarded to such Award recipient. -9- Section 6.5 Dividend Rights. --------------- (a) Unless the Committee determines otherwise with respect to any Award and specifies such determination in the relevant Award Notice, any cash dividends or distributions declared and paid with respect to Shares subject to the Award that are, as of the record date for such dividend, allocated to an Eligible Director or Eligible Employee in connection with such Award shall be promptly paid to and retained by such Eligible Director or Eligible Employee. Any cash dividends declared and paid with respect to Shares that are not, as of the record date for such dividend, allocated to any Eligible Director or Eligible Employee in connection with any Award shall, at the direction of the Committee, be held in the Trust or used to pay the administrative expenses of the Plan, including any compensation due to the Funding Agent. (b) Unless the Committee determines otherwise with respect to any Award and specifies such determination in the relevant Award Notice, any dividends or distributions declared and paid in property other than cash with respect to Shares shall be subject to the same vesting and other restrictions as the Shares to which the Award relates. Any such dividends declared and paid with respect to Shares that are not, as of the record date for such dividend, allocated to any Eligible Director or Eligible Employee in connection with any Award shall, at the direction of the Committee, be held in the Trust or used to pay the administrative expenses of the Plan, including any compensation due to the Funding Agent or, in the case of a stock dividend, used for future Awards. Section 6.6 Voting Rights. ------------- (a) Each Eligible Director or Eligible Employee to whom an Award has been made that is not fully vested shall have the right to exercise, or direct the exercise of, all voting rights appurtenant to unvested Shares related to such Award. Such a direction for any Shares as to which the Eligible Director or Eligible Employee is not the record owner shall be given by completing and filing, with the inspector of elections, the Funding Agent or such other person who shall be independent of the Company as the Committee shall designate in the direction, a written direction in the form and manner prescribed by the Committee. If no such direction is given by an Eligible Director or Eligible Employee, then the voting rights appurtenant to the Shares allocated to him shall not be exercised. (b) To the extent that the Fund contains Shares that are not allocated in connection with an Award, all voting rights appurtenant to such Shares shall be exercised by the Funding Agent in such manner as the Committee shall direct to reflect the voting directions given by Eligible Directors or Eligible Employees with respect to Shares allocated in connection with their Awards. (c) The Committee shall furnish, or cause to be furnished, to each Eligible Director or Eligible Employee who is not the record holder of the Shares relating to his or her Award all annual reports, proxy materials and other information furnished by Charter Financial Corp., or by any proxy solicitor, to the holders of Shares. -10- Section 6.7 Tender Offers. ------------- (a) Each Eligible Director or Eligible Employee to whom an Award has been made that is not fully vested shall have the right to respond, or to direct the response, with respect to the Shares related to such Award, to any tender offer, exchange offer or other offer made to the holders of Shares. Such a direction for any Shares as to which the Eligible Director or Eligible Employee is not the record owner shall be given by completing and filing, with the inspector of elections, the Funding Agent or such other person who shall be independent of the Company as the Committee shall designate in the direction, a written direction in the form and manner prescribed by the Committee. If no such direction is given by an Eligible Director or Eligible Employee, then the Shares shall not be tendered or exchanged. (b) To the extent that the Fund contains Shares that are not allocated in connection with an Award, all responses to tender, exchange and other offers appurtenant to such Shares shall be given by the Funding Agent in such manner as the Committee shall direct to reflect the responses given by Eligible Directors or Eligible Employees with respect to Shares allocated in connection with their Awards. (c) The Committee shall furnish, or cause to be furnished, to each Eligible Director or Eligible Employee, all information furnished by the offeror to the holders of Shares. Section 6.8 Limitations on Awards. --------------------- (a) No Award shall be granted under the Plan prior to the later of (i) the date on which the Plan is approved by shareholders pursuant to section 9.9 or (ii) six months after the date of the Reorganization; (b) No Award granted under the Plan shall become vested more rapidly than under the following schedule: (i) prior to the first anniversary of the Effective Date, no part of any Award shall be vested in the absence of the death or Disability of the Award recipient or the occurrence of a Change of Control; (ii) on and after the first anniversary of the Effective Date and prior to the second anniversary of the Effective Date, an Award will be vested as to a maximum of twenty percent (20%) of the Shares subject to the Award when granted in the absence of the death or Disability of the Award recipient or the occurrence of a Change of Control; (iii) on and after the second anniversary of the Effective Date and prior to the third anniversary of the Effective Date, an Award may be vested as to a maximum of forty percent (40%) of the Shares subject to the Award when granted in the absence of the death or Disability of the Award recipient or the occurrence of a Change of Control; -11- (iv) on and after the third anniversary of the Effective Date and prior to the fourth anniversary of the Effective Date, an Award may be vested as to a maximum of sixty percent (60%) of the Shares subject to the Award when granted in the absence of the death or Disability of the Award recipient or the occurrence of a Change of Control; (v) on and after the fourth anniversary of the Effective Date and prior to the fifth anniversary of the Effective Date, an Award may be vested as to a maximum of eighty percent (80%) of the Shares subject to the Award when granted in the absence of the death or Disability of the Award recipient or the occurrence of a Change of Control; and (vi) on and after the fifth anniversary of the date on which the Plan is approved by shareholders pursuant to section 9.9, the Award may be vested as to one hundred percent (100%) of the Shares subject to the Award when granted; and (vii) an Award may become fully vested on the date of the Award holder's death or Disability or on the date of a Change of Control without regard to the time expired from and after the Effective Date. (c) An Award by its terms shall not be transferable by the Eligible Director or Eligible Employee other than by will or by the laws of descent and distribution, and the Shares granted pursuant to such Award and held in the Trust shall be distributable, during the lifetime of the Recipient, only to the Recipient. Article VII ----------- Vesting ------- Section 7.1 Vesting of Awards. ----------------- Subject to the terms and conditions of the Plan, unless otherwise determined by the Committee and specified in the Award Notice relating to an Award, Shares subject to each Award granted to an Eligible Director or Eligible Employee under the Plan shall become vested as follows: (i) twenty percent (20%) of such Shares shall become vested twenty (20) calendar days after the end of the calendar quarter that includes the first anniversary of the date of grant; (ii) an additional twenty percent (20%) of such Shares shall become vested twenty (20) calendar days after the end of the calendar quarter that includes the second anniversary of the date of grant; (iii) an additional twenty percent (20%) of such Shares shall become vested twenty (20) calendar days after the end of the calendar quarter that includes the third anniversary of the date of grant; (iv) an additional twenty percent (20%) of such Shares shall become vested twenty (20) calendar days after the end of the calendar quarter that includes the fourth anniversary of the date of grant; (v) an additional twenty percent (20%) of such Shares shall become vested twenty (20) calendar days after the end of the calendar quarter that includes the fifth anniversary of the date of grant; and provided, further, an -12- Award shall become 100% vested upon the Award recipient's death or Disability or on the date of a Change of Control. Section 7.2 Designation of Beneficiary. -------------------------- An Eligible Director or Eligible Employee who has received an Award may designate a Beneficiary to receive any undistributed Shares that are, or become, available for distribution on, or after, the date of his death. Such designation (and any change or revocation of such designation) shall be made in writing in the form and manner prescribed by the Committee. In the event that the Beneficiary designated by an Eligible Director or Eligible Employee dies prior to the Eligible Director or Eligible Employee, or in the event that no Beneficiary has been designated, any undistributed Shares that are, or become, available for distribution on, or after, the Eligible Director's or Eligible Employee's death shall be paid to the executor or administrator of the Eligible Director's or Eligible Employee's estate, or if no such executor or administrator is appointed within such time as the Committee, in its sole discretion, shall deem reasonable, to such one or more of the spouse and descendants and blood relatives of such deceased person as the Committee may select. Section 7.3 Manner of Distribution. ---------------------- (a) Except as provided in section 7.3(b), as soon as practicable following the date any Shares granted pursuant to an Award become vested pursuant to sections 7.1, the Committee shall take such actions as are necessary to cause the transfer of record ownership of the Shares that have become vested from the Funding Agent to the Award holder and shall cause the Funding Agent to distribute to the Award holder all property other than Shares then being held in connection with the Shares being distributed. (b) The Committee may, in its discretion, cause the transfer to an Award recipient of record ownership of the Shares subject to such Award that have not yet vested. Any such Shares shall be held in certificated form only, and the certificate therefor shall bear the following or a substantially similar legend: The securities evidenced hereby are subject to the terms of an Award Notice dated [date] between the issuer and [name of Award recipient] pursuant to the Charter Financial Corp. 2001 Recognition and Retention Plan, a copy of which is on file with the issuer and may be inspected at the issuer's executive offices at 600 Third Avenue, West Point, Georgia 31833. No sale, transfer, hypothecation or other disposition of these securities may be made except in compliance with the terms of such Award Notice and the terms of the Plan. (c) The Company's obligation to deliver Shares with respect to an Award shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of the Eligible Director or Eligible Employee or Beneficiary to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such -13- representation shall become inoperative upon a registration of the Shares or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Shares under the Plan prior to (i) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, or (ii) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Committee shall determine to be necessary or advisable. Section 7.4 Taxes. ----- The Company, the Committee or the Funding Agent shall have the right to require any person entitled to receive Shares pursuant to an Award to pay the amount of any tax which is required to be withheld with respect to such Shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of Shares to cover the amount required to be withheld. Article VIII ------------ Amendment and Termination ------------------------- Section 8.1 Termination. ----------- The Board may suspend or terminate the Plan in whole or in part at any time by giving written notice of such suspension or termination to the Committee; provided, however, that the Plan may not be terminated while there are outstanding Awards that may thereafter become vested. Upon the termination of the Plan, the Funding Agent shall make distributions from the Fund in such amounts and to such persons as the Committee may direct and shall return the remaining assets of the Fund, if any, to Charter Financial Corp. Section 8.2 Amendment. --------- The Board may amend or revise the Plan in whole or in part at any time; provided, however, that no such amendment or revision shall alter the stockholder approval standard set forth in Article X as a condition precedent to the effectiveness of Article X or otherwise directly or indirectly give effect to the substance of the provisions of Article X without compliance with the stockholder approval requirement set forth therein. Section 8.3 Adjustments in the Event of a Business Reorganization. ----------------------------------------------------- (a) In the event of any merger, consolidation, or other business reorganization (including but not limited to a Change of Control) in which Charter Financial Corp. is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of Shares held by each person who is then a holder of record of Shares, the number of Shares -14- held or permitted to be held in the Fund, the number of Shares covered by outstanding Awards, and the number of Shares available as Awards in total or to particular individuals or groups shall be adjusted to account for such event. Such adjustment shall be effected by multiplying such number of Shares by an amount equal to the number of Shares that would be owned after such event by a person who, immediately prior to such event, was the holder of record of one Share, unless the Committee, in its discretion, establishes another appropriate method of adjustment. (b) In the event of any merger, consolidation, or other business reorganization (including but not limited to a Change of Control) in which Charter Financial Corp. is not the surviving entity, the Funding Agent shall hold in the Fund any money, stock, securities or other property received by holders of record of Shares in connection with such merger, consolidation, or other business reorganization. Any Award with respect to which Shares had been allocated to an Eligible Director or Eligible Employee shall be adjusted by allocating to the Eligible Director or Eligible Employee receiving such Award the amount of money, stock, securities or other property received by the Funding Agent for the Shares allocated to such Eligible Director or Eligible Employee, and such money, stock, securities or other property shall be subject to the same terms and conditions of the Award that applied to the Shares for which it has been exchanged. Article IX ---------- Miscellaneous ------------- Section 9.1 Status as an Employee Benefit Plan. ---------------------------------- This Plan is not intended to satisfy the requirements for qualification under section 401(a) of the Code or to satisfy the definitional requirements for an "employee benefit plan" under section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. It is intended to be a non- qualified incentive compensation program that is exempt from the regulatory requirements of the Employee Retirement Income Security Act of 1974, as amended. The Plan shall be construed and administered so as to effectuate this intent. Section 9.2 No Right to Continued Employment. -------------------------------- Neither the establishment of the Plan nor any provisions of the Plan nor any action of the Board or the Committee with respect to the Plan shall be held or construed to confer upon any Eligible Director or Eligible Employee any right to continue in the service of any Employer. The Employers reserve the right to dismiss any Eligible Director or Eligible Employee or otherwise deal with any Eligible Director or Eligible Employee to the same extent as though the Plan had not been adopted. -15- Section 9.3 Construction of Language. ------------------------ Whenever appropriate in the Plan, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to an Article or section number shall refer to an Article or section of this Plan unless otherwise indicated. Section 9.4 Governing Law. ------------- The Plan shall be construed and enforced in accordance with the laws of the State of Georgia without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by the federal laws of the United States of America. The Plan shall be construed to comply with applicable OTS Regulations. Section 9.5 Headings. -------- The headings of Articles and sections are included solely for convenience of reference. If there is any conflict between such headings and the text of the Plan, the text shall control. Section 9.6 Non-Alienation of Benefits. -------------------------- The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation or assignment, nor shall such right be liable for or subject to debts, contracts, liabilities, engagements or torts; provided, however, that any recipient of an Award who makes an election pursuant to section 83(b) of the Code to include the value of the Shares subject to such Award in gross income for federal income purposes when granted rather than when vested shall have the right to margin such Shares to finance the payment of taxes. Any Shares so margined shall nevertheless remain subject to the forfeiture provisions and other terms and conditions of the Award. Section 9.7 Notices. ------- Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is personally delivered or 5 days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other: -16- (a) If to the Committee: Charter Financial Corp. 600 Third Avenue West Point, Georgia 31833 Attention: Corporate Secretary ------------------- (b) If to an Eligible Director or Eligible Employee, to the Eligible Director's or Eligible Employee's address as shown in the Employer's records. Section 9.8 Required Regulatory Provisions. ------------------------------ The making and payment of Awards under this Plan shall be conditioned upon and subject to compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. 1828(k), and the rules and regulations promulgated thereunder. Section 9.9 Approval of Shareholders. ------------------------ The Plan shall not be effective prior to its approval by a majority of the total votes cast by purchasers (other than First Charter, MHC) in the stock offering conducted in conjunction with the Reorganization who become holders of Shares. If not effective due to the vote of purchasers in the Reorganization, the Plan shall be effective upon the date of its approval by a majority of the total votes eligible to be cast at any duly called annual or special meeting of the Company. If not effective prior to the one year anniversary of the date of the Reorganization, the Plan shall be effective on such later date as is specified by the Board. No Award shall be made prior to the date on which the Plan becomes effective nor shall any Award be granted within six months of the date of the Reorganization. Article X --------- Additional Provisions Subject to Further Shareholder Approval ------------------------------------------------------------- Section 10.1 Accelerated Vesting Upon Retirement. ----------------------------------- Notwithstanding anything in the Plan to the contrary, unless otherwise determined by the Committee and specified in the Award Notice relating to an Award in the event that any Eligible Employee terminates service as an Employee of all Employers, or in the event that an Eligible Director terminates service as a voting member of all Employers' boards of directors, and such termination constitutes a Retirement, all Awards outstanding to such holder on the date of his Retirement shall, to the extent not already vested, become vested upon Retirement. -17- Section 10.2 No Effect Prior to Stockholder Approval. --------------------------------------- Notwithstanding anything contained in this Article X to the contrary, the provisions of this Article X shall not be applied, and shall be of no force or effect, unless and until the shareholders of the Company shall have approved such provisions by affirmative vote of the holders of a majority of the Shares represented in person or by proxy and entitled to vote at a meeting of shareholders duly called and held after the one year anniversary of the date of the Reorganization. EX-10.7 11 dex107.txt EXHIBIT 10.7 EXHIBIT 10.7 Charter Financial Corp. 2001 Stock Option Plan ___________________________ Effective as of the Date of the Reorganization TABLE OF CONTENTS
Page Article I Purpose Section 1.1 General Purpose of the Plan................................. 1 Article II Definitions Section 2.1 Bank......................................................... 1 Section 2.2 Board........................................................ 1 Section 2.3 Change in Control............................................ 1 Section 2.4 Code......................................................... 3 Section 2.5 Committee.................................................... 3 Section 2.6 Company...................................................... 3 Section 2.7 Disability................................................... 3 Section 2.8 Disinterested Board Member................................... 3 Section 2.9 Effective Date............................................... 3 Section 2.10 Eligible Director............................................ 3 Section 2.11 Eligible Employee............................................ 3 Section 2.12 Employer..................................................... 4 Section 2.13 Exchange Act................................................. 4 Section 2.14 Exercise Price............................................... 4 Section 2.15 Fair Market Value............................................ 4 Section 2.16 Family Member................................................ 4 Section 2.17 FDIC Regulations............................................. 4 Section 2.18 Incentive Stock Option....................................... 4 Section 2.19 Non-Profit Organization...................................... 4 Section 2.20 Non-Qualified Stock Option................................... 5 Section 2.21 Option....................................................... 5 Section 2.22 Option Period................................................ 5 Section 2.23 Person....................................................... 5 Section 2.24 Plan......................................................... 5 Section 2.25 Retirement................................................... 5 Section 2.26 Share........................................................ 5 Section 2.27 Termination for Cause........................................ 5 Article III Available Shares Section 3.1 Available Shares............................................. 6 Article IV Administration Section 4.1 Committee.................................................... 7 Section 4.2 Committee Action............................................. 7
(i)
Page Section 4.3 Committee Responsibilities.................................. 7 Article V Stock Option Grants Section 5.1 Grant of Options............................................ 8 Section 5.2 Size of Option.............................................. 8 Section 5.3 Exercise Price.............................................. 8 Section 5.4 Option Period............................................... 9 Section 5.5 Required Regulatory Provisions.............................. 9 Section 5.6 Additional Restrictions on Incentive Stock Options.......... 11 Article VI Options -- In General Section 6.1 Method of Exercise.......................................... 12 Section 6.2 Limitations on Options...................................... 13 Article VII Amendment and Termination Section 7.1 Termination................................................. 14 Section 7.2 Amendment................................................... 14 Section 7.3 Adjustments in the Event of a Business Reorganization....... 14 Article VIII Miscellaneous Section 8.1 Status as an Employee Benefit Plan.......................... 15 Section 8.2 No Right to Continued Employment............................ 15 Section 8.3 Construction of Language.................................... 15 Section 8.4 Governing Law............................................... 15 Section 8.5 Headings.................................................... 16 Section 8.6 Non-Alienation of Benefits.................................. 16 Section 8.7 Taxes....................................................... 16 Section 8.8 Notices..................................................... 16 Section 8.9 Required Regulatory Provisions.............................. 17 Section 8.10 Approval of Shareholders.................................... 17 Article IX Additional Provisions Subject to Further Shareholder Approval Section 9.1 Accelerated Vesting Upon Retirement......................... 17 Section 9.2 No Effect Prior to Shareholder Approval..................... 17
(ii) Charter Financial Corp. 2001 Stock Option Plan ---------------------------------------------- Article I --------- Purpose ------- Section 1.1 General Purpose of the Plan. --------------------------- The purpose of the Plan is to promote the growth and profitability of Charter Financial Corp., to provide eligible directors, certain key officers and employees of Charter Financial Corp. and its affiliates with an incentive to achieve corporate objectives, to attract and retain individuals of outstanding competence and to provide such individuals with an equity interest in Charter Financial Corp. Article II ---------- Definitions ----------- The following definitions shall apply for the purposes of this Plan, unless a different meaning is plainly indicated by the context: Section 2.1 Bank means CharterBank and any successor thereto. ---- Section 2.2 Board means the board of directors of the Company. ----- Section 2.3 Change in Control means any of the following events: ----------------- (a) the consummation of a reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (i) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (ii) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% -2- of the securities entitled to vote generally in the election of directors of the Company; (b) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert; (c) a complete liquidation or dissolution of the Company; (d) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of the Company do not belong to any of the following groups: (i) individuals who were members of the Board of Directors of the Company on the Effective Date; or (ii) individuals who first became members of the Board of Directors of the Company after the Effective Date either: (A) upon election to serve as a member of the Board of Directors of the Company by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or (B) upon election by the shareholders of the Company to serve as a member of such board, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of Directors of the Company; provided, however, that this section 2.3(d) shall only apply if the Company is not majority owned by Fist Charter, MHC; or (e) approval by the stockholders of the Company of any agreement, plan or arrangement for the consummation of a transaction which, if consummated, would result in the occurrence of an event described in section 2.3(a), (b), (c) or (d); or (f) any event which would be described in section 2.3(a), (b), (c), (d) or (e) if the term "Bank" were substituted for the terms "Company" therein. -3- In no event, however, shall a Change of Control be deemed to have occurred as a result of (i) any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them or (ii) the conversion of First Charter, MHC to a stock form company and the issuance of additional Shares of the Company in connection therewith. For purposes of this section 2.3, the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. Section 2.4 Code means the Internal Revenue Code of 1986 (including ---- the corresponding provisions of any succeeding law). Section 2.5 Committee means the Committee described in section 4.1. --------- Section 2.6 Company means Charter Financial Corp., a corporation ------- organized and existing under the laws of the State of Georgia, and any successor thereto. Section 2.7 Disability means a condition of total incapacity, ---------- mental or physical, for further performance of duty with the Company which the Committee shall have determined, on the basis of competent medical evidence, is likely to be permanent. Section 2.8 Disinterested Board Member means a member of the Board -------------------------- who (a) is not a current employee of the Company or a subsidiary, (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, (c) has not been an officer of the Company, (d) does not receive remuneration from the Company or a subsidiary, either directly or indirectly, in any capacity other than as a director except in an amount for which disclosure would not be required pursuant to Item 404(a) of the proxy solicitation rules of the Securities and Exchange Commission and (e) does not possess an interest in any other transaction, and is not engaged in a business relationship, for which disclosure would be required pursuant to Item 404(a) or (b) of the proxy solicitation rules of the Securities and Exchange Commission. The term Disinterested Board Member shall be interpreted in such manner as shall be necessary to conform to the requirements of section 162(m) of the Code and Rule 16b-3 promulgated under the Exchange Act. Section 2.9 Effective Date means the date on which the Bank -------------- converts from a mutual bank to a stock bank (the "Reorganization"). Section 2.10 Eligible Director means a member of the board of ----------------- directors of an Employer who is not also an employee or an officer of any Employer. Section 2.11 Eligible Employee means any employee whom the Committee ----------------- may determine to be a key officer or employee of an Employer and select to receive a grant of an Option pursuant to the Plan. Section 2.12 Employer means the Company, the Bank and any successor -------- thereto and, with the prior approval of the Board, and subject to such terms and conditions as may be imposed by the Board, any other savings bank, savings and loan association, bank, corporation, financial institution or other business organization or institution. With respect to any Eligible -4- Employer or Eligible Director, the Employer shall mean the entity which employs such person or upon whose board of directors such person serves. Section 2.13 Exchange Act means the Securities Exchange Act of 1934, ------------ as amended. Section 2.14 Exercise Price means the price per Share at which -------------- Shares subject to an Option may be purchased upon exercise of the Option, determined in accordance with section 5.3. Section 2.15 Fair Market Value means, with respect to a Share on a ----------------- specified date: (a) the final reported sales price on the date in question (or if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) as reported in the principal consolidated reporting system with respect to securities listed or admitted to trading on the principal United States securities exchange on which the Shares are listed or admitted to trading; or (b) if the Shares are not listed or admitted to trading on any such exchange, the closing bid quotation with respect to a Share on such date on the National Association of Securities Dealers Automated Quotations System, or, if no such quotation is provided, on another similar system, selected by the Committee, then in use; or (c) if sections 2.15(a) and (b) are not applicable, the fair market value of a Share as the Committee may determine. Section 2.16 Family Member means the spouse, parent, child or ------------- sibling of an Eligible Director or Eligible Employee. Section 2.17 FDIC Regulations means the rules and regulations of the ---------------- Federal Deposit Insurance Corporation. Section 2.18 Incentive Stock Option means a right to purchase Shares ---------------------- that is granted to Eligible Employees pursuant to section 5.1, that is designated by the Committee to be an Incentive Stock Option and that is intended to satisfy the requirements of section 422 of the Code. Section 2.19 Non-Profit Organization means any organization which is ----------------------- exempt from federal income tax under section 501(c)(3), (4), (5), (6), (7), (8) or (10) of the Internal Revenue Code. Section 2.20 Non-Qualified Stock Option means a right to purchase -------------------------- Shares that is either (a) granted to an Eligible Director or (b) granted to an Eligible Employee and either (i) is not designated by the Committee to be an Incentive Stock Option, or (ii) does not satisfy the requirements of section 422 of the Code. Section 2.21 Option means either an Incentive Stock Option or a Non- ------ Qualified Stock Option. -5- Section 2.22 Option Period means the period during which an Option ------------- may be exercised, determined in accordance with section 5.4. Section 2.23 Person means an individual, a corporation, a bank, a ------ savings bank, a savings and loan association, a financial institution, a partnership, an association, a joint-stock company, a trust, an estate, an unincorporated organization and any other business organization or institution. Section 2.24 Plan means the Charter Financial Corp. 2001 Stock ---- Option Plan, as amended from time to time. Section 2.25 Retirement means with respect to an Eligible Employee, ---------- termination of all service for all Employers as an employee at or after the normal or early retirement date set forth in any tax-qualified retirement plan of the Bank, whether or not the individual in question actually participates in any such tax-qualified plan of the Bank, and in the case of an Eligible Director, termination of all service for all Employers as a voting member of the Employer's board of directors after the attainment of the latest age at which the Eligible Director is eligible for election or appointment as a voting member of the Employer's board of directors under the Employer's charter. Section 2.26 Share means a share of Common Stock, par value $.01 ----- share, of Charter Financial Corp. Section 2.27 Termination for Cause means termination of service or --------------------- removal from office with the Employer upon the occurrence of any of the following: (a) the individual intentionally engages in dishonest conduct in connection with his performance of services for the Employer resulting in his conviction of a felony; (b) the individual is convicted of, or pleads guilty or nolo contendere to, a felony or any crime involving moral turpitude; (c) the individual breaches his fiduciary duties to the Employer for personal profit; or (d) the individual willfully breaches or violates any law, rule or regulation (other than traffic violations or similar offenses), or final cease and desist order in connection with his performance of services for the Employer. Article III ----------- Available Shares ---------------- Section 3.1 Available Shares. ---------------- (a) The maximum aggregate number of Shares with respect to which Options may be granted at any time shall be equal to the excess of: (i) 4.9% of the total number of Shares issued in the Reorganization; over (ii) the sum of: -6- (A) the number of Shares with respect to which previously granted Options may then or may in the future be exercised; plus (B) the number of Shares with respect to which previously granted Options have been exercised; subject to adjustment pursuant to section 7.3. (b) Options to purchase an aggregate maximum of 1.47% of the total number of Shares issued in the Reorganization (subject to adjustment pursuant to section 7.3) may be granted to Eligible Directors, and Options to purchase a maximum of 0.245% of the total number of Shares issued in the Reorganization (subject to adjustment pursuant to section 7.3) may be granted to any one Eligible Director. (c) Options to purchase a maximum of 1.225% of the total number of Shares issued in the Reorganization (subject to adjustment pursuant to section 7.3) may be granted to any one Eligible Employee. (d) For purposes of this section 3.1, an Option shall not be considered as having been exercised to the extent that such Option terminates by reason other than the purchase of related Shares; provided, however, that for purposes of meeting the requirements of section 162(m) of the Code, no Eligible Employee who is a covered employee (within the meaning of section 162(m) of the Code) shall receive grants of Options for an aggregate number of Shares that is in excess of the amount specified for him under this section 3.1, computed as if any Option which is canceled or forfeited reduced the maximum number of Shares. Article IV ---------- Administration -------------- Section 4.1 Committee. --------- The Plan shall be administered by the members of the Compensation Committee of Charter Financial Corp. who are Disinterested Board Members. If the Committee consists of fewer than two Disinterested Board Members, then the Board shall appoint to the Committee such additional Disinterested Board Members as shall be necessary to provide for a Committee consisting of at least two Disinterested Board Members. Section 4.2 Committee Action. ---------------- The Committee shall hold such meetings, and may make such administrative rules and regulations, as it may deem proper. A majority of the members of the Committee shall constitute a quorum, and the action of a majority of the members of the Committee present at a meet ing at which a quorum is present, as well as actions taken pursuant to the unanimous written consent of all of the members of the Committee without holding a meeting, shall be deemed to be actions -7- of the Committee. All actions of the Committee shall be final and conclusive and shall be binding upon the Company and all other interested parties. Any Person dealing with the Committee shall be fully protected in relying upon any written notice, instruction, direction or other communication signed by the Secretary of the Committee and one member of the Committee, by two members of the Committee or by a representative of the Committee authorized to sign the same in its behalf. Section 4.3 Committee Responsibilities. -------------------------- Subject to the terms and conditions of the Plan and such limitations as may be imposed by the Board, the Committee shall be responsible for the overall management and administration of the Plan and shall have such authority as shall be necessary or appropriate in order to carry out its responsibilities, including, without limitation, the authority: (a) to interpret and construe the Plan, and to determine all questions that may arise under the Plan as to eligibility for participation in the Plan, the number of Shares subject to the Options, if any, to be granted, and the terms and conditions thereof; (b) to adopt rules and regulations and to prescribe forms for the operation and administration of the Plan; and (c) to take any other action not inconsistent with the provisions of the Plan that it may deem necessary or appropriate. Article V --------- Stock Option Grants ------------------- Section 5.1 Grant of Options. ---------------- (a) Subject to the limitations of the Plan, the Committee may, in its discretion, grant to an Eligible Employee or an Eligible Director an Option to purchase Shares. An Option for Eligible Employees must be designated as either an Incentive Stock Option or a Non-Qualified Stock Option and, if not designated as either, shall be a Non-Qualified Stock Option. An Option for an Eligible Director shall be a Non-Qualified Stock Option. (b) Any Option granted under this section 5.1 shall be evidenced by a written agreement which shall: (i) specify the number of Shares covered by the Option determined in accordance with section 5.2; (ii) specify the Exercise Price, determined in accordance with section 5.3, for the Shares subject to the Option; -8- (iii) specify the Option Period determined in accordance with section 5.4; (iv) set forth specifically or incorporate by reference the applicable provisions of the Plan; and (v) contain such other terms and conditions not inconsistent with the Plan as the Committee may, in its discretion, prescribe with respect to an Option granted to an Eligible Employee or an Eligible Director. Section 5.2 Size of Option. -------------- Subject to section 3.1 and such limitations as the Board may from time to time impose, the number of Shares as to which an Eligible Employee or Eligible Director may be granted Options shall be determined by the Committee, in its discretion. Section 5.3 Exercise Price. -------------- The price per Share at which an Option granted to an Eligible Employee or Eligible Director shall be determined by the Committee, in its discretion; provided, however, that the Exercise Price shall not be less than the Fair Market Value of a Share on the date on which the Option is granted. Section 5.4 Option Period. ------------- Subject to section 5.5, the Option Period during which an Option granted to an Eligible Employee may be exercised shall commence on the date specified by the Committee in the Option agreement and shall expire on the date specified in the Option agreement or, if no date is specified, on the earliest of: (a) in the case of an Option granted to an Eligible Employee: (i) the close of business on the last day of the three-month period commencing on the date of the Eligible Employee's termination of employment with the Employer, other than on account of death or Disability, Retirement or a Termination for Cause; (ii) the close of business on the last day of the one-year period commencing on the date of the Eligible Employee's termination of employment due to death, Disability or Retirement; (iii) the date and time when the Eligible Employee ceases to be an employee of the Employer due to a Termination for Cause; and (iv) the last day of the ten-year period commencing on the date on which the Option was granted; and (b) in the case of an Option granted to an Eligible Director: -9- (i) removal for cause in accordance with the Employer's bylaws, or Termination for Cause; or (ii) the last day of the ten-year period commencing on the date on which the Option was granted. Section 5.5 Required Regulatory Provisions. ------------------------------ Notwithstanding anything contained herein to the contrary: (a) no Option shall be granted to an Eligible Employee or Eligible Director under the Plan prior to the later of (i) six months after the date of the Reorganization or (ii) the approval of the Plan by shareholders in accordance with section 8.10; (b) each Option granted to an Eligible Employee or Eligible Director shall become exercisable no more rapidly than as follows: (i) prior to the first anniversary of the Effective Date, an Option shall not be exercisable; (ii) on and after the first anniversary, but prior to the second anniversary, of the Effective Date, an Option may be exercised as to a maximum of twenty percent (20%) of the Shares subject to the Option when granted; (iii) on and after the second anniversary, but prior to the third anniversary, of the Effective Date, an Option may be exercised as to a maximum of forty percent (40%) of the Shares subject to the Option when granted, including in such forty percent (40%) any optioned Shares purchased prior to such second anniversary; (iv) on and after the third anniversary, but prior to the fourth anniversary, of the Effective Date, an Option may be exercised as to a maximum of sixty percent (60%) of the Shares subject to the Option when granted, including in such sixty percent (60%) any optioned Shares purchased prior to such third anniversary; (v) on and after the fourth anniversary, but prior to the fifth anniversary, of the Effective Date, an Option may be exercised as to a maximum of eighty percent (80%) of the Shares subject to the Option when granted, including in such eighty percent (80%) any optioned Shares purchased prior to such fourth anniversary; and (vi) on and after the fifth anniversary of the Effective Date and for the remainder of the Option Period, an Option may be exercised as to the entire number of optioned Shares not theretofore purchased; -10- provided, however, that such an Option shall become fully exercisable, and all optioned Shares not previously purchased shall become available for purchase, on the date of the Option holder's death or Disability while in the service of an Employer or on the date of a Change in Control. (c) The Option Period of any Option granted hereunder, whether or not previously vested, shall be suspended as of the time and date at which the Option holder has received notice from the Board that his or her employment is subject to a possible Termination for Cause, or in the case of an Eligible Director, removal for cause in accordance with the Employer's by- laws. Such suspension shall remain in effect until the Option holder receives official notice from the Board that he or she has been cleared of any possible Termination for Cause, or in the case of an Eligible Director, removal for cause, at which time, the original Exercise Period shall be reinstated without any adjustment for the intervening suspended period. In the event that the Option Period under section 5.4 expires during such suspension, the Company shall pay to the Eligible Employee, within 30 days after his reinstatement as an employee of the Company, damages equal to the value of the expired Options (based on the Fair Market Value of a Share as of the expiration of the Option Period less the Exercise Price of such Options). (d) No Option granted to an Eligible Employee or Eligible Director hereunder, whether or not previously vested, shall be exercised after the time and date at which the Option holder's services with the Employer are terminated in a Termination for Cause, or, in the case of an Eligible Director, removal for cause in accordance with the Employer's by-laws. Section 5.6 Additional Restrictions on Incentive Stock Options. -------------------------------------------------- An Option granted to an Eligible Employee designated by the Committee to be an Incentive Stock Option shall be subject to the following limitations: (a) If, for any calendar year, the sum of (i) plus (ii) exceeds $100,000, where (i) equals the Fair Market Value (determined as of the date of the grant) of Shares subject to an Option intended to be an Incentive Stock Option which first be come available for purchase during such calendar year, and (ii) equals the Fair Market Value (determined as of the date of grant) of Shares subject to any other options intended to be Incentive Stock Options and previously granted to the same Eligible Employee which first become exercisable in such calendar year, then that number of Shares optioned which causes the sum of (i) and (ii) to exceed $100,000 shall be deemed to be Shares optioned pursuant to a Non-Qualified Stock Option or Non-Qualified Stock Options, with the same terms as the Option or Options intended to be an Incentive Stock Option; (b) The Exercise Price of an Incentive Stock Option granted to an Eligible Employee who, at the time the Option is granted, owns Shares comprising more than 10% of the total combined voting power of all classes of stock of the Company shall not be less than 110% of the Fair Market Value of a Share, and if an Option -11- designated as an Incentive Stock Option shall be granted at an Exercise Price that does not satisfy this requirement, the designated Exercise Price shall be observed and the Option shall be treated as a Non-Qualified Stock Option; (c) The Option Period of an Incentive Stock Option granted to an Eligible Employee who, at the time the Option is granted, owns Shares comprising more than 10% of the total combined voting power of all classes of stock of the Company, shall expire no later than the fifth anniversary of the date on which the Option was granted, and if an Option designated as an Incentive Stock Option shall be granted for an Option Period that does not satisfy this requirement, the designated Option Period shall be observed and the Option shall be treated as a Non-Qualified Stock Option; (d) An Incentive Stock Option that is exercised during its designated Option Period but more than: (i) three (3) months after the termination of employment with the Company, a parent or a subsidiary (other than on account of disability within the meaning of section 22(e)(3) of the Code or death) of the Eligible Employee to whom it was granted; and (ii) one (1) year after such individual's termination of employment with the Company, a parent or a subsidiary due to disability (within the meaning of section 22(e)(3) of the Code) or death; may be exercised in accordance with the terms but shall at the time of exercise be treated as a Non-Qualified Stock Option; and (e) Except with the prior written approval of the Committee, no individual shall dispose of Shares acquired pursuant to the exercise of an Incentive Stock Option until after the later of (i) the second anniversary of the date on which the Incentive Stock Option was granted, or (ii) the first anniversary of the date on which the Shares were acquired. Article VI ---------- Options -- In General --------------------- Section 6.1 Method of Exercise. ------------------ (a) Subject to the limitations of the Plan and the Option agreement, an Option holder may, at any time during the Option Period, exercise his or her right to purchase all or any part of the Shares to which the Option relates; provided, however, that the minimum number of Shares which may be purchased at any time shall be 100, or, if less, the total number of Shares relating to the Option which remain unpurchased. An Option holder shall exercise an Option to purchase Shares by: -12- (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Option; (ii) delivering to the Committee full payment, consistent with section 6.1(b), for the Shares as to which the Option is to be exercised; and (iii) satisfying such other conditions as may be prescribed in the Option agreement. (b) The Exercise Price of Shares to be purchased upon exercise of any Option shall be paid in full in cash (by certified or bank check or such other instrument as the Company may accept) or, if and to the extent permitted by the Committee, by one or more of the following: (i) in the form of Shares already owned by the Option holder having an aggregate Fair Market Value on the date the Option is exercised equal to the aggregate Exercise Price to be paid; (ii) by requesting the Company to cancel without payment Options outstanding to such Person for that number of Shares whose aggregate Fair Market Value on the date of exercise, when reduced by their aggregate Exercise Price, equals the aggregate Exercise Price of the Options being exercised; or (iii) by a combination thereof. Payment for any Shares to be purchased upon exercise of an Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. (c) When the requirements of section 6.1(a) and (b) have been satisfied, the Committee shall take such action as is necessary to cause the issuance of a stock certificate evidencing the Option holder's ownership of such Shares. The Person exercising the Option shall have no right to vote or to receive dividends, nor have any other rights with respect to the Shares, prior to the date as of which such Shares are transferred to such Person on the stock transfer records of the Company, and no adjustments shall be made for any dividends or other rights for which the record date is prior to the date as of which such transfer is effected, except as may be required under section 7.3. Section 6.2 Limitations on Options. ---------------------- (a) An Option by its terms shall not be transferable by the Option holder other than to Family Members or Non-Profit Organizations or by will or by the laws of descent and distribution and shall be exercisable, during the lifetime of the Option holder, only by the Option holder, a Family Member or a Non-Profit Organization. Any such transfer shall be effected by written notice to the Company given in such form and manner as the Committee may prescribe and shall be recognized only if such notice is received by the Company prior to the death of the person giving it. Thereafter, the transferee shall have, with respect to such Option, all of the rights, privileges and obligations which would attach thereunder to the transferor if the Option were issued to such transferor. If a privilege of the Option depends on the life, employment or other status of the transferor, such privilege of the Option for the transferee shall continue to depend on the life, employment or other status of the transferor. The Committee shall have full and exclusive authority to interpret and apply the provisions of this Plan to transferees to the extent not specifically described herein. Notwithstanding the foregoing, an Incentive Stock Option is not transferable by an Eligible -13- Employee other than by will or the laws of descent and distribution, and is exercisable, during his lifetime, solely by him. (b) The Company's obligation to deliver Shares with respect to an Option shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of the Option holder to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Shares or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Shares under the Plan prior to (i) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, or (ii) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Committee shall determine to be necessary or advisable. Article VII ----------- Amendment and Termination ------------------------- Section 7.1 Termination. ----------- The Board may suspend or terminate the Plan in whole or in part at any time prior to the tenth anniversary of the Effective Date by giving written notice of such suspension or termination to the Committee. Unless sooner terminated, the Plan shall terminate automatically on the day preceding the tenth anniversary of the Effective Date. In the event of any suspension or termination of the Plan, all Options theretofore granted under the Plan that are outstanding on the date of such suspension or termination of the Plan shall remain outstanding and exercisable for the period and on the terms and conditions set forth in the Option agreements evidencing such Options. Section 7.2 Amendment. --------- The Board may amend or revise the Plan in whole or in part at any time; provided, however, that, to the extent required to comply with section 162(m) of the Code, no such amendment or revision shall be effective if it amends a material term of the Plan unless approved by the holders of a majority of the votes cast on a proposal to approve such amendment or revision. Section 7.3 Adjustments in the Event of a Business Reorganization. ----------------------------------------------------- (a) In the event of any merger, consolidation, or other business reorganization in which the Company is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of Shares held by each Person who is then a holder of record of Shares, the number of Shares covered by each outstanding Option and the number of Shares available to any individual or group of individuals pursuant to section 3.1 shall be adjusted to account for such event. Such adjustment shall be effected by multiplying such number of Shares by an amount equal to the number of Shares that would be owned after such event by a Person who, immediately prior to such event, was the holder of record of one Share, and the Exercise Price of the -14- Options shall be adjusted by dividing the Exercise Price by such number of Shares; provided, however, that the Committee may, in its discretion, establish another appropriate method of adjustment. (b) In the event of any merger, consolidation, or other business reorganization in which the Company is not the surviving entity, any Options granted under the Plan which remain outstanding shall be converted into options to purchase voting common equity securities of the business entity which survives such merger, consolidation or other business reorganization having substantially the same terms and conditions as the outstanding Options under this Plan and reflecting the same economic benefit (as measured by the difference between the aggregate exercise price and the value exchanged for outstanding Shares in such merger, consolidation or other business reorganization), all as determined by the Committee prior to the consummation of such merger; provided, however, that the Committee may, at any time prior to the consummation of such merger, consolidation or other business reorganization, direct that all, but not less than all, outstanding Options be canceled as of the effective date of such merger, consolidation or other business reorganization in exchange for a cash payment per optioned Share equal to the excess (if any) of the value exchanged for an outstanding Share in such merger, consolidation or other business reorganization over the Exercise Price of the Option being canceled. Article VIII ------------ Miscellaneous ------------- Section 8.1 Status as an Employee Benefit Plan. ---------------------------------- This Plan is not intended to satisfy the requirements for qualification under section 401(a) of the Code or to satisfy the definitional requirements for an "employee benefit plan" under section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. It is intended to be a non- qualified incentive compensation program that is exempt from the regulatory requirements of the Employee Retirement Income Security Act of 1974, as amended. The Plan shall be construed and administered so as to effectuate this intent. -15- Section 8.2 No Right to Continued Employment. -------------------------------- Neither the establishment of the Plan nor any provisions of the Plan nor any action of the Board or the Committee with respect to the Plan shall be held or construed to confer upon any Eligible Director or Eligible Employee any right to a continuation of his or her position as a director or employee of the Company. The Employers reserve the right to remove any Eligible Director or dismiss any Eligible Employee or otherwise deal with any Eligible Director or Eligible Employee to the same extent as though the Plan had not been adopted. Section 8.3 Construction of Language. ------------------------ Whenever appropriate in the Plan, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to an Article or section number shall refer to an Article or section of this Plan unless otherwise indicated. Section 8.4 Governing Law. ------------- The Plan shall be construed, administered and enforced according to the laws of the State of Georgia without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by federal law. The Plan shall be construed to comply with applicable OTS Regulations. Section 8.5 Headings. -------- The headings of Articles and sections are included solely for convenience of reference. If there is any conflict between such headings and the text of the Plan, the text shall control. Section 8.6 Non-Alienation of Benefits. -------------------------- The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation or assignment, nor shall such right be liable for or subject to debts, contracts, liabilities, engagements or torts. Section 8.7 Taxes. ----- The Company shall have the right to deduct from all amounts paid by the Company in cash with respect to an Option under the Plan any taxes required by law to be withheld with respect to such Option. Where any Person is entitled to receive Shares pursuant to the exercise of an Option, the Company shall have the right to require such Person to pay the Company the amount of any tax which the Company is required to withhold with respect to such Shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of Shares to cover the minimum amount re quired to be withheld under applicable law. -16- Section 8.8 Notices. ------- Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other party: (a) If to the Committee: Charter Financial Corp. 600 Third Avenue West Point, GA 31833 Attention: Corporate Secretary ------------------- (b) If to an Option holder, to the Option holder's address as shown in the Employer's records. Section 8.9 Required Regulatory Provisions. ------------------------------ The grant and settlement of Options under this Plan shall be conditioned upon and subject to compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. 1828(k), and the rules and regulations promulgated thereunder. Section 8.1 Approval of Shareholders. ------------------------ The Plan shall not be effective prior to its approval by a majority of the total votes cast by purchasers (other than First Charter, MHC) in the stock offering conducted in conjunction with the Reorganization who become holders of Shares. If not effective due to the vote of purchasers in the Reorganization, the Plan shall be effective upon the date of its approval by a majority of the total votes eligible to be cast at any duly called annual or special meeting of the Company. If not effective prior to the one year anniversary of the date of the Reorganization, the Plan shall be effective on such later date as is specified by the Board. No Option shall be granted prior to the date on which the Plan becomes effective nor shall any Option be granted within six months of the date of the Reorganization. -17- Article IX ---------- Additional Provisions Subject to Further Shareholder Approval ------------------------------------------------------------- Section 9.1 Accelerated Vesting Upon Retirement. ----------------------------------- Notwithstanding anything in the Plan to the contrary, but subject to section 9.2: in the event that any Eligible Employee terminates service as an Employee of all Employers, or in the event that an Eligible Director terminates service as a voting member of all Employers' boards of directors, and such termination constitutes a Retirement, all Options outstanding to such holder on the date of his Retirement shall, to the extent not already exercisable, become exercisable upon Retirement. Section 9.2 No Effect Prior to Shareholder Approval. --------------------------------------- Notwithstanding anything contained in this Article IX to the contrary, the provisions of this Article IX shall not be applied, and shall be of no force or effect, unless and until the shareholders of the Company shall have approved such provisions by affirmative vote of the holders of a majority of the Shares represented in person or by proxy and entitled to vote at a meeting of shareholders duly called and held after the one year anniversary of the date of the Reorganization. EX-23.2 12 dex232.txt EXHIBIT 23.2 EXHIBIT 23.2 The Board of Directors CharterBank: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. Our report dated December 1, 2000 except as to note 22, as to which the date is March 22, 2001, contains an explanatory paragraph that states that the statement of financial condition as of September 30, 2000, and the related statements of income and comprehensive income, equity, and cash flows for the year ended September 30, 2000 have been restated. KPMG LLP Atlanta, GA May 17, 2001 EX-23.3 13 dex233.txt EXHIBIT 23.3 Exhibit 23.3 May 17, 2001 Board of Directors CharterBank 600 Third Avenue West Point, Georgia 31833 Members of the Board of Directors: We hereby consent to the use of our firm's name in the applications for the conversion and holding company formation for CharterBank (the "Bank") in which the Bank will become a wholly-owned subsidiary of Charter Financial Corp. (the "Company"), a federal corporation in organization, and the Company will issue a majority of its Common Stock to First Charter, MHC (the "MHC"), and will sell a minority of its Common Stock to the public. We also hereby consent to the inclusion of, summary of and references to our Appraisal Report and our statement concerning subscription rights in such filings including the Prospectus of Charter Financial Corporation. Respectfully submitted, RP FINANCIAL, LC. /s/ James P. Hennessey James P. Hennessey Senior Vice President EX-99.1 14 dex991.txt EXHIBIT 99.1 Exhibit 99.1 RP FINANCIAL, LC. - ------------------------------------------------ Financial Services Industry Consultants March 2, 2001 Board of Directors CharterBank 600 Third Avenue West Point, Georgia 31833 Members of the Board: At your request, we have completed and hereby provide an independent appraisal ("Appraisal") of the estimated pro forma market value of the Common Stock that is to be offered by CharterBank, West Point, Georgia ("CharterBank" or the "Bank") in connection with the mutual holding company reorganization of the Bank described below. The Appraisal is furnished pursuant to the requirements of 563b.7 and has been prepared in accordance with the "Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization" of the Office of Thrift Supervision ("OTS"), including the most recent revisions as of October 21, 1994, and applicable interpretations thereof. Plan of Reorganization and Stock Issuance - ----------------------------------------- The Bank's Board of Directors has unanimously adopted a plan to reorganize into the mutual holding company form of organization (the "Reorganization"). As part of the Reorganization, CharterBank will: (1) form a mutual holding company and issue a 20 percent minority interest through an offering by a mid-tier holding company; (2) operate the Bank's approved reinsurance activities under the mid-tier holding company; and (3) allocate the Bank's current investment in common stock of the Federal Home Loan Mortgage Corporation ("Freddie Mac") among the various operating entities in the new organization to provide sufficient capitalization for the separate anticipated business activities. 1. Plan of MHC Reorganization and Stock Issuance --------------------------------------------- The Bank will reorganize into a three level organization structure. At the top level will be a newly formed federal mutual holding company called First Charter, MHC (the "MHC") that will retain a majority ownership interest in the Bank. At the middle level will be a newly formed federal corporation called Charter Financial Corporation (the "Company") that will own a 100% interest in the bottom level companies. And at the bottom level will be the Bank and Charter Insurance Company ("CIC"). Concurrent with the Reorganization, the Company will issue a majority of its common stock to the MHC and offer for sale a minority ownership interest of its common stock to the Bank's Eligible Account Holders, Supplemental Eligible Account Holders and tax-qualified plans of the Bank including the employee stock ownership plan ("ESOP"). Any shares that are not sold in the Subscription Offering may be offered for sale in the Board of Directors March 2, 2001 Page 2 Community Offering and subsequently, if appropriate, to the public in a Syndicated Community Offering or Public Offering. The above structure reflects a "two-tier" mutual holding company structure, given the two levels of holding companies, a "mid-tier" stock holding company and a "top-tier" mutual holding company. The number of shares of common stock to be sold in the Offering will approximate 20 percent of the total shares. The number of shares issued to the MHC will approximate 80 percent of the total shares. 2. Charter Insurance Company ------------------------- Charter Insurance Company ("CIC"), a recently formed reinsurance subsidiary, reinsures a portion of the Bank's loan originations which carry private mortgage insurance ("PMI") issued by Mortgage Guaranty Insurance Company ("MGIC"), a market leader in the PMI business. In conjunction with the Reorganization, CIC, currently held in a subsidiary of the Bank, will become a direct 100 percent owned subsidiary of the Company. The Bank's current investment in its insurance subsidiary is approximately $450,000. 3. Allocation of Freddie Mac Common Stock -------------------------------------- The Bank currently holds 5,055,000 shares of Freddie Mac common stock with an approximate market value of $216.5 million as of December 31, 2000, net of the related deferred tax liability (the value of the Freddie Mac holdings is subject to change daily based on market conditions). In conjunction with the Reorganization, the Freddie Mac stock will be allocated among the various operating entities to provide sufficient capitalization for their separate anticipated business activities. The Freddie Mac shares will be allocated as follows: (a) 400,000 shares will be placed at the MHC level as part of the MHC's initial capitalization; (b) 400,000 shares will be placed at CIC as part of this insurance subsidiary's capitalization; (c) 1,700,000 shares will be owned directly by the Company; and (d) 2,555,000 shares, more than half of the Bank's current holdings, will be retained by the Bank. * * * * * * * * * Immediately after consummation of the Reorganization, it is not anticipated that the Company will engage in any business activity other than ownership of the Bank and CIC. The assets and liabilities of the Company will be substantially equivalent to those of the Bank prior to the Reorganization, except for the $100,000 of cash and 400,000 shares of Freddie Mac stock that will be placed at the MHC level and will thus be excluded from consideration in the conclusions of the Appraisal. RP Financial, LC. - ----------------- RP Financial, LC. ("RP Financial") is a financial consulting firm serving the financial services industry nationwide that, among other things, specializes in financial valuations and Board of Directors March 2, 2001 Page 3 analyses of business enterprises and securities, including the pro forma valuation for savings institutions converting from mutual-to-stock form. The background and experience of RP Financial is detailed in Exhibit V-1. We believe that, except for the fee we will receive for our appraisal and assisting in the preparation of related business plans, we are independent of the Bank and the other parties engaged by the Bank to assist in the Reorganization and Stock Issuance process. Valuation Methodology - --------------------- In preparing our appraisal, we have reviewed the Bank's and the Company's regulatory applications, including the prospectus as filed with the Department, FDIC, FRB and the Securities and Exchange Commission ("SEC"). We have conducted a financial analysis of the Bank that has included a review of its audited financial information for fiscal years ended September 30, 1996 through September 30, 2000, and internal and unaudited financial data through December 31, 2000. We have also conducted due diligence related discussions with the Bank's management; KPMG, LLP, the Bank's independent auditor; Thacher Proffitt and Wood, the Bank's legal counsel for the MHC Reorganization and Stock Issuance; and Sandler O'Neil and Partners, the Bank's financial and marketing advisors in connection with the Company's stock offering. All conclusions set forth in the Appraisal were reached independently from such discussions. In addition, where appropriate, we have considered information based on other available published sources that we believe are reliable. While we believe the information and data gathered from all these sources are reliable, we cannot guarantee the accuracy and completeness of such information. We have investigated the competitive environment within which the Bank operates and have assessed the Bank's relative strengths and weaknesses. We have kept abreast of the changing regulatory and legislative environment for financial institutions and analyzed the potential impact on the Bank and the industry as a whole. We have analyzed the potential effects of the Reorganization and Stock Issuance on the Bank's operating characteristics and financial performance as they relate to pro forma market value. We have considered the impact of the Bank's investment in Freddie Mac stock on pro forma market value, including the volatile nature of the trading price of Freddie Mac stock and the related impact on the Bank's capital and comprehensive earnings, the Bank's internal investment policies with regard to the Freddie Mac stock and the potential implications in the event a portion or all of the Freddie Mac stock were to be sold. We have reviewed the economy in the Bank's primary market area and have compared the Bank's financial performance and condition with publicly-traded thrifts in mutual holding company form, as well as all publicly-traded thrifts. We have reviewed conditions in the securities markets in general and in the market for thrift stocks in particular, including the market for existing thrift issues and the market for initial public offerings by thrifts. We have specifically considered the market for the stock of publicly- traded mutual holding companies, including the market for initial public offerings in conjunction with other MHC reorganizations. We have excluded from such analyses thrifts subject to announced or rumored acquisition, mutual holding company institutions that have announced their intent to pursue second step Board of Directors March 2, 2001 Page 4 conversions, and/or those institutions that exhibit other unusual characteristics. We have also considered the expected market for the Company's public shares. Our Appraisal is based on the Bank's representation that the information contained in the regulatory applications and additional information furnished to us by the Bank, its independent auditors, legal counsel and other authorized agents are truthful, accurate and complete. We did not independently verify the financial statements and other information provided by the Bank, its independent auditors, legal counsel and other authorized agents nor did we independently value the individual assets or liabilities, on or off balance sheet, of the Bank. The valuation considers the Bank only as a going concern and should not be considered as an indication of the Bank's liquidation value. Our appraised value is predicated on a continuation of the current operating environment for the Bank, the MHC and the Company and for all thrifts and their holding companies, including mutual holding companies. Changes in the local, state and national economy, the legislative and regulatory environment for financial institutions and mutual holding companies, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the value of thrift stocks as a whole or the Bank's, the MHC's and the Company's values alone. It is our understanding that there are no current or long-term plans for pursuing a second step conversion or for selling control of the Company or the Bank at this time. To the extent that such factors can be foreseen, they have been factored into our analysis. Pro forma market value is defined as the price at which CharterBank's stock, immediately upon completion of the offering, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Valuation Conclusion - -------------------- It is our opinion that, as of March 2, 2001, the aggregate market value of the Company's common stock is $195.0 million. The resulting range of value pursuant to regulatory guidelines and the corresponding number of shares based on the $10.00 per share offering price is set forth below: Total Aggregate Shares Issued(1) Market Value(1) ---------------- --------------- Minimum 16,575,000 $165,750,000 Midpoint 19,500,000 195,000,000 Maximum 22,425,000 224,250,000 Supermaximum 25,788,750 257,887,500 (1) Based on a $10.00 per share price, pursuant to a full conversion. Board of Directors March 2, 2001 Page 5 Based on the foregoing valuation, the Board has determined to offer for sale in the MHC Reorganization, the following range:
Total Shares Public Shares MHC Shares ------------ ------------- ---------- Shares(1) - --------- Minimum 16,575,000 3,315,000 13,260,000 Midpoint 19,500,000 3,900,000 15,600,000 Maximum 22,425,000 4,485,000 17,940,000 Supermaximum 25,788,750 5,157,750 20,631,000 Distribution of Shares - ---------------------- Minimum 100.00% 20.00% 80.00% Midpoint 100.00% 20.00% 80.00% Maximum 100.00% 20.00% 80.00% Supermaximum 100.00% 20.00% 80.00% Aggregate Market Value(1) - ------------------------- Minimum $165,750,000 $33,150,000 $132,600,000 Midpoint 195,000,000 39,000,000 156,000,000 Maximum 224,250,000 44,850,000 179,400,000 Supermaximum 257,887,500 51,577,500 206,310,000
(1) Based on offering price of $10.00 per share. Limiting Factors and Considerations - ----------------------------------- Our valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of the Common Stock. Moreover, because such valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of Common Stock in the Offering will thereafter be able to buy or sell such shares at prices related to the foregoing valuation of the pro forma market value thereof. RP Financial's valuation was determined based on the financial condition and operations of the Bank as of December 31, 2000, the date of the financial data included in the regulatory applications and prospectus. RP Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by RP Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities. RP Financial maintains a Board of Directors March 2, 2001 Page 6 policy that prohibits the company, its principals or employees from purchasing stock of its client institutions. The valuation will be updated as provided for in the conversion regulations and guidelines. These updates will consider, among other things, any developments or changes in the Bank's financial performance and condition, management policies, and current conditions in the equity markets for thrift shares. These updates may also consider changes in other external factors which impact value including, but not limited to: various changes in the legislative and regulatory environment, the stock market and the market for thrift stocks, and interest rates. Should any such new developments or changes be material, in our opinion, to the valuation of the shares, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained in the update at the date of the release of the update. Respectfully submitted, RP FINANCIAL, LC. William E. Pommerening Managing Director James P. Hennessey Senior Vice President ---------------------------------- PRO FORMA VALUATION REPORT MUTUAL HOLDING COMPANY STOCK OFFERING CHARTERBANK West Point, Georgia Dated As Of: March 2, 2001 ---------------------------------- Prepared By: RP Financial, LC. 1700 North Moore Street Suite 2210 Arlington, Virginia 22209 RP Financial, LC. TABLE OF CONTENTS CHARTERBANK West Point, Georgia PAGE DESCRIPTION NUMBER - ----------- ------ CHAPTER ONE OVERVIEW AND FINANCIAL ANALYSIS - ----------- Introduction 1.1 Plan of Reorganization and Stock Issuance 1.2 Strategic Overview 1.4 Business Plan 1.6 Balance Sheet Trends 1.8 Income and Expense Trends 1.15 Interest Rate Risk Management 1.21 Lending Activities and Strategy 1.22 Asset Quality 1.26 Funding Composition and Strategy 1.27 Subsidiary Operations 1.28 Legal Proceedings 1.29 CHAPTER TWO MARKET AREA ANALYSIS - ----------- Introduction 2.1 Strategic Expansion 2.2 Market Area Demographics 2.3 Local Economy 2.6 Competition 2.8 CHAPTER THREE PEER GROUP ANALYSIS - ------------- Peer Group Selection 3.1 Basis of Comparison 3.2 CharterBank's Peer Group 3.3 Financial Condition 3.6 Income and Expense Components 3.10 Loan Composition 3.15 Credit Risk 3.15 Interest Rate Risk 3.18 Summary 3.20 RP Financial, LC. TABLE OF CONTENTS CHARTERBANK West Point, Georgia (continued) PAGE DESCRIPTION NUMBER - ----------- ------ CHAPTER FOUR VALUATION ANALYSIS - ------------ Introduction 4.1 Appraisal Guidelines 4.1 RP Financial Approach to the Valuation 4.1 Valuation Analysis 4.2 1. Financial Condition 4.3 2. Profitability, Growth and Viability of Earnings 4.4 3. Asset Growth 4.7 4. Primary Market Area 4.7 5. Dividends 4.9 6. Liquidity of the Shares 4.10 7. Marketing of the Issue 4.10 A. The Public Market 4.11 B. The New Issue Market 4.15 C. The Acquisition Market 4.16 8. Management 4.17 9. Effect of Government Regulation and Regulatory Reform 4.17 Summary of Adjustments 4.18 Basis of Valuation: Fully-Converted Pricing Ratios 4.18 Valuation Approaches: Fully-Converted Basis 4.21 1. Price-to-Earnings ("P/E") 4.23 2. Price-to-Book ("P/B") 4.24 3. Price-to-Assets ("P/A") 4.26 Technical Analyses 4.26 Valuation Conclusion 4.28 RP Financial, LC. LIST OF TABLES CHARTERBANK West Point, Georgia
TABLE NUMBER DESCRIPTION PAGE ------ ----------- ---- 1.1 Historical Balance Sheets 1.9 1.2 Historical Income Statements 1.16 2.1 Summary Demographic Information 2.4 2.2 Troup County Area Employment Base 2.6 2.3 Market Area Unemployment Trends 2.8 2.4 Insured Deposit Market Share 2.9 3.1 Peer Group of Publicly-Traded Thrifts 3.5 3.2 Balance Sheet Composition and Growth Rates 3.7 3.3 Income as a Percent of Average Assets and Yields, Costs, Spreads 3.11 3.4 Loan Portfolio Composition and Related Information 3.16 3.5 Credit Risk Measures and Related Information 3.17 3.6 Interest Rate Risk Measures and Net Interest Income Volatility 3.19 4.1 Peer Group Market Area Comparative Analysis 4.8 4.2 Calculation of Implied Per Share Data - Incorporating MHC Second Step Conversion 4.20 4.3 MHC Institutions - Implied Pricing Ratios Full Conversion Basis 4.25 4.4 Market Pricing Comparatives 4.29
RP Financial, LC. Page 1.1 I. OVERVIEW AND FINANCIAL ANALYSIS Introduction - ------------ CharterBank (the "Bank") is a federally-chartered savings bank headquartered in West Point, Georgia. CharterBank conducts operations in west- central Georgia and east-central Alabama through its main office in West Point (Troup County), one branch in LaGrange, Georgia (Troup County), and two branches in Valley, Alabama (Chambers County) for a total of four full service offices. The main office in West Point and the two Valley, Alabama offices serve the "Valley" area consisting of towns of West Point in Georgia, and Lanett and Valley in Alabama. The LaGrange branch serves an adjacent Troup County community on interstate I-85. CharterBank's strategy has been, and will continue to be, to expand its market north on the I-85 corridor to LaGrange, southwest to Auburn, Alabama, and southeast to north Columbus and Harris County, Georgia. In addition to its retail branches, CharterBank operates three loan production offices ("LPOs") including two offices in Georgia (Newnan and Columbus) and one office in Alabama (Auburn). The LPOs have given CharterBank access to nearby areas that are either larger and/or economically more vibrant than the comparatively small, slow growth, rural markets served by the retail branches. Additionally, the LPOs provide a superior market entree with limited cost and, in fact, the Bank will be seeking to build upon the firm foundation provided by the Auburn LPO with the construction of a full-service facility targeted for opening by October 2001. The Bank's primary regulator is the Office of Thrift Supervision ("OTS"). CharterBank is a member of the Federal Home Loan Bank ("FHLB") system. Deposits are insured up to the regulatory maximums by the Savings Association Insurance Fund ("SAIF"). As of December 31, 2001, CharterBank had $1.0 billion in assets, $211.3 million in deposits and $257.5 million in equity, equal to 25.5 percent of assets. For the twelve months ended December 31, 2000, CharterBank's earnings totaled $749,000, equal to 0.08 percent of average assets. RP Financial, LC. Page 1.2 Plan of Reorganization and Stock Issuance - ----------------------------------------- The Bank's Board of Directors has unanimously adopted a plan to reorganize into the mutual holding company form of organization ("Reorganization"). As part of the Reorganization, CharterBank will: (1) form a mutual holding company and issue a 20 percent minority interest through an offering by a mid-tier holding company; (2) operate the Bank's approved reinsurance activities under the mid-tier holding company; and (3) allocate the Bank's current investment in common stock of the Federal Home Loan Mortgage Corporation ("Freddie Mac") among the various operating entities in the new organization to provide sufficient capitalization for the separate anticipated business activities. Plan of MHC Reorganization and Stock Issuance. The Bank will reorganize --------------------------------------------- into a three level structure. At the top level will be a newly formed federal mutual holding company called First Charter, MHC (the "MHC"), which will retain a majority ownership interest in the Bank. At the middle level will be a newly formed federal corporation called Charter Financial Corporation (the "Company"), which will own a 100% interest in the bottom level companies. And at the bottom level will be the Bank and Charter Insurance Company ("CIC"). In conjunction with the reorganization, the Company will conduct a stock offering selling an approximate 20% ownership interest in a subscription and community offering (the "minority stock offering"). The remaining majority ownership interest of approximately 80% will be retained by the MHC. Charter Insurance Company. Charter Insurance Company ("CIC"), a recently ------------------------- formed reinsurance subsidiary, reinsures a portion of the Bank's loan originations which carry private mortgage insurance ("PMI") issued by Mortgage Guaranty Insurance Company ("MGIC"), a market leader in the PMI business. In conjunction with the Reorganization, CIC, currently held in a subsidiary of the Bank, will become a direct subsidiary of the Company. The Bank's current investment in its insurance subsidiary is approximately $450,000. Allocation of Freddie Mac Common Stock. The Bank currently holds 5,055,000 -------------------------------------- shares of Freddie Mac common stock with an approximate market value of $216.5 million as of December 31, 2000, net of the related deferred tax liability (the value of the Freddie Mac RP Financial, LC. Page 1.3 holdings is subject to change daily based on market conditions). In conjunction with the Reorganization, the Freddie Mac stock will be allocated among the various operating entities to provide sufficient capitalization for their separate anticipated business activities. The Freddie Mac shares will be allocated as follows: (a) 400,000 shares the MHC as part of the MHC's initial capitalization; (b) 400,000 shares will be placed at CIC as part of the insurance subsidiary's capitalization; (c) 1,700,000 shares will be owned directly by the Company; and (d) 2,555,000 shares (equal to 50.5 of the Bank's entire investment) will be retained by the Bank. Concurrent with the Reorganization, the Company will sell a 20 percent minority ownership interest to the public while the MHC will retain the 80 percent majority ownership. Immediately after consummation of the Reorganization, it is not anticipated that the Company will engage in any business activity other than ownership of the Bank and CIC. The assets and liabilities of the Company will be substantially equivalent to those of CharterBank prior to the Reorganization, except for the $100,000 of cash and the 400,000 shares of Freddie Mac stock that will be placed at the MHC and will thus be excluded from consideration in the conclusions of the Appraisal. --------------------------------------------------- First Charter Mutual Holding Company --------------------------------------------------- Following the Reorganization, the MHC's capitalization apart from wholy-owned subsidiaries will consist of approximately $100,000 of cash and 400,000 shares of Freddie Mac Stock. --------------------------------------------------- --------------------------------------------------- First Charter Corporation (Mid-Tier) --------------------------------------------------- Following the Reorganization, the mid-tier's capitalization will consist of 1,700,000 shares of Freddie Mac Stock, the investment in subsidiary, and 50% of the net conversion proceeds, net of the loan to the ESOP. --------------------------------------------------- - -------------------------------------- ----------------------------------- CharterBank Charter Insurance Company (Stock Bank) - -------------------------------------- ----------------------------------- Retains 2,555,000 shares of Freddie First Charter capitalizes CIC with Mac stock and all of the other assets 400,000 shares of Freddie Mac stock and liabilities of the Bank. and $450,000 of cash. CharterBank also receives 50% of the net conversion proceeds. - -------------------------------------- ----------------------------------- RP Financial, LC. Page 1.4 Strategic Overview - ------------------ CharterBank is a community-oriented financial institution, with the primary focus on meeting the borrowing needs of its local retail and commercial customers in the markets served by its branches and other nearby areas. Over much of its existence, CharterBank pursued a traditional thrift operating strategy, with 1-4 family loans and retail deposits making up the majority of the balance sheet. Beginning in the late 1980s, however, CharterBank began to pursue alternative strategies that impacted the current size and composition of the balance sheet. Freddie Mac Stock. The economy in CharterBank's market area has ----------------- historically been tied to the fortunes of the textile industry. As a result, the local economy has suffered a period of sustained weakness. Combined with the increasingly competitive nature of the Bank's core residential lending business, the weakness in the local market prompted management in the late 1980s to perceive Freddie Mac stock as an attractive investment in comparison to both Freddie Mac's long term fundamental value and other investment alternatives in the core banking business. As a result, CharterBank made a substantial investment in Freddie Mac stock, a significant portion of which it continues to retain. As a result of strong fundamental growth at Freddie Mac, the Bank's Freddie Mac stock investment has appreciated in value significantly. The Bank has supplemented its capital with past sales of Freddie Mac stock and the remaining unrealized gain continues to constitute the majority of the Bank's current GAAP equity (the Freddie Mac stock is classified as available for sale and recorded on the books at its after tax market value). As of December 31, 2000, CharterBank owned 5,055,000 shares of Freddie Mac stock with a market value of $348.2, which reflects a net unrealized gain of $216.5 million after accounting for the $131.7 million related deferred tax liability. The appreciation in Freddie Mac stock has been the primary source of growth in the Bank's capital. Balance Sheet Leverage. In response to the growth in equity resulting from ---------------------- the Freddie Mac appreciation, between 1996 and 1999, CharterBank pursued a strategy of aggressively leveraging its balance sheet with borrowings and wholesale deposits, with those funds invested into loans receivable and investment securities. The purpose of this strategy has been to supplement the growth provided by retail operations to generate net interest income from the yield-cost spread realized on the new assets and liabilities. As a result of this strategy, the balance sheet grew from $352 million in 1996 to $905 million in 1999, with the majority of that RP Financial, LC. Page 1.5 growth supported by an increase in wholesale deposits and borrowed funds. (Note: growth achieved after 1999 was primarily the result of appreciation in Freddie Mac stock and not wholesale leverage.) Core Banking Operations. Notwithstanding the strategies above, the ----------------------- operating earnings generated by CharterBank's core retail banking operations have been lackluster owing in part, to the continuing weak economic and demographic growth characteristics of CharterBank's traditional markets in the Valley area and due to the limited profit potential of CharterBank's traditional thrift product offerings and customer base. In response to the foregoing, management developed and implemented a strategic plan to reorient the Bank's strategy from that of a traditional thrift to a profit-oriented community bank. In this regard, CharterBank has been redirecting its resources towards those products and customers which management has determined provide the Bank with the greatest profit potential. In order to further enhance its objectives, CharterBank has been refining its management information systems to gather information relating to customer and product profitability over the last several years to enhance the ability to assess the profitability of products and product bundles, as well as information pertaining to the Bank's cost structure. The core banking strategy includes a three pronged lending strategy including (a) residential lending including the sale of long term fixed rate loans to generate fee income, (b) commercial lending including multi-family and commercial business lending, and (c) consumer lending including home equity and home improvement loans, manufactured housing loans, auto loans and other. The core banking strategy also includes a focus on retail deposit funding including higher balance and/or low-cost transaction accounts that management anticipates will reduce CharterBank's funding and/or operating costs while stabilizing overall funding operations. CharterBank's core business operations also include an effort to improve service and increase efficiency in the core banking operations. Although the unrealized gain in Freddie Mac stock has tended to distort the Bank's operating ratios, management believes the allocation of Freddie Mac stock to other entities within the organization and the stock form of ownership will increase accountability at the Bank - in the process improving service levels. Citizens Acquisition. Introduction of the new products and services have -------------------- led management to seek to expand externally in order to expand the Bank on a retail basis. In this RP Financial, LC. Page 1.6 regard, the Bank acquired Citizens BancGroup, Inc. ("Citizens"), Valley Alabama in 1999, in an all cash acquisition which added approximately $45 million and $42 million of assets and deposits, respectively, to the Bank's balance sheet and three offices in Valley and one office in Lannett (one office has subsequently been closed). The goodwill created in the acquisition of Citizen was subsequently written off in the quarter ended September 30, 2000. Business Plan - ------------- The Bank's business plan for the future includes several new strategies designed to restore the historical community banking orientation of CharterBank, including significant reduction at the Bank level of holding Freddie Mac common stock; diversifying revenue streams consistent with a community banking strategy; and expanding retail operations both internally and externally within its primary market area. Management believes that the mutual holding company reorganization and issuance of a minority ownership position in the Company will increase the balances of capital, regulatory capital, and liquid assets to facilitate CharterBank's achievement of its business plan goals and objectives. The Bank has developed a strategy for expanding retail operations in western Georgia and eastern Alabama markets. The new core capital raised in the Reorganization will facilitate the Bank's desired expansion, both internally and externally. Externally, management will be seeking to expand by acquisition with an emphasis on institutions within the market targeted for internal expansion but it may seek to acquire institutions in contiguous or nearby markets in Alabama and Georgia if there are compelling financial and other benefits. Internally, the Bank will be seeking to expand primarily in three ways. 1. Expanded Market Coverage Through Branching ------------------------------------------ CharterBank will be seeking to expand aggressively within its targeted markets within the I-85 corridor consisting largely of the triangular area with LaGrange, Georgia forming the northeastern point, running down the I-85 corridor through the West Point market to Auburn, Alabama, over to the north Columbus market which forms the southern point of the triangular area, with the triangular area closed by an area running northward up the I-185 corridor to LaGrange. CharterBank also may expand northward to Newnan, possibly by converting its LPO to a full-service banking facility or through other growth alternatives. A map of CharterBank's RP Financial, LC. Page 1.7 targeted market including the location of current and anticipated branch offices has been included as Exhibit I-2. The Bank will be seeking to expand its market coverage given the limited growth prevailing in its traditional markets in the West Point, Valley, and Lanett areas and due to the more favorable economic and demographic characteristics prevailing in nearby areas. In this regard, CharterBank will be seeking to employ a portion of the conversion proceeds through the establishment of up to five branch offices over the next three to four years. Additionally, CharterBank will be substantially enhancing the LaGrange office with upgraded management and staffing with the objective of enhancing its ability to service the LaGrange market. Overall, management's strategy is to employ a hub and spoke branch system by placing a substantial facility in a prime location in a targeted market and then filling in the surrounding area with up to two or three smaller and lower cost branch offices. The first step in the implementation of this branching strategy has commenced with the construction of the Auburn, Alabama office which is expected to be completed in the fall of 2001 at a total cost of approximately $2.5 million. The Bank expects to enter the Harris County/North Columbus market by the end of calendar 2001 and will establish up to 3 new satellite offices within the three year period following the mutual holding company reorganization. Overall, total capital expenditures for branching are estimated to approximate $2.3 million over the next three to four years. 2. Expand Delivery Channels. ------------------------- CharterBank plans to increase delivery channels through the addition of branches to improve market coverage, customer service and convenience, as well as through adding alternative delivery mechanisms including ATM's and the Internet. The expansion of delivery channels through branching has been discussed above. CharterBank will seek to support its retail branch network through the expanded use of ATM's which have only been used by the Bank since the acquisition of Citizens and by the development of an Internet banking capability. CharterBank is making preliminary plans to develop a transaction Internet web site and the Bank will be spending approximately $100,000 to $150,000 in this regard with the web site to be up and running by early 2002. The Bank has reserved the "CharterBank.net" domain name for the purpose of conducting future business on the Internet. Additionally, up to 10 additional ATM's RP Financial, LC. Page 1.8 will be placed at strategic locations within the primary market at an estimated initial cost of $50,000 each and an annual operating cost of $10,000 per ATM. 3. Product Diversification. ------------------------ CharterBank will seek on-going diversification of the loan portfolio including modest expansion of commercial lending and products such as home equity loans and lines of credit demanded by the Bank's upscale and credit driven targeted customer groups. Cash and capital resources raised in the conversion and minority stock offering will be utilized to support targeted product expansion. Balance Sheet Trends - -------------------- Growth Trends. Table 1.1 shows selected financial data for the Bank from ------------- September 30, 1996 to December 31, 2000 as reported on the financial statements. The "Adjusted as of December 31, 2000" columns reflect the impact of the MHC formation and, it is the adjusted assets and capital figures that will be considered in the pro forma valuation analysis. During the period shown, CharterBank's assets increased at a 28.16 percent compounded annual rate, with wholesale investment and funding (i.e., brokered and credit union deposits as well as borrowings) accounting for the majority of the balance sheet growth although retail deposits have also expanded, particularly following the acquisition of Citizens in 1999. Overall, the rate of growth of investment securities outpaced the growth rate of loans (36.62 percent for investment securities versus 25.09 percent for loans receivable), which is reflective of management's efforts to undertake wholesale leverage with the objective of bolstering net income. CharterBank's audited financial statements are incorporated by reference as Exhibit I-1 and historical key operating ratios are presented in Exhibit I-4. While loans receivable have increased more slowly than investment securities, they nonetheless reflect brisk expansion in terms of the annual percentage growth rate, with a significant portion of the growth (approximately $27 million) resulting from the acquisition of Citizens in 1999. Additionally, the Bank has realized loan growth from expanded marketing efforts through the expanded array of products as well as a more competitive rate structure. RP Financial, LC. Page 1.9 RP Financial, LC. Page 1.10 The Company's assets are funded with a combination of deposits, borrowings and retained earnings. As previously referenced, the retail portion of CharterBank's funding mixture has been limited and the majority of funding liabilities are comprised of CDs issued through brokers or to credit unions or are comprised of borrowed funds (primarily FHLB advances and reverse repurchase agreements). Retail deposits expanded significantly in fiscal 1999, primarily as a result of the acquisition of Citizens. The ability of CharterBank to generate retail deposit funds has been somewhat limited by the constraints imposed by the relatively small size and limited growth characteristics of its market. Since expansion of the retail portion of CharterBank's operation is a key aspect of the business plan, management intends to aggressively pursue branching in areas within the targeted market area to provide retail exposure for CharterBank in larger more favorable markets. The growth of wholesale deposits and borrowed funds has largely been predicated on the magnitude and scope of CharterBank's leveraging activities. As was previously discussed, management has been seeking to supplement the modest level of earnings generated through retail operations by investing in various types of investment and mortgage securities funded through wholesale deposits and borrowings. Equity has increased at a relatively rapid 24.26 percent annual growth rate since the end of fiscal 1996. In this regard, the expansion of equity primarily reflects the strong price appreciation of Freddie Mac stock over this time frame, which has been realized into capital through the sale of 570,000 shares in fiscal 1999 for an approximate $34.5 million gain, as well as through growth in the unrealized gain on the Bank's Freddie Mac stock, all of which is classified as available for sale ("AFS"). Capital growth is primarily attributable to capital appreciation in CharterBank's substantial investment in Freddie Mac stock. The fluctuation in the Bank's equity-to-assets ratio (between 21 and 29 percent of assets) is attributable to changes in the market value of Freddie Mac stock and changes in the size of the balance sheet pursuant to the Bank's wholesale leveraging. While the Bank's GAAP capital was 25.49 percent at December 31, 2000, the Bank's regulation capital was considerably lower because the unrealized gain in Freddie Mac stock does not qualify as regulatory capital. Accordingly, while CharterBank is a well-capitalized institution pursuant to the regulatory definition, its regulatory capital base is substantially smaller than the GAAP equity level. RP Financial, LC. Page 1.11 Loans Receivable. Loans receivable totaled $254.1 million, or 25.1 percent ---------------- of total assets, as of December 31, 2000. The relatively low ratio of loans reflects the Bank's efforts to leverage capital and enhance earnings in the face of its limited ability to expand on a retail basis through its current retail branch structure. Over the past several years, management has gradually sought to reorient the structure of the loan portfolio structure to be consistent with its objective of focusing on those products, services and customer relationships which it believes are most profitable over the long term. In this regard, the focus of CharterBank's efforts has been to build its position in relatively less competitive markets. Within this context, CharterBank offers a broad array of loan products with a variety of rates and terms. CharterBank's lending operations consist of three major segments as follows: (1) residential mortgage lending for portfolio; (2) commercial and multi-family mortgage lending; and (3) consumer lending. Additionally, long term conforming fixed rate loans are originated for resale into the secondary market. Currently, 1-4 family mortgage loans comprise the largest segment of the loan portfolio, equal to 61.0 percent of total loans, which reflects a decline from 78.0 percent of loans as of the end of fiscal 1996. The diversification of the loan portfolio to include 100 percent risk-weighted assets is evidenced by loan portfolio data, which indicates that commercial real estate loans equaled more than 20 percent of total loans while consumer loans approximated 11 percent of total loans. Importantly, the majority of the consumer loan portfolio is comprised of second mortgage loans and home equity lines of credit. Commercial business and construction loans also represents a minor but growing segment of the loan portfolio. Investments and Mortgage-Backed Securities. The intent of the Bank's ------------------------------------------ investment policy is to provide adequate liquidity, to generate a favorable return on excess investable funds and to support the Bank's return on equity. Over the last five fiscal years, the investment portfolio has realized significant growth, increasing from $102.1 as of the end of fiscal 1996 to $384.5 million as of December 31, 2000 (see Exhibit I-5 for the investment portfolio composition). As discussed earlier, the substantial growth in the investment portfolio reflects CharterBank's efforts to leverage to increase earnings in the face of thin returns on the Bank's retail operations and limited ability to grow in the current markets. RP Financial, LC. Page 1.12 As of December 31, 2000, CharterBank's investment securities portfolio was comprised of three principal segments as follows: (1) investment securities primarily consisting of U.S. government and agency securities as well as stock in the FHLB of Atlanta totaling $27.5 million; (2) pass-through mortgage-backed securities ("MBS") issued by GNMA, FNMA and Freddie Mac totaling $147.3 million; and (3) collateralized mortgage obligations ("CMOs") issued by FNMA, Freddie Mac or other private issuers totaling $209.6 million. All of CharterBank's investments are classified as available for sale ("AFS"). The portfolio of MBS and CMOs includes securities with a wide variety of structures including variable rate and fixed rate securities, including many hybrid securities with balloon terms. The Bank anticipates initially reinvesting the net proceeds of the offering into investments with short to intermediate maturities, pending the longer-term deployment into other investments and loans as well as new fixed asset investments in conjunction with the planned retail expansion. CharterBank anticipates continuing to invest in similar types of investment securities as are currently held. Freddie Mac Stock. As of December 31, 2000, CharterBank's Freddie Mac ----------------- stock investment was comprised of ownership of 5,055,000 shares of Freddie Mac common stock with a market value of approximately $348.2 million ($68.875 per share) and a cost basis of approximately $1.40 per share. The large unrealized pre-tax gain of approximately $341 million is the result of a series of well- timed investments in Freddie Mac stock in the middle to late 1980's, the substantial portion of which it continues to hold to this day. As a result of strong fundamental growth at Freddie Mac as well as a favorable stock market environment, the Bank's Freddie Mac stock investment has appreciated significantly, and the unrealized gain constitutes the largest segment of the Bank's GAAP equity position. Notwithstanding the long term price appreciation, the Freddie Mac stock is a common equity investment whose value can fluctuate significantly. Over the 52 week period ending December 31, 2000, the Freddie Mac stock experienced a range of closing prices from $36.88 to $70.13 per share. This level of volatility in the trading price of Freddie Mac stock introduces a comparable level of volatility into the Bank's equity capital, as the Bank's equity will fluctuate with changes in the market value of the Freddie Mac stock. As discussed previously, while the gain in Freddie Mac stock has substantially bolstered the Bank's capital and earnings, the Bank is proposing to reorganize in a mutual RP Financial, LC. Page 1.13 holding company structure and will retain a portion of the stock at the MHC and mid-tier level so as to more efficiently manage its Freddie Mac stock investment as well as the Bank's retail operations. The appraisal will take into account the amount of Freddie Mac stock placed at the MHC level. Management has in the past, and will continue in the future, to continually evaluate the merits of the investment in the Freddie Mac stock. Management proposes to retain 2,555,000 shares of Freddie Mac stock at the Bank level in the MHC Reorganization. Based on current market conditions, tax consideration, etc., there are no plans to sell the Bank's Freddie Mac stock holdings at this time. As indicated in the Bank's Prospectus, the policy of holding Freddie Mac stock is based partially on concerns that any sales out of the portfolio (for capital management or other purposes) could taint the Freddie Mac stock as a trading portfolio for tax purposes, potentially triggering the payment of the full deferred tax liability related to the Freddie Mac gains. This factor, along with other considerations, has caused the Bank to adopt the current policy of retaining the Freddie Mac stock for investment. Since the Freddie Mac stock is not included in Tier I capital for regulatory purposes, the decision to hold the Freddie Mac stock as an investment would preclude using the unrealized gains to fund dividends. Goodwill. Effective August 18, 1999, CharterBank acquired all the shares -------- of Citizens for a purchase price of approximately $2.25 million in cash. The acquisition was accounted for as a purchase and resulted in the creation of $4.6 million of goodwill. The goodwill was initially amortized over five years on a straight-line basis. CharterBank examines the carrying amount of its intangible assets to determine whether there are any impairment losses. The analysis for the fiscal year ended September 30, 2000, indicated that undiscounted future cash flows associated with the Citizens acquisition would be negative and therefore insufficient to recover the carrying amount of the related intangible assets primarily due to chargeoffs of loans. Accordingly, CharterBank recorded an impairment loss of $3.6 million in addition to scheduled amortization of $930,000 for the year ended September 30, 2000. The Bank's goodwill was thereby reduced to a zero balance, and all of the Bank's capital consisted of tangible capital as of December 31, 2000. RP Financial, LC. Page 1.14 Funding Structure. As of December 31, 2000, CharterBank funded operations ----------------- with a combination of retail and wholesale deposits (i.e., brokered deposits and credit union CDs) as well as borrowings. In this regard, the majority of CharterBank's funding liabilities are wholesale in nature reflecting the limited ability to generate retail deposit funds in the Bank's western Georgia and eastern Alabama markets as well as efforts to leverage equity to enhance overall earnings levels. As shown in Table 1.1, the Bank's deposit portfolio is comprised of both a retail and wholesale segment with retail deposits totaling approximately $141.4 million as of December 31, 2000, and wholesale deposits, consisting of brokered CDs and funds on deposit from credit unions, equaling approximately $69.9 million or 33.1 percent of total deposits. Overall, deposits totaled $211.3 million, equal to 20.9 percent of assets as of December 31, 2000. At that same date, the Bank's borrowed funds, comprised of Federal Home Loan Bank advances and reverse repurchase agreements, totaled $398.5 million, equal to 39.4 percent of assets. The level of borrowings and wholesale deposits have fluctuated in recent periods based on a number of factors including the ability to generate funds through the retail operations and the relative all inclusive costs of deposits or borrowings at the time the funds are needed. Additionally, it has been CharterBank's practice to utilize wholesale funding when such funds may be reinvested into investment securities at an adequate risk-adjusted spread as determined by management. Important from the perspective of the valuation, wholesale deposits and borrowings represent a volatile funding element whose cost can vary considerably based on prevailing market conditions. Additionally, most of the wholesale funds in CharterBank's portfolio are short term in nature, thus requiring the Bank to continually access the capital markets to replace maturing funds. Other Liabilities. Other liabilities consist of deferred income taxes, ----------------- escrows, accrued interest payable and other miscellaneous liabilities. Deferred income taxes are the largest component of other liabilities and totaled $134.4 million, equal to 13.3 percent of assets as of December 31, 2000. The deferred income tax account primarily reflects estimated taxes payable on unrealized gains on AFS securities, with taxes deferred on unrealized gains on Freddie Mac stock comprising most of the deferred tax balance. RP Financial, LC. Page 1.15 Capital. The Bank's GAAP capital has increased substantially over the last ------- five fiscal years, primarily reflecting strong price appreciation in CharterBank's Freddie Mac stock holdings - realized both through the sale of 570,000 shares in fiscal 1999, as well as through unrealized gains from unsold shares recorded on the financial statements at their fair market value. By comparison, the earnings and capital growth generated through the Bank's retail banking operations as well as its wholesale leveraging activities have been comparatively modest. As of December 31, 2000, CharterBank's capital equaled $257.5 million equal to 25.49 percent of total assets. Retained earnings equaled $52.9 million at that same date while accumulated comprehensive income was in excess of $200 million, which provides an indication of the impact that the Freddie Mac stock investment has had on CharterBank's capital level. Importantly, while the net unrealized gains on investments including Freddie Mac stock are included as capital pursuant to generally accepted accounting principles ("GAAP"), it is not an element of core capital in the calculation of the Bank's compliance with its minimum regulatory capital requirements. Thus, while CharterBank possesses a strong capital ratio, its core capital level is much lower. One factor leading the Bank to restructure into the mutual holding company form of ownership is the ability to raise outside core capital without selling Freddie Mac stock. In this regard, it is management's stated intention to hold the Freddie Mac stock for the long-term, so as to continue to benefit from the growth of Freddie Mac's core business and to continue to defer the payment of income taxes as long as possible. Income and Expense Trends - ------------------------- Table 1.2 shows the Bank's historical income statements for the fiscal years from 1996 through fiscal 2000 and for the most recent twelve months ended December 31, 2000. The "As Adjusted" columns reflect the impact of the MHC formation, and it is the adjusted earnings figures from this column that will form the basis for the pro forma valuation analysis. The data reflects the following significant features of CharterBank's operations: (1) the impact of the wholesale investment and funding on the Bank's operating ratios (i.e., spreads and margins are thin and the ratio of other income and expenses are low reflecting the limited level of fees and expenses generated through wholesale operations); (2) the returns on the Bank's retail operations are low as a result of the relatively high overhead costs attributable to the retail banking RP Financial, LC. Page 1.16 RP Financial, LC. Page 1.17 operations; and (3) CharterBank's Freddie Mac stock investment provides the Bank with the opportunity to generate equity growth through capital appreciation in the Freddie Mac stock but revenue flowing through the income statement is limited to common stock dividends which are relatively modest (i.e., Freddie Mac's cash return is modest). Overall, net income ranged from a high of $27.0 million, equal to 3.39 percent of average assets for the fiscal year ended September 30, 1999 to a low of $475,000 for fiscal 1998. For the twelve months ended December 31, 2000, earnings totaled $749,000, equal to 0.08 percent of average assets. The modest level of reported earnings for the most recent twelve month period is attributable to the modest level of core earnings and the impact of the non-recurring expense of the writeoff and amortization of goodwill, which totaled $4.5 million. Net Interest Income. The level of net interest income reported by ------------------- CharterBank reflects growth over the last five fiscal years, from a level of $6.4 million reported in fiscal 1996 to $16.9 million reported for the twelve months ended December 31, 2000. Because interest rate spreads have not increased significantly, growth in net interest income over the period shown in Table 1.2 is primarily related to increases in the balances of interest-earning assets and interest-bearing liabilities. Dividend income realized by the Bank has been supported by increases in Freddie Mac's cash dividend on a per share basis. For the 12 months ended December 31, 2000, dividend income on Freddie Mac stock totaled $3.4 million, equal to 0.37 percent of average assets. Freddie Mac's current dividend is $0.68 per share on an annual basis. While the overall balance of net interest income has expanded, CharterBank's spreads and margins are very thin, primarily owing to the high balance of wholesale investments and funding liabilities, which have been acquired at very narrow spreads. The ratio of net interest income to average assets equaled 2.05 percent in fiscal 1996 and 1997 and declined to 1.64 percent in fiscal 1998, which management attributes to declining spreads and margins as well as expanded leveraging activities. Subsequently, the ratio of net interest income has increased modestly and equaled 1.80 percent of average assets for the twelve months ended December 31, 2000. The Company's yields, costs and resulting spreads generally reflect the same trends (see Exhibit I-6 for details) as interest rate spreads decreased from 2.30 percent in fiscal 1997, to 1.87 percent in fiscal 1998, while subsequently increasing through the fiscal year ended September 30, 2000 to equal 1.96 percent. RP Financial, LC. Page 1.18 Loan Loss Provisions. Provisions for loan losses have historically been -------------------- modest and were $300,000 or less for the four fiscal years leading up through fiscal 1999. Factors supporting CharterBank's asset quality over this time period included the high level of highly rated investment securities which carry limited credit risk, and the Bank's focus on relatively low risk residential lending. Provisions increased to $1.4 million, or 0.15 percent of average assets, in fiscal 2000 and equaled $1.5 million, or 0.16 percent of average assets, for the twelve months ended December 31, 2000. The higher loan loss provision in fiscal 2000 reflects a $1 million special provision recorded to reflect deterioration of the loans acquired in the Citizens transaction in fiscal 1999, particularly in the consumer and auto loan portfolios acquired with Citizens. In this regard, the Bank has realized a high level of non-performing loans and loan charge-offs with regard to these acquired loans. Additionally, the Bank has become more aggressive with regard to originating higher risk commercial mortgage and other high risk-weight loans reflecting the Bank's efforts to fill in the void left by acquisitions of competing commercial banks. Going forward, CharterBank intends to continue to evaluate the adequacy of the level of general valuation allowances ("GVAs") on a regular basis, and will establish additional loan loss provisions in accordance with the Company's asset classification and loss reserve policies. Non-Interest Income. Non-interest income is a limited contributor to ------------------- overall earnings and fluctuated in a range of $0.6 million and $0.9 million between fiscal 1996 and fiscal 1999. Non-interest income increased in fiscal 2000, to total $1.4 million or 0.14 percent of average assets which was relatively consistent with the level of $1.3 million, equal to 0.14 percent of average assets reported for the twelve months ended December 31, 2000. Non- interest income consists of service fee income on deposits and loans as well as various other miscellaneous sources of income. The increase in the level of non-interest income generated by the Bank between fiscal 1999 and fiscal 2000 is largely the result of the Citizen acquisition which added fee generating transaction accounts and customer relationships. Additionally, the Bank's expanded emphasis on growing commercial and consumer accounts has been a limited factor in the growth of non-interest revenues. While non-interest income reflects growth, non-interest revenue as a percent of average assets remains at low levels given the low proportion of retail assets on the Bank's balance sheet (i.e., wholesale investments do not represent fee generating RP Financial, LC. Page 1.19 customer relationships). Going forward, the Bank anticipates that non-interest income will continue to be generated from similar sources. The Bank's objective is to increase such income through anticipated growth in commercial accounts and its focus on profitable and fee generating customer relationships. Operating Expenses. CharterBank's operating expenses have increased in ------------------ recent years due to the growth in the level of retail assets, with the most significant addition consisting of the 1999 acquisition of Citizens. Additionally, CharterBank's overhead and administrative costs have increased as the Bank has increased staffing to support expansion of its commercial real estate lending and continued implementation of its community bank operating strategy. As a result of the foregoing, the Bank's operating expenses have increased from $6.6 million, equal to 1.12 percent of assets in fiscal 1998 to $8.6 million (1.07 percent of average assets) in fiscal 1999 and $11.4 million in fiscal 2000 (1.25 percent of average assets). For the twelve months ended December 31, 2000, CharterBank's operating expense equaled $11.0 million, equal to 1.17 percent of average assets. While CharterBank maintains a very low operating expense ratio in comparison to industry averages, the operating expense ratio is distorted somewhat by the large amount of assets and liabilities requiring little or no expense to manage. Such assets, including Freddie Mac stock and wholesale investments, comprised more than 70 percent of the balance sheet as of December 31, 2000 and the related cost to manage assets was comparatively modest in relation to managing the Bank's retail and other functions. Thus, excluding such assets, the Bank's cost structure is actually relatively high and is an important cause of the moderate operating returns posted by the Bank. Operating expenses are expected to increase following the conversion as a result of the expense of the stock-related benefit plans, the cost related to operating as a public company and as a result of long-term plans to continue to expand the branch network. With regard to the latter factor, the Bank has tentative plans to substantially enhance the LaGrange office and open a new office in Auburn, Alabama in fiscal 2001. Longer term, CharterBank plans to open additional offices in other nearby areas in its targeted market, potentially resulting in the addition of four to five new offices over the next three to four years. Based on CharterBank's business plan estimates, the incremental expenses related to branching and opening new ATMs is expected to approximate $270,000 in fiscal 2001 and estimated to increase to $1.9 million RP Financial, LC. Page 1.20 annually by fiscal 2003. While such figures are preliminary estimates, they provide an indication of the Bank's intent to expand and to incur short-term costs with the objective of enhancing long-term earnings growth. Non-Operating Income and Expense. Non-operating income and expense items -------------------------------- have been a significant factor in the Bank's operations. In fiscal 1998 and the twelve months ended December 31, 2000, gains on the sale of loans contributed modestly to the operating results. In this regard, gains on the sale of loans have been the most significant contributor to the Bank's non-operating revenues reflecting the regular impact of secondary market loans sales. Other significant non-operating items include losses on partnership investments in fiscal 1998 ($5.8 million), gains on the sale of investment securities in fiscal 1999 ($36.3 million) and contributions to the CharterBank Foundation ($2.2 million each in fiscal 1997 and fiscal 1999). Additionally, the Bank reported a non-recurring expense related to the amortization and write-off of the entire remaining balance of goodwill totaling $4.5 million in fiscal 2000. Because the goodwill has been written off, the Bank will incur no future expense related to goodwill. The most significant non-operating item over the last five fiscal years was the $36.3 million gain on the sale of investments recorded in fiscal 1999, which principally consisted of gains realized on the sale of 570,000 shares of Freddie Mac stock. The Bank sold the stock to generate additional regulatory capital as well as to facilitate ongoing funding of the CharterBank Foundation. Importantly, the Bank has received the advice of independent accountants that additional sales of Freddie Mac stock could potentially taint the portfolio as a trading portfolio for tax purposes, which would result in all the deferred taxes on the unrealized gains on Freddie Mac stock becoming due and payable, regardless of whether the stock is sold. Accordingly, management is being cautious in its management of its Freddie Mac stock holdings and, based on current market conditions and its perceived outlook for Freddie Mac stock, expects to hold the Freddie Mac stock for long-term investment purposes with the primary objective of realizing capital appreciation. Taxes. The Bank's tax rate has fluctuated in a very wide range and ----- CharterBank's income tax liability for financial reporting purposes was very high for the most recent reporting period, equal to 60.8 percent for the twelve months ended December 31, 2000. Factors RP Financial, LC. Page 1.21 impacting the Bank's tax liability include the 70 percent dividend exclusion for Freddie Mac stock dividend income as well as other income items that are not subject to taxation. CharterBank is subject to a 34 percent federal income tax rate (35 percent when income exceeds $10 million) and a six percent state income tax rate. The Bank's taxes have also been impacted by charitable contributions, which are subject to limitations in the tax code. As of December 31, 2000, CharterBank had net operating loss carryforwards of approximately $2.4 million which begin to expire in 2018. There was a valuation allowance of $940,000 at December 31, 2000, which relates to a portion of the charitable contributions as well as net operating loss and business credit carryforwards. At that date, there was a charitable contribution carryforward, which expires commencing in 2002 (the Bank's ability to utilize the carryforward is primarily based on the future level of net taxable income). Efficiency Ratio. The Bank's efficiency ratio has fluctuated over the last ---------------- five fiscal years, but increased in the most recent fiscal year primarily as a result of the increase in operating expenses. Specifically, the efficiency ratio equaled 58.94 percent in fiscal 1998, and increased to 60.49 percent for the twelve months ended December 31, 2000. On a post-offering basis, the efficiency ratio may show some improvement as the net interest ratio increases with the reinvestment of proceeds, although the increased operating expenses (reflecting the public company and stock plans expense as well as other anticipated expenses for infrastructure and branches) may limit the improvement. Interest Rate Risk Management - ----------------------------- CharterBank's interest rate risk management strategy has been developed to seek a balance between minimizing risk while maintaining profitability levels. A dynamic rate shock analysis (see Exhibit I-7) reflects a liability sensitive position for CharterBank with the net portfolio value ("NPV") as a percent of the present value of assets declining by 14.8 percent pursuant to a positive 200 basis point instantaneous and permanent rate shock and by 22.4 percent pursuant to a 300 basis point rate shock. Management has indicated that it is willing to accept a higher level of interest rate risk than the average institution, primarily as a result of its strong GAAP equity position. Thus, even though the Bank's NPV is projected to decline by 24.8 RP Financial, LC. Page 1.22 percent pursuant to a 300 basis point rate shock, CharterBank's projected capital position would remain strong approximating 20 percent of assets. The Bank's interest rate risk exposure as indicated through the NPV analysis is the result of the retention of fixed rate loans and hybrid ARMs in portfolio and the comparatively short average maturity of the Bank's funding structure. Furthermore, CharterBank's funding structure is heavily weighted towards short term interest sensitive wholesale CDs and borrowings pursuant to the leverage strategy. The Bank's leveraging strategy reflects a maturity mismatch in order to enhance the long-term profitability of such strategy, albeit at the risk of earnings impairment in the event of a sustained increase in short term funding costs. While the Bank's strong capital position serves as a buffer for interest rate risk, the moderate earnings levels currently reported would be substantially eroded in the event of a sustained increase in interest rates. Given the importance that many investors place on earnings in evaluating thrift stocks, CharterBank's interest rate risk exposure and the volatility of its earnings in response to changing interest rates will be an important consideration in the valuation. Lending Activities and Strategy - ------------------------------- Consistent with its community bank operating strategy, CharterBank has implemented a three-prong portfolio lending strategy focused on: (1) residential mortgage lending; (2) commercial lending, including commercial and multi-family mortgage lending, as well as commercial non-mortgage lending; and (3) consumer lending, including home equity and home improvement loans, manufactured home loans, installment loans secured by autos and various other collateral. Additionally, CharterBank has been originating long-term fixed rate conforming residential mortgage loans for resale into the secondary market, with the objective of enhancing fee income and overall revenues. Retail lending operations (i.e., portfolio lending operations) have focused on higher yielding non-conforming residential loans as well as commercial and multi-family mortgage loans. The Bank has pursued loan diversification with the objective of enhancing yields and overall earnings levels while increasing the interest sensitivity of assets. The Bank's lending strategy is evidenced in financial data reflecting the loan portfolio and lending activity set forth in Exhibits I- 8 through I-11. RP Financial, LC. Page 1.23 Although permanent residential mortgage loans represent a diminishing percentage of the loan portfolio, they continue to represent the single largest element of the loans overall totaling 61 percent of total loans, as of December 31, 2000. The remainder of the portfolio has been diversified to include commercial real estate loans equal to more than 22 percent of total loans and consumer loans equal to approximately 11 percent of total loans. The majority of the consumer loan portfolio is comprised of second mortgage loans and home equity lines of credit; and consumer installment loans including auto loans acquired in the Citizens acquisition are diminishing through repayments and the workout of problem loans. Residential Lending. As of December 31, 2000, residential mortgage loans ------------------- totaled $158.2 million, equal to 61 percent of total loans. CharterBank originates both fixed rate and adjustable rate one-to-four family loans with all conforming loans with maturities in excess of fifteen years originated for resale into the secondary market. As of December 31, 2000, approximately one- third of the portfolio was comprised of fixed rate mortgage loans and two-thirds was comprised of either adjustable rate loans or hybrid loans with fixed rates for the first three, five or seven years of the loans and adjustable thereafter. Higher yielding and/or shorter term non-conforming loans are originated for portfolio. The Bank has sought to differentiate itself in the area of non- conforming lending programs as the profitability of placing longer-term conforming mortgages in portfolio has diminished as the secondary mortgage market has continue to expand. Importantly, while the risks of non-conforming lending may be somewhat higher, CharterBank believes it is more than compensated for the risk in terms of the yield earned and the shorter repricing structure of the loans it originates and places into portfolio. Additionally, while CharterBank makes non-conforming loans, management has indicated that credit quality of the loan portfolio is largely unaffected (vis-a-vis a typical conforming portfolio) because the majority of non-conforming loans are considered non-conforming due to factors unrelated to credit quality (i.e., jumbo loans, high acreage or multiple structures, newly self employed, etc.). Such loans may also be non-conforming as a result of a credit record that reflects some blemish, but which CharterBank's management does not believe impairs the borrower's ability to repay the loan. On an exception basis, the Bank may originate non-conforming loans with FICO scores below 620 when there are other positive compensating factors weighing in favor of the credit decision. The lower quality non-conforming loans (i.e., RP Financial, LC. Page 1.24 loans not meeting the Bank's lending criteria) are originated through broker relationships. Importantly, because of the positive factors supporting the loan, management does not view such loans as subprime. CharterBank originates one-to- four family loans up to a loan-to-value ("LTV") ratio of 95.0 percent, with private mortgage insurance ("PMI") being required for loans in excess of an 85.0 percent LTV ratio. Substantially all the 1-4 family first mortgage loans are secured by residences in Georgia or Alabama. The Bank will occasionally purchase loans outside its market area when such loans meet its underwriting criteria and risk-adjusted return requirements. Commercial and Multi-Family Mortgage Lending. Commercial and multi-family -------------------------------------------- mortgage lending has become an increasingly important part of CharterBank's lending activities over the last five years. CharterBank has pursued income property lending because substantial residential mortgage lending competition has reduced the profitability of 1-4 family lending. Additionally, such loans typically carry superior yields and larger loan balances relative to residential mortgage loans. Recently, commercial and multi-family mortgage lending has become more attractive as CharterBank has sought to broaden the range of customer relationships. As a result, as of December 31, 2000, commercial mortgage loans (including a small balance of multi-family mortgage loans) have increased to $58.1 million, or 22.4 percent of the loan portfolio. Commercial and multi-family mortgage loans are generally made to Georgia or Alabama entities and are secured by properties in the same states. Commercial real estate/multi-family loans are generally extended up to a 75 percent LTV ratio and require a debt-coverage ratio of at least 1.2 times. Multi-family mortgage loans are originated for both new and existing properties and cover apartments for a wide range of tenant income levels. Commercial mortgage loans are typically secured by office buildings, strip shopping centers, land, or convenience stores within Georgia and Alabama. Commercial mortgage loans typically possess maturities of up to 20 years or, alternatively, balloon features after 10 years. The Bank will also make hybrid mortgage loans secured by commercial and multi-family properties that are fixed for the first 5 years of the loan and adjustable thereafter. Such loans are typically made with prepayment penalties that tend to lessen interest rate risk. CharterBank's commercial/nonresidential lending is virtually all real estate based. Underwriting criteria include RP Financial, LC. Page 1.25 loan-to-value, debt coverage, secondary source of repayment, guarantors, net worth of borrower and quality of cash flow stream. Consumer and Commercial Loans. CharterBank originates non-mortgage loans, ----------------------------- including commercial and consumer loans, which totaled $28.1 million (10.8 percent of total loans) and $8.4 million (3.2 percent of total loans) respectively, as of December 31, 2000. The majority of CharterBank's non- mortgage loans consist of consumer loans including loans on deposit, home improvement loans, home equity lines of credit, auto loans and various other installment loans. A portion of the Bank's consumer and commercial loans were acquired with Citizens in the latter half of 1999. The Bank actively promotes second mortgage loans and home equity lines of credit, but offers other types of consumer loans as an accommodation to customers. CharterBank's consumer lending generally follows accepted industry standards for non sub-prime lending including credit scores and debt to income ratios. Additionally, most consumer lending is home equity based with mortgage insurance if total loan to value exceeds 80 percent. Construction Lending. Construction lending has been a relatively minor -------------------- aspect of the overall lending operations and construction loans totaled $6.7 million, equal to 2.6 percent of total loans, as of December 31, 2000. Construction loans are most frequently originated for the purpose of constructing detached single-family houses, although CharterBank does make multi-family and commercial construction loans on a select basis. CharterBank offers two principal types of construction loans: builder loans including both speculative and pre-sold loans to pre-approved local builders and construction/permanent loans to property owners which are converted to permanent loans at the end of the construction phase. The number of spec loans extended to a builder at one time is dependent upon the financial strength and credit history of the builder. CharterBank's construction loan program is expected to remain a modest portion of the Bank's loan volume, but may increase over time with market expansion. Loan Activity. CharterBank's residential mortgage loan originations ------------- primarily come from existing and previous borrowers, Realtors, customer referrals, builders and walk-in customers. Origination of residential mortgage loans is further supported by advertising, direct mailings and community involvement by CharterBank employees. The ability of CharterBank to RP Financial, LC. Page 1.26 originate residential mortgage loans is substantially enhanced by the three LPOs it currently operates, as well through the stationing of three loan originators in the branches. One of the LPOs is a correspondent loan origination center that maintains relationships with approximately 30 to 40 loan correspondents active in the market. Additionally, CharterBank has been seeking to bolster non- residential mortgage loan originations through the employment of two business development officers since September 1999. In terms of generating commercial real estate and multi-family mortgage loans, the majority of the originations are derived through relationships of senior management and via a loan officer in the Newnan, Georgia LPO, who has been responsible for a material portion of the Bank's recent commercial mortgage loan volume. Exhibit I-11 shows the Bank's recent data regarding loan originations, repayments and sales. For the fiscal year ended September 30, 2000, permanent 1-4 family mortgage loan originations totaled $92.5 million, while commercial real estate loan originations equaled $55.4 million. The level of commercial loan originations has increased relative to the prior year totals reflecting the impact of the employment of additional commercial loan officers. Likewise, consumer lending also reflects growth reflecting the Bank's recent emphasis on home equity and second mortgage lending. Overall, loan originations totaled $125.1 million, $202.8 million, $171.2 million and $29.8 million in fiscal 1998, 1999, 2000 and the first three months of fiscal 2001, respectively. The fiscal 1999 loan originations were bolstered by $27.4 million of loans acquired with Citizens. Management is targeting to continue to expand loan volumes through targeted expansion of the retail branch network and employment of additional loan officers over the long term. Asset Quality - ------------- CharterBank's asset quality has historically been strong, reflecting the emphasis on local loan originations, strong underwriting, and large investment in mortgage-backed securities, CMOs and Freddie Mac stock that carry no credit risk. However, the level of non-performing assets has recently been subject to increase, primarily reflecting problem assets acquired with Citizens in fiscal 1999. Specifically, as reflected in Exhibit I-12, the balance of non-performing assets ("NPAs") has increased from $436,000, equal to 0.06 percent of total assets in fiscal 1998 to $3.4 million, equal to 0.34 percent of assets as of December 31, 2000. CharterBank's NPAs RP Financial, LC. Page 1.27 consisted of $2.9 million of non-accrual loans and $0.5 million of foreclosed assets as of December 31, 2000. The increase in NPAs and the impact of loan charge-offs (primarily related to acquired loans) coupled with growth of the loan portfolio including high risk weight loans has required the Bank to establish additional allowances for loan losses. Overall, allowances for loan and lease losses ("ALLLs"), as a percent of NPAs and total loans, equaled 159 percent and 2.10 percent, respectively, as of December 31, 2000 (see Exhibit I- 13). Funding Composition and Strategy - -------------------------------- As of December 31, 2000, the Bank's assets were funded primarily with deposits, and, to a lesser extent, borrowings and retained earnings (see Exhibits I-14 and I-15). While it is CharterBank's preference to fund operations with retail deposits, the small population base and limited growth characteristics of its markets have limited the ability to expand the retail deposit base. Accordingly, as management has sought to leverage equity to enhance earnings, the Bank has primarily relied on wholesale funds to fund the purchase of interest-earning investments. Wholesale funds have been primarily derived from four sources: (1) CDs issued to credit unions; (2) brokered deposits; (3) borrowings from the Federal Home Loan Bank of Atlanta; and (4) reverse repurchase agreements. Retail Deposits. Funding through local retail deposits has been limited as --------------- evidenced by the data set forth in Exhibit I-14. Overall, retail deposits totaled $141.4 million, equal to 67.0 percent of total deposits but only 14 percent of total assets. Retail deposits increased in fiscal 1999, primarily as a result of the deposits acquired through the Citizens transaction, to equal $153.7 million, but retail deposits have declined subsequently. The retail deposit base reflects a mixture of transaction, savings and CD accounts and the balance of checking and NOW accounts was bolstered with the Citizens acquisition. As of December 31, 2000, retail CD accounts equaled approximately 69.9 percent of total retail deposits while transaction and savings accounts comprised the balance of the deposit base. In general, the retail deposit rates currently offered by CharterBank tend to be in the middle of the competitive range of rates; however, until recently, the Bank has authorized its branch managers to negotiate rates to meet the level of the competition which has lent an upward bias to the retail deposit rate structure (management has indicated that approximately half of the customers with maturing certificates will negotiate a RP Financial, LC. Page 1.28 higher rate). Charter plans to start tiering certificate rates in an attempt to reduce the amount of negotiation and will also offer a tiered money market account to provide an incentive for customers to maintain higher balances, which tend to be more profitable accounts for CharterBank. Overall, the tiered deposit structure for retail accounts is expected to provide the most profitable customers with an incentive to consolidate their banking with CharterBank, consistent with the Bank's long-term business strategy. The impact that this alternative deposit pricing strategy may have on the Bank's cost of funds is uncertain however. In the future, the Bank will be seeking to build the balance of retail deposits, replacing wholesale funds when possible. The expanded retail presence realized through de novo branching, addition of ATMs and a presence on the Internet is expected to facilitate efforts in this regard. At the same time, retail growth expansion through these avenues is likely to be gradual and thus, the wholesale component of CharterBank's funding structure is expected to remain significant into the foreseeable future. Wholesale Funding. CharterBank relies on brokered and credit union CDs as ----------------- well as borrowed funds to fund the majority of its operations. The advantage of these funding sources primarily relates to the low administrative costs related to obtaining the deposit or borrowing and the ability to control the amount and maturity of the funds. These advantages are tempered by the relatively high interest costs of wholesale CDs and borrowings that fluctuate daily based on the prevailing market trends. As of December 31, 2000, wholesale certificates totaled $69.8 million while the balance of FHLB advances and reverse repurchase agreements totaled $240.5 million and $158.0 million, respectively. Management expects that wholesale funds will continue to be utilized and that the decision to utilize a particular instrument will be based on numerous factors including the estimated all-inclusive costs of such funds, collateral requirements and other similar considerations. Subsidiary Operations - --------------------- CharterBank currently has one first tier subsidiary, Charter Holdings, Inc., which is a corporation chartered in Georgia and incorporated in December 2000 to hold all of the outstanding stock of Charter Insurance Corporation, a Hawaii corporation incorporated in December 2000. CIC was formed to reinsure a portion of the Bank's loan originations that carry RP Financial, LC. Page 1.29 PMI issued by Mortgage Guaranty Insurance Company ("MGIC"), a market leader in the PMI business. In conjunction with the Reorganization, CIC, currently held in a subsidiary of the Bank, will become a direct subsidiary of the Company. The Bank's current investment in its insurance subsidiary is approximately $450,000. Legal Proceedings - ----------------- The only legal proceedings of which management is aware are routine matters that occur in the Bank's ordinary course of business. The Bank is not involved in litigation that is expected to have a material impact on the Bank's financial condition or operations. RP Financial, LC. Page 2.1 II. MARKET AREA ANALYSIS Introduction - ------------ CharterBank conducts operations in west-central Georgia and east-central Alabama through its main office in West Point, Georgia (Troup County), a branch office in LaGrange, Georgia (Troup County) and two branches in Valley, Alabama (Chambers County), for a total of four full service offices. The main office in West Point and the two Valley, Alabama offices serve the "Valley" area consisting of the towns of West Point in Georgia, and Lanett and Valley in Alabama. The LaGrange branch serves an adjacent community on I-85. CharterBank's strategy has been, and will continue to be, to expand its market north on the I- 85 corridor to LaGrange (and possibly the Newnan-Peachtree city area eventually), southwest to Auburn, Alabama, and southeast to north Columbus, Georgia and Harris County. In addition, CharterBank operates three LPOs including two offices in Georgia (Newnan and Columbus) and one office in Alabama (Auburn). The geographic expansion through the LPOs has benefited the Bank as the markets where CharterBank has historically operated branch offices are comparatively small, slow growth, rural markets whereas the LPOs are situated in nearby areas that are either larger and/or economically more vibrant. Additionally, the LPOs provide an excellent market entree with limited cost and, in fact, the Bank will be seeking to build upon the firm foundation provided by the Auburn LPO with the construction of a full-service facility targeted for opening by October 2001. The economies of the Bank's markets have historically been supported by the textile industry. Although manufacturing, primarily textiles, continues to employ more than 30 percent of the workers in the Bank's markets, government, services, and the retail trade sectors have expanded significantly over the last several decades. However, the economy of the Bank's traditional markets in West Point (Georgia), Lanett and Valley (Alabama) has not had the robust growth experienced regionally and nationally and, in fact, the market is in danger of losing the corporate headquarters of West Point Stevens which is the area's largest employer. In its business plan, CharterBank is seeking to address the economic risks and limited growth characteristics through expansion of its retail delivery systems into other nearby markets as described below. RP Financial, LC. Page 2.2 Strategic Expansion - ------------------- CharterBank has been hampered by the limited growth and relatively strong market share in the West Point, Lanett and Valley markets. However, more favorable growth characteristics and upscale and credit driven consumers (i.e., the customers targeted by the Bank) are present in other nearby markets. Coupled with the fact that CharterBank is the only locally-headquartered financial institution in the West Point/Lanett area, CharterBank will be seeking to expand on a retail basis aggressively within its targeted markets within the I-85 corridor consisting largely of the triangular area running from LaGrange, Georgia to Auburn, Alabama to the north Columbus area. Importantly, this area is consistent with the defined CRA assessment area for the Bank and such expansion is expected to facilitate CharterBank meeting its CRA goals. Over the longer term, CharterBank may expand its full service banking northward to Newnan, possibly by converting its LPO to a full-service banking facility. The Bank will be seeking to expand its market coverage given the limited growth prevailing in its traditional markets in the West Point and Lanett areas and due to the more favorable economic and demographic characteristics prevailing in nearby areas. In this regard, CharterBank will be seeking to employ the conversion proceeds through the establishment of up to five branch offices over the next three to four years. Additionally, CharterBank will be substantially enhancing the LaGrange office with upgraded management and staffing with the objective of enhancing its ability to service the LaGrange market for both loans and deposits. Overall, management's strategy is to employ a hub and spoke branch system placing a substantial facility in a prime location in a targeted market and then filling in the surrounding area with up to two or three smaller and lower cost facilities (i.e., staffing may be limited to two or three tellers operating from a small leased facility). The first step in the implementation of this branching strategy has commenced with the construction of the Auburn, Alabama office, anticipated to be completed in October 2001 at a total cost of approximately $2.5 million. The Bank expects to enter the Harris County/North Columbus market by the end of calendar 2001 and will establish up to 3 new satellite offices within the three year period following the mutual holding company reorganization. RP Financial, LC. Page 2.3 In addition to the foregoing, CharterBank will be substantially expanding its ability to reach its targeted customers through the use of automated teller machines ("ATM's"). In this regard, the Bank is planning to invest in the establishment of an additional 10 ATMs within its targeted market area over the three years following the mutual holding company reorganization. Future growth opportunities for CharterBank depend on future growth and stability of the regional economy (in particular the areas surrounding the Bank's current and planned office locations), demographic growth trends and the nature and intensity of the competitive environment. These factors are examined in summary form in the following pages to help determine the growth potential that exists for the Bank and the relative economic health of CharterBank's market area, particularly as they impact the Bank's pro forma valuation. Market Area Demographics - ------------------------ Table 2.1 includes detailed information regarding the demographic trends for the Bank's market area counties from 1990 to 1999 and projected through 2004. Data for the nation and the State of Georgia and Alabama is included for comparative purposes. The data reflects that the markets served by CharterBank's full-service retail branches are relatively small, with Troup and Chambers Counties possessing total populations equal to 61,000 and 37,000, respectively. Likewise, growth rates in these markets are limited as the overall population totals for Troup County (i.e., the West Point and LaGrange markets) increased at a 0.6 percent annually for the 1990 to 2000 period while the population of the Bank's Alabama markets in Chambers County actually shrank over the corresponding time frame. At the same time, the rationale for targeted expansion into larger more vibrant markets is clearly evidenced in the data as Lee County, Alabama (i.e., the Auburn market) population increased from 87,000 to 104,000 over the most recent decade which translated into a 1.8 percent annual growth rate, a rate of increase which is well above the state and national average. Likewise, Harris County, Georgia, where the Bank will be seeking to open a branch office early in 2002, achieved 2.7 percent annual growth. While not reflected in the countywide data, the northern portion of Muscogee County (i.e., the Columbus market) is also experiencing growth and residential development which the Bank will seek to serve through a planned Harris County/north Muscogee County office. Income data for CharterBank's current and targeted RP Financial, LC. Page 2.4 RP Financial, LC. Page 2.5 RP Financial, LC. Page 2.6 future markets reflects that the Bank's traditional markets in Chambers County, Alabama and Troup County, Georgia generally have lower income levels, indicative of the weaker economy and which tends to limit credit demand which CharterBank is seeking to serve. Conversely, the nearby markets targeted for expansion tend to have somewhat higher income levels based on median household and per capita income data which will provide greater opportunity for the Bank to market its products and services to the targeted upscale and credit-driven customer. Local Economy - ------------- The Bank's retail markets in the Valley area are historically based on textiles, specifically West Point Stevens. However, the economy has gradually diversified over the last several decades and now includes a wide mix of employers, including a significant family of telecommunications companies, including Powertel, ITC Deltacom and Intercall and other significant employers in the services and retail trade sectors. Table 1.2 provides data pertaining to employment in the Troup County market. Table 2.2 Troup County Area Employment Base Ranked by Wages
Weekly Firms Employment % Emp. Wages ------ ---------- ------- ----- Mining 3 43 -- $793 Transportation & Public Utilities 158 2,636 4% 758 Manufacturing 278 21,291 31 591 Finance, Insurance & Real Estate 275 1,685 2 581 Wholesale Trade 242 1,957 3 536 Construction 473 3,360 5 494 Government - Fed., State, Local, Intl. 228 11,600 17 478 Services 1,104 11,666 17 398 Agriculture, Forestry & Fishing 108 791 1 296 Retail Trade 914 14,287 21 267 Not Elsewhere Classified 3 -- -- -- ----- ------ --- ---- 3,787 69,321 100% $470 Source: Georgia Department of Industry, Trade & Tourism.
RP Financial, LC. Page 2.7 The first branch to be opened in conjunction with CharterBank's branching strategy will be located in Auburn, Alabama (Lee County). This market is home to Auburn University, which has steadily grown in enrollment and which has supported an attractive economic and cultural infrastructure attracting new employers and jobs. Additionally, the strong education system in this university town (not only Auburn University but the public education system) has provided a highly educated motivated workforce that has also spurred economic growth. A de novo branch is also targeted for opening in the Harris County/north Muscogee County market for early in 2002. This also represents an attractive growth market as Harris County is one of Georgia's premier resort and conference areas with the presence of the Calloway Gardens facility and the planned development of a number of other premier golf course and resort/residential developments. At the same time, north Muscogee County is experiencing substantial residential development as a result of the strong public school systems and the availability of relatively inexpensive land for development. As shown in Table 2.3, unemployment in the Bank's market area communities is generally moderate. At the same time, CharterBank is concerned that unemployment may trend upwards as a result of several recent events. Specifically, the West Point Stevens headquarters is in danger of being relocated and Powertel, a local telecommunications company, was recently acquired and its headquarters office is likely to close. Coupled with the strength of other nearby markets in terms of their economies and growth trends, CharterBank will be seeking to undertake retail expansion outside of the traditional markets in West Point and Lanett. RP Financial, LC. Page 2.8 Table 2.3 CharterBank Market Area Unemployment Trends
September 1999 September 2000 Region Unemployment Unemployment ------ --------------- ------------- United States 4.2% 3.9% Georgia 4.1 4.0 Troup County 4.5 4.0 Coweta County 2.6 2.9 Muscogee County 5.5 5.0 Alabama 4.9 4.5 Chambers County 4.9 4.6 Lee County 3.9 3.4
Source: U.S. Bureau of Labor Statistics. Competition - ----------- Table 2.4 displays deposit market share data for the Valley area. The data shows the strong market presence maintained by the Bank. CharterBank is currently the largest depository institution in the Valley while the market share in LaGrange was comparatively modest. Its position was substantially enhanced in the Valley with the Citizens acquisition in the latter half of 1999, and as a result, the Bank is the leading financial institution in the Valley area in terms of total deposits. The major competitors for CharterBank include both community and superregional financial institutions such as First Flag Bank, Commercial Bank and Trust, First National Bank of West Point, Valley National Bank and Bank of America. On the lending side of operations, CharterBank ranks as the largest residential mortgage lender in the Valley area. Between the branch network and the LPO's, including the correspondent lending, the geographic reach of the lending operation are diversified and a list of competitors is not particularly meaningful. RP Financial, LC. Page 2.9 Table 2.4 Valley Area Insured Deposit Market Share As of June 30, 1999
# of Total Market Institution Name Offices Deposits Share ---------------- -------- -------- ------- ($000) CharterBank 5 (1) $128,123 37.50% First National of West Point 3 98,000 29.00 Valley National Bank 3 67,517 20.00 Bank of America 1 24,741 7.00 Colonial Bank 1 15,138 4.50 Farmers & Merchants Bank 1 8,217 2.00 ----- -------- ------ Total 14 $341,736 100.00%
(1) CharterBank has recently consolidated two offices, reducing the total to four offices. Source: FDIC. Table 2.4 (continued) LaGrange, Georgia Market Insured Deposit Market Share As of June 30, 1999
# of Total Market Institution Name Offices Deposits Share ---------------- -------- -------- ------ ($000) First Flag Bank 4 $176,660 35% Commercial Bank and Trust 5 132,888 26 Bank of America 2 69,632 14 Community Bank and Trust 2 46,800 9 SunTrust Bank 1 44,075 9 CharterBank 1 23,111 5 First Citizens Bank 1 12,578 2 ----- -------- --- Total 16 $505,744 100%
Source: FDIC. The above table excludes CharterBank's wholesale deposits. Wholesale deposits are included for the other institutions, to the extent they have wholesale deposits, but we believe that RP Financial, LC. Page 2.10 other institution's wholesale deposits are insignificant. Valley Area includes West Point, Georgia and Lanett and Valley, Alabama. Importantly, CharterBank's already strong share of the deposit market in the Valley area limits its ability to sustain substantial further growth in this market. Accordingly, CharterBank is planning to expand in other nearby contiguous markets where management is familiar with the market and targeted customer base; and the markets are proximate to the Bank's existing headquarters facilitating management and marketing activities. * * * * * * * Factors such as the weak growth prospects in the primary market area, potential increases in unemployment, the level and nature of competition and the Bank's business plan strategies to access other adjacent markets in an attempt to generate retail growth will all be considered in the valuation process in subsequent sections. RP Financial, LC. Page 3.1 III. PEER GROUP ANALYSIS This chapter presents an analysis of CharterBank's operations versus a group of comparable companies (the "Peer Group") selected from the universe of all publicly-traded savings institutions. The primary basis of the pro forma market valuation of CharterBank is provided by these public companies. Factors affecting the Bank's pro forma market value such as financial condition, credit risk, interest rate risk, and recent operating results can be readily assessed in relation to the Peer Group. Current market pricing of the Peer Group, subject to appropriate adjustments to account for differences between CharterBank and the Peer Group, will then be used as a basis for the valuation of CharterBank's to-be-issued common stock. Peer Group Selection - -------------------- The mutual holding company form of ownership has been in existence in its present form since 1991. As of the date of this appraisal, there were approximately 27 publicly-traded institutions operating as subsidiaries of MHCs. We believe there are a number of characteristics of MHC shares that make them different from the shares of fully-converted companies. These factors include: (1) lower aftermarket liquidity in the MHC shares since less than 50 percent of the shares are available for trading; (2) guaranteed minority ownership interest, with no opportunity of exercising voting control of the institution in the MHC form of organization, thus limiting acquisition speculation in the stock price; (3) the potential impact of "second step" conversions on the pricing of public MHC institutions; (4) the regulatory policies regarding the dividend waiver by MHC institutions; and (5) certain MHCs have formed or are forming middle-tier holding companies, facilitating the ability for stock repurchases, thus improving the liquidity of the stock on an interim basis. We believe that each of these factors has an impact on the pricing of the shares of MHC institutions, and that such factors are not reflected in the pricing of fully- converted public companies. Given the unique characteristic of the MHC form of ownership, RP Financial concluded that the appropriate Peer Group for CharterBank's valuation should be comprised of subsidiary institutions of mutual holding companies. The Peer Group is consistent with the regulatory guidelines, and other recently completed MHC transactions. Further, the Peer Group should be RP Financial, LC. Page 3.2 comprised of only those MHC institutions whose common stock is either listed on a national exchange or is NASDAQ listed, since the market for companies trading in this fashion is regular and reported. We believe non-listed MHC institutions are inappropriate for the Peer Group, since the trading activity for thinly- traded stocks is typically highly irregular in terms of frequency and price and may not be a reliable indicator of market value. We have excluded from the Peer Group those public MHC institutions that are currently pursuing a "second step" conversion and/or companies whose market prices appear to be distorted by speculative factors or unusual operating conditions. The universe of all publicly-traded institutions is included as Exhibit III-1. Basis of Comparison - ------------------- This appraisal includes two sets of financial data and ratios for each public MHC institution. The first set of financial data reflects the actual book value, earnings, assets and operating results reported by the public MHC institutions in their public filings inclusive of the minority ownership interest outstanding to the public. The second set of financial data, discussed at length in the following chapter, places the Peer Group institutions on equal footing by restating their financial data and pricing ratios on a "fully- converted" basis assuming the sale of the majority shares held by the MHCs in public offerings based on their respective current prices and standard assumptions for a thrift conversion offering. Throughout the appraisal, the adjusted figures will be specifically identified as being on a fully-converted basis. Unless so noted, the figures referred to in the appraisal will be actual financial data reported by the public MHC institutions. Both sets of financial data have their specific use and applicability to the appraisal. The actual financial data, as reported by the Peer Group companies and reflective of the minority interest outstanding, will be used primarily in this Chapter III to make financial comparisons between the Peer Group and CharterBank. The adjusted financial data (fully-converted basis) will be more fully described and quantified in the pricing analysis discussed in Chapter IV. The fully-converted pricing ratios are considered critical to the valuation analysis in Chapter IV, because they place each public MHC institution on a fully-converted basis (making their pricing ratios comparable to the pro forma valuation conclusion reached herein), eliminate distortion in RP Financial, LC. Page 3.3 pricing ratios between public MHC institutions that have sold different percentage ownership interests to the public, and reflect the actual pricing ratios (fully-converted basis) being placed on public MHC institutions in the market today to reflect the unique trading characteristics of publicly-traded MHC institutions. CharterBank's Peer Group - ------------------------ Under ideal circumstances, the Peer Group would be comprised of a minimum of ten publicly-traded Georgia and Alabama-based MHC institutions with capital, earnings, credit quality and interest rate risk comparable to CharterBank. However, out of the universe of 28 publicly-traded MHC institutions, none are headquartered in Georgia or Alabama and in fact, there are only six full stock savings institutions which are publicly traded. Out of the 28 public MHCs, only one was excluded from the Peer Group due to its pending second step stock offering. Unlike the universe of public companies, which includes approximately 300 public companies, the universe of public MHC institutions is small, thereby limiting the prospects of a relatively comparable Peer Group. Nonetheless, because the trading characteristics of public MHC institution shares are significantly different from those of fully-converted companies, the universe of 27 public MHC institutions was the most appropriate group for this valuation. Relying solely on full stock public companies for the Peer Group would not capture the difference in current market pricing for public MHC institutions and thus could lead to distorted valuation conclusions. The federal regulatory agencies have previously concurred with this selection procedure of the Peer Group for MHC valuations. Potential shortcomings to using all 27 publicly-traded MHCs include the variations in asset sizes, operating strategies, market areas (both regional and local), and financial measures among the public MHC institutions. Although we considered these potential shortcomings in our analysis, RP Financial's ultimate conclusion was that the size of the Peer Group was statistically meaningful (i.e., there were enough institutions included to support meaningful conclusions), some of the differences in financial and other characteristics among the Peer Group members would be offsetting, and importantly the pricing characteristics were more relevant than fully- RP Financial, LC. Page 3.4 converted institutions. To account for differences between CharterBank and the MHC Peer Group in reaching a valuation conclusion, it will be necessary to make certain valuation adjustments. The following discussion addresses financial similarities and differences. Table 3.1 on the following page lists key general characteristics of the Peer Group companies. Although there are differences among several of the Peer Group members, by and large they are well-capitalized and profitable institutions and their decision to reorganize in MHC form suggests a commonality of operating philosophy. Importantly, the trading prices of the Peer Group companies reflect the unique operating and other characteristics of public MHC institutions. While the Peer Group is not exactly comparable to CharterBank, we believe such companies form a good basis for the valuation of CharterBank, subject to certain valuation adjustments. In aggregate, the Peer Group companies maintain a higher level of capitalization relative to the universe of all public thrifts (13.0 percent of assets versus 10.7 percent for the all public average), generate higher core earnings (0.81 percent ROA versus 0.70 percent average for the all public average), and generate a lower core ROE (6.32 percent core ROE versus 7.31 percent for the all public average). Please note that RP Financial has used core earnings in this discussion to eliminate the effects of non-operating items. The summary table below underscores the key differences, particularly in the average pricing ratios between full stock and MHC institutions (both as reported and on a fully-converted basis). RP Financial, LC. Page 3.5 RP Financial, LC. Page 3.6
Fully All Peer Group Converted SAIF-Insured Reported Basis Publicly-Traded Basis (Pro Forma) Financial Characteristics (Averages) ------------------------------------ Assets ($Mil) $ 1,874 $ 1,688 $1,838 Equity/Assets (%) 10.69% 12.97% 19.06% Core Return on Assets (%) 0.70 0.81 0.97 Core Return on Equity (%) 7.31 6.32 4.97 Pricing Ratios (Averages)(1) ------------------------- Core Price/Earnings (x) 14.26x 18.85x 15.19x Price/Book (%) 102.22% 115.40% 73.37% Price/Assets (%) 10.52 14.86 14.17
(1) Based on market prices as of March 2, 2001. The following sections present a comparison of CharterBank's financial condition, income and expense trends, loan composition, interest rate risk and credit risk versus the figures reported by the Peer Group. The conclusions drawn from the comparative analysis are then factored into the valuation analysis discussed in the final chapter. Financial Condition - ------------------- Table 3.2 shows comparative balance sheet measures as a percent of assets for CharterBank and the Peer Group. CharterBank's and the Peer Group's ratios reflect balances as December 31, 2000, unless otherwise indicated for the Peer Group companies. CharterBank's net worth base of 25.5 percent was above the Peer Group's average net worth ratio of 12.6 percent. The Bank's pro forma capital position (consolidated with the holding company) will increase with the addition of the stock proceeds, with such increases offset to an extent by the impact of the MHC retaining 400,000 shares of Freddie Mac stock. At the same time, the Bank's core capital ratios, which are important with regard to CharterBank's ability to expand the balance sheet and pay dividends are much lower, equal to only 7.70 percent of adjusted assets as of December 31, 2000. RP Financial, LC. Page 3.7 RP Financial, LC. Page 3.8 The interest-earning asset compositions for the Bank and the Peer Group also reflect some significant differences which will need to be accounted for in the valuation. CharterBank's loans-to-assets ratio of 25.3 percent was well below the comparable Peer Group ratio of 64.1 percent. Comparatively, the Peer Group's cash and investments-to-assets ratio of 32.2 percent was well below the comparable ratio for the Bank of 73.4 percent. The principal factor leading to CharterBank's higher ratio of wholesale investments (as well as wholesale liabilities) has been the growth in equity resulting from appreciation of the Bank's Freddie Mac stock investment. Between fiscal 1996 and 2000, the value of CharterBank's Freddie Mac stock increased rapidly and CharterBank pursued a strategy to aggressively leverage its balance sheet with borrowings and wholesale deposits with those funds primarily deployed into MBS and CMOs. The Bank has pursued this leverage strategy owing to its limited ability to expand the loan portfolio in the face of constraints imposed by its market (i.e., small size, limited growth characteristics, etc.) and to bolster the relatively weak earnings generated through its retail banking operations. The Peer Group has invested in equity securities (including Freddie Mac stock) only to a very limited extent. The Freddie Mac stock investment provides the Bank with significant GAAP capital as a result of recent appreciation in the stock, although such capital is dependent upon Freddie Mac's stock price continuing to hold up in the public markets. Additionally, the risk characteristics of CharterBank's Freddie Mac stock are different than the risk level of many of the Peer Group's investment portfolios (i.e., equity investment may potentially generate higher returns over the long term albeit at a greater level of risk). Overall, CharterBank's interest-earning assets including the Freddie Mac stock amounted to 98.7 percent of assets, which was somewhat above the Peer Group's ratio of 96.3 percent. The Bank's higher ratio was primarily the result of its stronger capital position and limited investment in fixed and other assets given the significant wholesale aspect to the balance sheet. CharterBank's funding liabilities reflected some important differences in relation to the Peer Group as follows: (1) retail funding sources were limited as the principal sources of interest-bearing liabilities primarily consisted of wholesale borrowings and deposits; and (2) the ratio of interest-bearing liabilities was low owing to CharterBank's strong capital position and RP Financial, LC. Page 3.9 the presence of the net deferred tax liability, the largest component of which resulted from unrealized gains on Freddie Mac stock. Overall, deposits equaled only 20.9 percent of assets for CharterBank in comparison to an average of 72.2 percent for the Peer Group, while borrowings totaled 39.4 percent and 13.4 percent of assets for the Bank and the Peer Group, respectively. Total interest-bearing liabilities maintained by the Bank and the Peer Group, as a percent of assets, equaled 60.3 and 85.6 percent, respectively. As discussed above, the lower level of interest-bearing liabilities for CharterBank is the result of its high capital ratio and to the presence of a large deferred tax liability which is non-interest bearing. While these characteristics benefit CharterBank's operations and operating returns, the reliance on high cost interest-sensitive wholesale borrowings and deposits offsets many of these benefits and are a factor in the Bank's modest returns on core operations. A measure of balance sheet strength for a thrift institution is its IEA/IBL ratio. Presently, CharterBank's IEA/IBL ratio is stronger than the Peer Group's ratio, based on respective ratios of 163.7 percent and 112.5 percent. CharterBank will likely continue to possess an advantage in this regard into the foreseeable future. The growth rate section of Table 3.2 shows annual growth rates for key balance sheet items. CharterBank's growth rates were based on annual growth for the 12 months ended December 31, 2000, while the Peer Group's growth rates were based on annual growth for the corresponding time frame or the most recent period available. The Bank's balance sheet growth rates have primarily been impacted by the stock price appreciation realized in Freddie Mac stock which increased from $47.06 per share as of December 31, 1999, to $68.88 per share as of December 31, 2000, or by 46.3 percent. Based on the 5,055,000 shares of Freddie Mac stock in the investment portfolio, stock price appreciation in Freddie Mac stock comprised substantially all of the growth in total assets and investments, which equaled 9.96 percent and 11.92 percent respectively. Thus, in comparison to the Peer Group which increased their total assets by an average of 11.76 percent, CharterBank would have realized balance sheet shrinkage absent the price appreciation realized in the Freddie Mac stock equity investment. CharterBank's loan portfolio increased by 15.10 percent which closely approximated the Peer Group average of 13.80 percent. The recent growth for CharterBank reflects management's RP Financial, LC. Page 3.10 efforts to expand the loan portfolio overall, particularly in the area of higher yielding and relationship-oriented loans. At the same time, the comparable growth rate for CharterBank's and the Peer Group's loan portfolios must be considered in the context of the Bank's modest balance of loans overall and that portfolio growth is relatively small as a percent of total balance sheet assets. CharterBank's interest-bearing liabilities grew more slowly than the Peer Group as deposits shrank by 23.73 percent and borrowings increased by 12.00 percent. As referenced above, balance sheet growth for CharterBank was primarily driven by capital appreciation in the Freddie Mac stock investment whereas the Peer Group's growth was a function of both retail expansion and some wholesale leveraging. The Peer Group's deposits and borrowings increased by 11.93 percent and 1.82 percent, respectively, for the most recent twelve month period. Capital growth reported by CharterBank was very strong, as net worth increased by 39.42 percent and tangible net worth increased by 42.74 percent. In contrast, the Peer Group's capital growth rate was much lower, as reported equity increased by 5.16 percent for the most recent twelve month period. Importantly, the increase in capital is solely attributable to changes in the other accumulated comprehensive income account as CharterBank operated at a breakeven level for the most recent twelve month period. At the same time, the Peer Group's modest growth rate reflects the impact of dividend payments and stock repurchases and would otherwise have been higher absent these capital management strategies. Income and Expense Components - ----------------------------- Table 3.3 displays comparable statements of operations for the Bank and the Peer Group , based on earnings for the twelve months ended December 31, 2000. As discussed in the financial analysis in Section One, CharterBank's operating ratios are different from the majority of savings institutions reflecting the following significant features of CharterBank's operations: (1) the impact of the wholesale investment and funding on the Bank's operating ratios (i.e., spreads and margins are thin and the ratio of other income and expenses are low reflecting the limited level of fees and expenses generated through wholesale operations); (2) the returns on the Bank's retail operations are low as a result of the relatively high overhead costs attributable to RP Financial, LC. Page 3.11 RP Financial, LC. Page 3.12 the retail banking operations; and (3) CharterBank's Freddie Mac stock investment provides the Bank with the opportunity to generate equity growth through capital appreciation in the Freddie Mac stock investment but revenue flowing through the income statement is limited to common stock dividends which are relatively modest (i.e., Freddie Mac's cash return is modest). For the period shown in Table 3.3, CharterBank operated at near a breakeven level which was well below the 0.83 percent return posted by the Peer Group. The breakeven level of earnings was the result of the Bank's moderate core earnings levels as discussed above and the amortization and writeoff of CharterBank's remaining goodwill balance in fiscal 2000. CharterBank's weaker core operating returns were the result of the thin spreads and margins on the Bank's leveraging activities and weak returns from CharterBank's retail banking operations. The Peer Group's stronger net interest margin resulted from both a higher interest income ratio and a lower interest expense ratio. The Bank's net interest margin is heavily influenced by the significant balance of balance sheet leverage undertaken by CharterBank as the balance sheet is dominated by wholesale investments purchased with wholesale funds including borrowings as well as brokered and credit union deposits. Additionally, the net interest margin is depressed relative to the Peer Group by the Freddie Mac stock investment which provides a relatively small cash return through a dividend (the most significant returns on the Freddie Mac stock have been provided through capital appreciation in the stock while Freddie Mac pays out only a fraction of its earnings in dividends). The thin net interest margin coupled with the mismatch between the repricing of wholesale assets and liabilities subjects CharterBank to a higher level of interest rate risk exposure than the Peer Group. Overall, CharterBank and the Peer Group reported net interest income to average assets ratios of 1.80 percent and 3.25 percent, respectively. In another key area of core earnings strength, the Bank maintained a lower level of operating expenses than the Peer Group; CharterBank's operating expense as a percent of average assets equaled 1.17 percent versus an average of 2.28 percent for the Peer Group. As discussed in Section One, while CharterBank maintains a very low operating expense ratio in comparison to industry averages, the operating expense ratio is distorted somewhat by the large amount of assets and liabilities requiring little or no expense to manage. In this regard, RP Financial, LC. Page 3.13 approximately 70 percent of CharterBank's December 31, 2000 balance sheet were comprised of investments (primarily Freddie Mac stock, MBS and CMOs) which entail limited management and overhead expense. Excluding such assets, the Bank's cost structure is actually relatively high and is an important cause of the moderate operating returns posted on CharterBank's retail banking operations. On a post-offering basis, the Bank's operating expenses can be expected to increase with the addition of stock benefit plans, with such expenses already impacting the Peer Group's operating expenses. Additionally, CharterBank's cost structure is expected to increase as the Bank upgrades the LaGrange office, opens a new office in Auburn and branches into new areas within its targeted markets over the longer term. When viewed together, net interest income and operating expenses provide considerable insight into a thrift's earnings strength, since those sources of income and expenses are typically the most prominent components of earnings and are generally more predictable than losses and gains realized from the sale of assets or other non-recurring activities. In this regard, as measured by their expense coverage ratios (net interest income divided by operating expenses), the Bank's earnings strength was less than the Peer Group's. Expense coverage ratios posted by CharterBank and the Peer Group equaled 1.54x and 1.43x, respectively. The calculation of CharterBank's expense coverage ratio excludes the goodwill amortization expense resulting from the revaluation adjustment to intangibles, which equaled 0.48 percent of average assets. An expense coverage ratio of greater than 1.0x indicates that an institution is able to sustain pre- tax profitability without having to rely on non-interest sources of income. Sources of non-interest operating income were a more modest contributor to the Bank's earnings, with such income amounting to 0.14 percent and 0.44 percent of CharterBank's and the Peer Group's average assets, respectively. Similar to CharterBank's operating expenses, the Bank's ratio of non-interest income is impacted by wholesale leveraging activities which generate no fee income but expand the level of assets thereby diluting the ratio of fee income earned on traditional retail banking activities. Taking non-interest operating income into account in comparing the Bank's and the Peer Group's earnings, CharterBank's efficiency ratio (operating expenses, net of amortization of intangibles, as a percent of the sum of non-interest RP Financial, LC. Page 3.14 operating income and net interest income) of 61.4 percent was comparable to the Peer Group's efficiency ratio of 61.8 percent. Loan loss provisions had a slightly larger impact on the Bank's earnings, amounting to 0.16 percent and 0.12 percent of average assets for CharterBank and the Peer Group, respectively. While CharterBank's loan loss provisions are comparable to the Peer Group ratios on a reported basis, over 70 percent of CharterBank's asset base is comprised of investment or equity securities which carry little or no credit risk. Accordingly, loan loss provisions as a percent of retail loans are at relatively high levels, primarily reflecting provisions recorded by the Bank to reserve for the deterioration of loans acquired in the Citizens acquisition in fiscal 1999, particularly acquired consumer and auto loans. Non-operating income and expenses including goodwill amortization were a minor component of the Peer Group's earnings, particularly in comparison to CharterBank which posted a non-recurring expense related to the amortization and chargeoff of its remaining goodwill balance equal to 0.48 percent of assets, which was offset by net non-operating income equal to 0.07 percent of average assets. By comparison, non-operating income averaged only 0.02 percent of average assets for the Peer Group. Given the generally non-recurring nature of gains and losses resulting from the sale of loans and investments, the net gains reflected in Bank's and the Peer Group's earnings will be discounted in evaluating the relative strengths and weaknesses of their respective earnings. Likewise, goodwill amortization which will be a non-recurring expense for CharterBank will also be discounted in the comparative evaluation of the Bank's earnings strength in comparison to the Peer Group. As discussed in Section One, CharterBank's tax rate has fluctuated in a very wide range and approximated 60.9 percent for the twelve months ended December 31, 2000. CharterBank's net income is subject to numerous adjustments including those related to charitable contribution carryforwards and dividend income exclusion. Furthermore, as indicated in the Bank's Prospectus, the policy of holding Freddie Mac stock is based partially on concerns that any sales out of the portfolio (for capital management or other purposes) could taint the Freddie Mac stock as a trading portfolio for tax purposes, potentially triggering the payment of the full deferred tax liability related to the Freddie Mac gains, even on unrealized gains on unsold shares. In RP Financial, LC. Page 3.15 comparison to CharterBank, the Peer Group's tax situation is less complicated with most in a fully taxable status reporting an average effective tax rate equal to 34.95 percent. Loan Composition - ---------------- Table 3.4 presents data related to the loan composition of CharterBank and the Peer Group. The Bank's loan portfolio composition reflects the impact that the Freddie Mac stock investment and leveraging strategies. In this regard, the portion of the Bank's balance sheet devoted to retail banking assets is limited as loans accounted for only 25.1 percent of total assets as of December 31, 2000, as compared to an average of 64.1 percent of assets for the Peer Group. As previously discussed, the factors leading to CharterBank's higher ratio of equity and investment securities is related to the substantial price appreciation in Freddie Mac stock realized over the last decade and the Bank's efforts to leverage this capital, largely through investing in MBS and CMOs with funds obtained through wholesale funding sources. The impact of leveraging through MBS and CMO investments is evidenced in the higher ratio of such assets for CharterBank (35.33 percent for CharterBank versus an average of 14.03 percent for the Peer Group). Residential mortgage loans comprised the next largest segment of the loan portfolio, equaling 15.66 percent of assets for the Bank and 44.04 percent of assets for the Peer Group. Construction and non- mortgage loans comprised a relatively small proportion of the Bank's and the Peer Group's loan portfolios. The Bank risk-weighted assets-to-regulatory assets ratio was relatively comparable to the Peer Group average (56.5 percent and 55.0 percent, respectively), reflecting the fact that the unrealized gain on Freddie Mac stock is not included in the calculation of risk assets (i.e., a substantial portion of the Bank's asset base is excluded for purposes of this calculation). The Bank would have a much lower ratio with the inclusion of such unrealized gains. Credit Risk - ----------- While credit quality at CharterBank has historically been strong, the level of non-performing assets has recently been subject to increase. At the same time, the significant balance of wholesale leveraging investments, which carry no credit risk tend to support favorable credit RP Financial, LC. Page 3.16 RP Financial, LC. Page 3.17 RP Financial, LC. Page 3.18 quality ratios which are expressed as a percent of total assets. As shown in Table 3.5, CharterBank's ratio of non-performing assets and accruing loans that are more than 90 days past due as a percent of assets approximated the comparable Peer Group ratio (0.34 percent versus of 0.41 percent for the Peer Group). Comparatively, CharterBank's non-performing loans-to-loans ratio, was higher than the Peer Group average (1.14 percent versus 0.60 percent for the Peer Group). Loss reserves as a percent of loans was higher for the Bank (2.18 percent versus 0.87 percent for the Peer Group) reflecting recent efforts by CharterBank's management to bolster reserves in the face of higher NPAs. Notwithstanding the recent increase in reserve levels, reserve coverage as a percent of NPAs was lower for CharterBank (162.04 percent versus 200.72 percent for the Peer Group). As a result of the recent increase in NPAs and management's efforts to address such problems, loan chargeoffs totaled $1.8 million for CharterBank, equal to 0.72 percent of loans versus an average of 0.05 percent of loans for the Peer Group. Interest Rate Risk - ------------------ Table 3.6 reflects various key ratios highlighting the relative interest rate risk exposure of the Bank versus the Peer Group companies. In terms of balance sheet composition, CharterBank's interest rate risk characteristics were considered to be more favorable than the Peer Group's. Most notably, CharterBank maintains a stronger capital position a more favorable IEA/IBL ratio and a lower level of non-earning assets. At the same time, CharterBank's net interest margin exibits significant volatility to changing interest rates, as indicated in the quarterly data set forth in Table 3.6 as well as the NPV analysis discussed in Section One. The interest rate risk exposure is the result of the Bank's asset-liability repricing mismatch on both its retail as well as wholesale leveraging operations. While the Bank's strong capital position serves as a buffer for interest rate risk, the moderate earnings levels currently reported would be substantially eroded in the event of a sustained increase in interest rates. Given the importance that many investors place on earnings in evaluating thrift stocks, CharterBank's interest rate risk exposure and the volatility of its earnings in response to changing interest rates will be an important consideration in the valuation. RP Financial, LC. Page 3.19 RP Financial, LC. Page 3.20 Summary - ------- Based on the above analysis, notwithstanding several notable differences, RP Financial concluded that the Peer Group forms a reasonable basis for determining the pro forma market value of CharterBank. Such general characteristics as asset size, capital position, interest-earning asset composition, funding composition, core earnings measures, loan composition, credit quality and exposure to interest rate risk all tend to generally support the reasonability of the Peer Group from a financial standpoint. Those areas where differences exist, such as CharterBank's substantial Freddie Mac stock investment, will be addressed in the form of valuation adjustments to the extent necessary. RP Financial, LC. Page 4.1 IV. VALUATION ANALYSIS Introduction - ------------ This chapter presents the valuation analysis and methodology used to determine CharterBank's estimated pro forma market value for purposes of pricing the minority stock. The valuation incorporates the appraisal methodology promulgated by the OTS for standard conversions and mutual holding company offerings, particularly regarding selection of the Peer Group, fundamental analysis on both the Bank and the Peer Group, and determination of the Bank's pro forma market value utilizing the market value approach. Appraisal Guidelines - -------------------- The OTS written appraisal guidelines, originally released in October 1983 and updated in late-1994, specify the market value methodology for estimating the pro forma market value of an institution. As previously noted, the appraisal guidelines for MHC offerings is somewhat different, particularly in the Peer Group selection process. Specifically, the regulatory agencies have indicated that the Peer Group should be based on the pro forma fully-converted pricing characteristics of publicly-traded MHCs, rather than on already fully-converted publicly-traded stock thrifts, given the unique differences in stock pricing of MHCs and fully-converted stock thrifts. Pursuant to this methodology: (1) a peer group of comparable publicly-traded institutions is selected; (2) a financial and operational comparison of the subject company to the peer group is conducted to discern key differences; and (3) the pro forma market value of the subject company is determined based on the market pricing of the peer group, subject to certain valuation adjustments based on key differences. RP Financial Approach to the Valuation - -------------------------------------- The valuation analysis herein complies with such regulatory approval guidelines. Accordingly, the valuation incorporates a detailed analysis based on the Peer Group, discussed in Chapter III, which constitutes "fundamental analysis" techniques. Additionally, the valuation incorporates a "technical analysis" of recently completed conversions and stock offerings of RP Financial, LC. Page 4.2 comparable MHCs, including closing pricing and aftermarket trading of such offerings. It should be noted that these valuation analyses, based on either the Peer Group or the recent conversions and MHC transactions, cannot possibly fully account for all the market forces which impact trading activity and pricing characteristics of a stock on a given day. The pro forma market value determined herein is a preliminary value for the Bank's to-be-issued stock. Throughout the MHC process, RP Financial will: (1) review changes in the Bank's operations and financial condition; (2) monitor the Bank's operations and financial condition relative to the Peer Group to identify any fundamental changes; (3) monitor the external factors affecting value including, but not limited to, local and national economic conditions, interest rates, and the stock market environment, including the market for thrift stocks; and (4) monitor pending MHC offerings, and to a lesser extent, conversion offerings, both regionally and nationally. If material changes should occur prior to closing the offering, RP Financial will evaluate if updated valuation reports should be prepared reflecting such changes and their related impact on value, if any. RP Financial will also prepare a final valuation update at the closing of the offering to determine if the prepared valuation analysis and resulting range of value continues to be appropriate. The appraised value determined herein is based on the current market and operating environment for the Bank and for all thrifts. Subsequent changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or major world events), which may occur from time to time (often with great unpredictability) may materially impact the market value of all thrift stocks, including CharterBank's value, the market value of the stocks of public MHC institutions, or CharterBank's value alone. To the extent a change in factors impacting the Bank's value can be reasonably anticipated and/or quantified, RP Financial has incorporated the estimated impact into its analysis. Valuation Analysis - ------------------ A fundamental analysis discussing similarities and differences relative to the Peer Group was presented in Chapter III. The following sections summarize the key differences between the Bank and the Peer Group and how those differences affect the pro forma valuation. Emphasis is RP Financial, LC. Page 4.3 placed on the specific strengths and weaknesses of the Bank relative to the Peer Group in such key areas as financial condition, profitability, growth and viability of earnings, asset growth, primary market area, dividends, liquidity of the shares, marketing of the issue, management, and the effect of government regulations and/or regulatory reform. We have also considered the market for thrift stocks, in particular new issues, to assess the impact on value of CharterBank coming to market at this time. 1. Financial Condition ------------------- The financial condition of an institution is an important determinant in pro forma market value, because investors typically look to such factors as liquidity, capital, asset composition and quality, and funding sources in assessing investment attractiveness. The similarities and differences in the Bank's and the Peer Group's financial strength are noted as follows: . Overall A/L Composition. There were some important differences between ----------------------- the asset-liability composition of CharterBank and the Peer Group which must be accounted for in the valuation. The Bank has a limited level of loans, as the majority of assets consist of Freddie Mac common stock as well as MBS and CMOs. The relatively limited level of loans has adversely impacted the Bank's earnings and related franchise value of the Bank relative to the Peer Group. CharterBank's funding liabilities reflected some important differences in relation to the Peer Group. Specifically, retail funding sources were limited as the principal sources of interest-bearing liabilities primarily consisted of wholesale borrowings and deposits, and the ratio of interest- bearing liabilities was low owing to CharterBank's strong capital position and the presence of the net deferred tax liability, the largest component of which resulted from unrealized gains on Freddie Mac stock. Overall, as a percent of assets, the Bank maintained a higher level of interest-earning assets and a lower level of interest- bearing liabilities, which resulted in a higher IEA/IBL ratio for the Peer Group. The infusion of stock proceeds should serve to increase the Bank's IEA/IBL ratio, although such increases will largely be offset by the placement of a portion of the Bank's Freddie Mac stock at the MHC in the Reorganization. . Credit Quality. The Peer Group's credit quality measures were -------------- generally stronger than those of the Bank. While CharterBank and the Peer Group had comparably moderate levels of NPAs as a percent of average assets, non-performing loans as a percent of total loans were higher and reserve coverage was lower for the Bank. Additionally, CharterBank's chargeoffs exceeded the Peer Group average. CharterBank's relatively high level of investment securities, including MBS and CMOs, are positive factor in the assessment of the Bank's credit risk exposure in comparison to the Peer Group. RP Financial, LC. Page 4.4 . Balance Sheet Liquidity. The Bank operated with a higher level of cash ----------------------- and investments, all of which are classified as AFS, relative to the Peer Group. While the high ratio of AFS securities may facilitate the ability to restructure, a large portion of the MBS portfolio serves as collateral for borrowings (i.e., the sale of investments may not generate much in the way of new cash). Additionally, CharterBank is limited in its ability to sell or borrow against Freddie Mac stock owing to tax considerations. Following the infusion of stock proceeds, the Bank's cash and investments ratio is expected to increase modestly as the net proceeds retained by the Bank and the Company are anticipated to be initially deployed into investments. CharterBank's future borrowings capacity may likely be somewhat more limited than the Peer Group as a result of the current high borrowing levels. Overall, balance sheet liquidity for the Bank was considered to be less favorable in comparison to the Peer Group. . Funding Liabilities. As discussed in Section Three, CharterBank's ------------------- funding liabilities reflected some important differences in relation to the Peer Group as follows: (1) retail funding sources were limited as the principal sources of interest-bearing liabilities primarily consisted of wholesale borrowings and deposits; and (2) the ratio of interest-bearing liabilities was low owing to CharterBank's strong capital position and the presence of the net deferred tax liability, the largest component of which resulted from unrealized gains on Freddie Mac stock. The significant wholesale element of the Bank's funding structure tends to raise the cost and overall volatility of the Bank's interest expense in relation to the Peer Group. At the same time, the Bank benefits from its comparatively low ratio of interest- bearing liabilities. . Capital. The Bank operates with a higher pre-conversion capital ratio ------- than the Peer Group. While the capital ratio will be subject to increase as a result of the conversion and minority stock offering, capital will be diminished as 400,000 shares of Freddie Mac stock and $100,000 of cash will be placed at the MHC in the Reorganization. Furthermore, CharterBank's core capital ratios, which are important with regard to the Bank's ability to expand the balance sheet and pay dividends, are well below the Peer Group average and will continue to be lower than the Peer Group on a post-conversion basis. On balance, CharterBank's balance sheet strength was considered to be comparable to the Peer Group's and thus, no adjustment was warranted for this factor. 2. Profitability, Growth and Viability of Earnings ----------------------------------------------- Earnings are a key factor in determining pro forma market value, as the level and risk characteristics of an institution's earnings stream and the prospects and ability to generate future earnings heavily influence the multiple the investment community will pay for earnings. The major factors considered in the valuation are described below. RP Financial, LC. Page 4.5 . Reported Earnings. The Bank recorded lower earnings on a ROAA basis ----------------- (0.08 percent of average assets versus 0.83 percent for the Peer Group). The near break-even level of operations posted by the Bank was attributable to the write-off of goodwill, which is not considered to be part of the Bank's ongoing earnings. Net of the write-off adjustment, which approximated 0.48 percent of average assets, the Peer Group's reported earnings remained higher than the Bank's. The following factors impact CharterBank's operations and operating ratios in relation to the Peer Group: (1) the impact of the wholesale investment and funding on the Bank's operating ratios (i.e., spreads and margins are thin and the ratio of other income and expenses are low reflecting the limited level of fees and expenses generated through wholesale operations); (2) the returns on the Bank's retail operations are low as a result of the relatively high overhead costs attributable to the retail banking operations; and (3) CharterBank's Freddie Mac stock investment provides the Bank with the opportunity to generate equity growth through capital appreciation in the Freddie Mac stock investment but revenue flowing through the income statement is limited to common stock dividends which are relatively modest (i.e., Freddie Mac's cash return is modest). . Core Earnings. After excluding goodwill amortization, the write-off of ------------- goodwill for impairment of value, and a modest level of gains on the sale of investments and loans, the Bank's core earnings were still lower than the Peer Group's earnings. As discussed in Section Three and as referenced above, the Bank's lower core earnings are primarily attributable to the thin spreads and margins generated through wholesale leveraging, high overhead costs which diminish the profitability of the retail banking segment of operations, and the Freddie Mac stock investment which generates a low current return but provides the potential for capital appreciation and the realization of other accumulated comprehensive income. CharterBank's lower core earnings will be bolstered with the reinvestment of the net conversion proceeds. At the same time, this increase will be negated over the near term by expenses associated with the stock benefit plans as well as the costs associated with planned expansion of customer delivery systems. . Interest Rate Risk. Quarterly changes in the Bank's net interest ------------------ income to average assets ratios indicated a higher degree of interest rate risk exposure. Other measures of interest rate risk, such as capital ratios, IEA/IBL ratios, and the level of non-interest earning assets-to-total assets were more favorable for the Bank. In view of CharterBank's moderate reported and core earnings levels, and the magnitude of wholesale leverage wherein spreads are thin and in which the Bank is willing to accept a certain level of interest rate risk exposure to enhance earnings, are all factors which provide the Bank with a greater level of interest rate risk exposure. . Credit Risk. Overall, we believe the Bank operates with a greater ------------ level of credit risk exposure based primarily on the higher level of non-performing loans as a percent of total loans and the lower reserve coverage as a percent of NPAs. These negative factors in CharterBank's credit quality are partially mitigated by the high level of RP Financial, LC. Page 4.6 investments, which carry little or no credit risk, and CharterBank's higher reserve ratio as a percent of loans outstanding. . Earnings Growth Potential. Several factors were considered in ------------------------- assessing earnings growth potential. First, excluding the impact of price appreciation of Freddie Mac stock (which only impacts comprehensive income and not reported net income), earnings growth has been less than the Peer Group's. Additionally, while the infusion of the stock proceeds will benefit earnings, additional costs related to the stock plans will offset these benefits to an extent. Additionally, the costs associated with anticipated branching and improvement of other customer delivery systems will adversely impact near term earnings while potentially benefit long-term earnings growth and enhancement of franchise value. . Freddie Mac Stock Investment. CharterBank maintains a substantial ---------------------------- common stock investment in Freddie Mac whereas the Peer Group's equity investments portfolios are limited. The Freddie Mac stock is classified as AFS and the changes in the after-tax value of the investment are realized through the comprehensive income line item in the income statement, and are also reflected as an adjustment to equity. The Freddie Mac equity investment differs from the interest- earning assets dominating the Peer Group's balance sheet in terms of its risk and return characteristics (i.e., market studies have demonstrated that the average return over the long term on equity investments is greater than average long term returns provided by high quality fixed income investments). However, the potentially higher returns on equity investments come with a greater level of risk (i.e., uncertainty that the expected return may not be realized). Accordingly, the higher potential return in the Freddie Mac stock is a positive factor for the Bank in comparison to the Peer Group, which is mitigated to an extent by the volatility and risk related to equity investments. Additionally, the return generated through the Freddie Mac stock is expected to be realized through capital appreciation, as the cash returns through dividend payments are relatively low in relation to Freddie Mac's earnings per share and stock market value. . Return on Equity. The Bank's return on equity based on reported and ---------------- core earnings will be below the comparable averages for the Peer Group and the industry, owing to CharterBank's higher pro forma capital and lower reported and core earnings levels. The ROE including comprehensive income will be primarily dependent upon the trading value of Freddie Mac stock in the market. Given the significant volatility of the trading value of Freddie Mac, CharterBank's future ROE including comprehensive income is difficult to assess. Overall, in light of the Bank's less favorable reported and core earnings, less favorable earnings growth potential and expected lower return on equity based on reported earnings, RP Financial concluded that a significant downward valuation adjustment was warranted for the Bank's profitability, growth and viability of earnings. RP Financial, LC. Page 4.7 3. Asset Growth ------------ Until the most recent fiscal year, CharterBank's balance sheet growth has been strong owing to appreciation realized in Freddie Mac stock, completion of the Citizens acquisition in 1999, and wholesale leveraging of equity. At the same time, internal retail growth for the Bank has been limited and asset growth in the most recent fiscal year was solely attributable to appreciation in Freddie Mac stock. By comparison, the Peer Group's asset growth is more balanced and internally generated retail growth comprises a portion of overall growth. While retail growth has been limited historically owing to CharterBank's presence in a small low-growth market, management has indicated its intention to expand in other nearby contiguous markets to enhance the Bank's growth prospects. In addition, the growth in Freddie Mac's operations and, ultimately, market value will serve as an internal engine of asset growth for the Bank that provides and advantage relative to the Peer Group. On balance, we believe a slight upward adjustment was warranted for this factor. 4. Primary Market Area ------------------- The general condition of a financial institution's market area has an impact on value, as future success is in part dependent upon opportunities for profitable activities in the local market area. Operating in western Georgia and eastern Alabama markets through its headquarters in Troup County, Georgia, the Bank faces significant competition for loans and deposits from other community- oriented financial institutions as well as several large regional and superregional financial institutions. The Bank's market is heavily influenced by manufacturing, including the textile industry, which has been subject to substantial competition. Thus, while the economy appears to be relatively stable, there is no significant impetus for new growth. Summary demographic and deposit market share data for the Bank and the Peer Group companies is provided in Table 4.1. In general, the Peer Group companies operate in more populous markets, which are also growing at a relatively moderate pace. On average, the Peer Group companies maintained a much smaller deposit market share; however, the market share ratios for the Bank are bolstered by out-of-market wholesale deposits which are non-retail in nature. Income levels in CharterBank's market are well below the Peer Group average and median indicating a lower propensity to use the products and services of a financial institution such as the Bank. Overall, RP Financial, LC. Page 4.8 RP Financial, LC. Page 4.9 the primary market areas served by the Peer Group companies were viewed as being slightly more favorable, primarily based on their larger size, higher income levels and greater overall economic diversity. While CharterBank's business plan is to expand into other nearby markets which present more favorable economic and demographic characteristics, the impact of such expansion will only be realized over the long term. Therefore, we concluded that a moderate downward valuation adjustment was warranted for the Bank's primary market area. 5. Dividends --------- The Company has indicated that it will consider establishing a regular dividend policy, but the amount of the initial dividend, if any, has not yet been determined. Future declarations of dividends by the Board of Directors will depend upon a number of factors, including investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum capital requirements, regulatory limitations, stock market characteristics and general economic conditions. Substantially all of the Peer Group companies pay regular cash dividends (one recently converted company has not yet paid a dividend), with implied dividend yields ranging from 1.16 percent to 6.06 percent. The average dividend yield on the stocks of the Peer Group institutions was 3.04 percent as of March 2, 2001, representing an average earnings payout ratio of 18.46 percent (see Table 4.3). As of March 2, 2001, approximately 87 percent of all publicly-traded thrifts (non-MHC institutions) had adopted cash dividend policies (see Exhibit IV-1) exhibiting an average yield of 3.10 percent and an average payout ratio of 38.47 percent. The dividend paying thrifts generally maintain higher than average profitability ratios, facilitating their ability to pay cash dividends. Our valuation adjustment for dividends for CharterBank as an MHC also considered the regulatory policy with regard to waiver of dividends by the MHC. Under current policy, any waiver of dividends by the MHC may require the minority stockholders' ownership interest to be reduced in a "second step" conversion to reflect the cumulative waived dividend account. Under a policy change recently proposed by the OTS, no adjustment for waived dividends would be required for OTS regulated companies. By virtue of the Peer Group being comprised solely of the stock subsidiaries of MHC's, we believe that the speculation with respect to the final resolution of this regulatory policy issue has been captured in the Peer Group's pricing. The RP Financial, LC. Page 4.10 Company's strong capital ratios and the presence of substantial assets at the mid-tier level (i.e., the net conversion proceeds and 1.7 million shares of Freddie Mac stock) might facilitate the ability of the Company to pay dividends. At the same time, the Company may be limited in its ability to generate cash to pay dividends owing to the Bank's indicated policy of holding Freddie Mac stock for investment purposes (precluding the use of Freddie Mac stock to pay dividends) and to the moderate core capital ratio of the subsidiary bank. Coupled with CharterBank's comparatively lower core earnings, we believe a slight downward adjustment was warranted for purposes of dividends relative to the Peer Group. 6. Liquidity of the Shares ----------------------- The Peer Group is by definition composed of companies that are traded in the public markets, and all of the Peer Group members trade on the NASDAQ system. Typically, the number of shares outstanding and market capitalization provides an indication of how much liquidity there will be in a particular stock. The market capitalization of the Peer Group companies, based on the shares issued and outstanding to public shareholders (i.e., excluding the majority ownership interest owned by the respective MHCs) ranged from $6.9 million to $1.1 billion as of March 2, 2001, with average and median market values of $120.8 million and $19.85 million, respectively. The shares issued and outstanding to the public shareholders of the Peer Group members ranged from approximately 0.7 million to 54.4 million, with average and median shares outstanding of approximately 7.2 million and 1.7 million, respectively. The Bank's minority stock offering is expected to result in shares outstanding that will fall within the range of the Peer Group average and median. It is anticipated that the Company's stock will be quoted on the NASDAQ National Market System. Overall, we anticipate that the Company's stock will have a comparable trading market as the Peer Group companies on average and, therefore, concluded no adjustment was necessary for this factor. 7. Marketing of the Issue ---------------------- Three separate markets exist for thrift stocks: (1) the after-market for public companies, both fully-converted stock companies and MHCs, in which trading activity is regular and investment decisions are made based upon financial condition, earnings, capital, ROE, dividends RP Financial, LC. Page 4.11 and future prospects; (2) the new issue market in which converting thrifts are evaluated on the basis of the same factors but on a pro forma basis without the benefit of prior operations as a publicly-held company and stock trading history; and (3) the thrift acquisition market. All three of these markets were considered in the valuation of the Bank's to-be-issued stock. A. The Public Market ----------------- The value of publicly-traded thrift stocks is easily measurable, and is tracked by most investment houses and related organizations. Exhibit IV-1 provides pricing and financial data on all publicly-traded thrifts. In general, thrift stock values react to market stimuli such as interest rates, inflation, perceived industry health, projected rates of economic growth, regulatory issues and stock market conditions in general. Exhibit IV-2 displays historical stock market trends for various indices and includes historical stock price index values for thrifts and commercial banks. Exhibit IV-3 displays historical stock price indices for thrifts only. In terms of assessing general stock market conditions, the market has exhibited significant volatility in 2000 and into early 2001 with bearish sentiment becoming increasing prevalent. A summary of market conditions prevailing over the last six to nine months is as follows. Second quarter 2000 stock market activity was generally impacted by a tightening monetary policy by the Federal Reserve and a selloff in the NASDAQ as investors sold internet stocks as a number of analysts and investor publication focused on the internet sectors cash reserves and long-term viability in the face of on-going cash losses. Expectations that the strong economy would lead the Federal Reserve to boost rates more than normal at its next meeting pressured stocks lower during the first half of May. Following a brief rally in advance of the Federal Reserve meeting, stocks generally declined after the 0.5 rate increase and indications by the Federal Reserve that the fast growing economy probably would prompt another rate increase. Stocks generally edged higher in early-June, as inflation worries lessened on signs that the pace of the economy was slowing. The performance of the overall stock market was mixed during the third quarter of 2000. Old economy stocks outperformed the technology issues in the third quarter as the RP Financial, LC. Page 4.12 telecommunications sector was the victim of a selloff in this period. Signs of a slowing economy generally supported advances in the stock market during most of August, as easing inflation worries lessened expectations of further rate increases by the Federal Reserve. Stocks continued to edge higher following the Federal Reserve's decision to hold rates steady at its late-August meeting. Market averages generally declined during September, despite economic data that showed inflation remained subdued. Technology stocks experienced some of the sharpest declines, as some of the bellwether technology stocks issued warnings of third quarter earnings and revenues falling short of expectations. Stocks retreated in October 2000 ahead of the elections with particularly sharp reductions registered in mid-October in response to disappointing earnings announcements by a number of leading companies. Additionally, rising energy prices raised the specter of inflation. While the market rebounded in early November with the DJIA approaching 11,000, the market again retreated following the indecisive results of the presidential election. With the apparent slowing of the economy, many market watchers speculated that the Federal Reserve would alter its current bias toward tightening monetary policy to a neutral bias at its next meeting. The market continued to trend downward through December although blue chip and defensive stocks staged a mild rally at the close of 2000, reflecting growing expectations that the slowing economy would produce an interest rate cut by the Federal Reserve. Comparatively, gains in technology stocks were limited by concerns of weaker earnings that may result from the economic slow down. Volatility was evident in the stock market at the beginning of 2001. Weak manufacturing data for December sent stocks plunging on the first day of trading of the New Year, as manufacturing activity in December fell to its weakest level in almost ten years. However, stocks moved sharply higher the next day, as the Federal Reserve cut the federal funds rate by 50 basis points in a rare decision to move interest rates between formal meetings of the Federal Reserve Board. For the balance of January, stocks generally settled into a more narrow trading range, as investors reacted to the release of various fourth quarter earnings reports. Anticipation of another interest rate cut by the Federal Reserve support a rally in stocks at the end of January. Stocks continued to trend downward in February, notwithstanding further interest rate reductions by the Federal Reserve as it became apparent that the economy was slowing faster than many had anticipated and in response to negative earnings and RP Financial, LC. Page 4.13 announcements and projections by many leading companies. On March 2, 2001, the DJIA closed at 10466.31, a decline of 3.0 percent since year end 2000 and 7.5 percent from its all-time high. The market for thrift stocks has outperformed the market generally over the last year. Thrift stocks traded in a narrow range during the first half of April 2000, in anticipation of first quarter earnings and uncertainty over the degree of net interest margin pressure that would result from the higher interest rate environment. Attractive fundamentals supported higher thrift prices during the second half of April, which was followed by a narrow trading range during the first half of May. Interest rate jitters and profit taking were factors that undercut the rally in thrift prices. The widely anticipated rate hike implemented by the Federal Reserve at its May meeting generally had little impact on thrift prices. Indications of slower economic growth supported an advance in thrift prices during late-May and early-June, although the rally stalled on profit taking and continued uncertainty about further rate increases by the Federal Reserve. Thrift stocks generally declined during the second half of June 2000, reflecting growing concerns that some thrifts were experiencing a decline in credit quality. The Federal Reserve's decision to leave interest rates unchanged at its late-June meeting, along with expectations that the slowing economy would deter further interest rate increases by the Federal Reserve, supported a recovery in thrift prices during the first half of July. Thrift stocks traded in a narrow range through the end of July, as second quarter earnings generally met expectations. Lower interest rates lifted thrift stocks higher during the first half of August, as bond yields approached their lowest level in more than a year. Thrift stocks stabilized in late-August, as the Federal Reserve's decision to leave rates unchanged was widely anticipated. Signs of slower economic growth with tame inflation propelled thrift stocks higher through most of September, as interest rate sensitive stocks benefited from lower interest rates and the reversion to a normal yield curve for the first time since mid-January. Larger cap financial stocks also generally moved higher on news of Chase Manhattan's agreement to acquire J.P. Morgan, which was announced on September 13, 2000 and FleetBoston's proposed acquisition of Summit of New Jersey, which was announced on October 2, 2000. RP Financial, LC. Page 4.14 Financial stocks declined with the broader market following the release of the September employment data, which showed the unemployment rate matching a 30-year low first reached in April 2000. The sharp sell-off in stocks during mid-October included thrift stocks, reflecting growing concerns of credit quality deterioration and higher interest rates negatively impacting the earnings of financial stocks. Comparatively, thrift stocks posted solid gains during the second half of October, as investors sold technology stocks and moved into financial and other Old Economy stocks. Thrift stocks eased lower through most of November, as financial stocks in general experienced selling pressures from growing credit quality concerns and the Federal Reserve's decision not to cut rates at its mid-November meeting. More attractive fundamentals and favorable comments from a thrift analyst provided for a rebound in thrift prices at the end of November. Thrift stocks fared better than the broader market through most of December, as the slowing economy and decline in interest rates attracted investors to interest rate sensitive issues in general. Thrift stocks generally advanced in late-December 2000, as interest rate sensitive issues benefited from lower interest rates and signs of slower economic growth. Despite the surprise interest rate cut by the Federal Reserve in early-January 2001, thrift stocks trended lower during the first half of January. Profit taking following the year-end rally and concerns that the slowing economy would lead to an increase credit quality problems for lenders, particularly commercial lenders, were factors that contributed to the decline in thrift prices. Thrift stocks rebound during late-January and the first half of February, as the second interest rate cut by the Federal Reserve and expectations of further interest rate cuts served to rekindle interest in thrift issues. Thrift earnings were also expected to be enhanced by an increase in 1-4 family loan demand, as the result of an increase in refinancing activity prompted by the decline in mortgage rates. On March 2, 2001, the SNL Index for all publicly-traded thrifts closed at 857.9, an increase of 72 percent from one year ago. The SNL MHC Index closed at 967.6 on March 2, 2001, reflecting an increase of 43 percent from one year ago. RP Financial, LC. Page 4.15 B. The New Issue Market -------------------- In addition to thrift stock market conditions in general, the new issue market for converting thrifts is also an important consideration in determining the Bank's pro forma market value. The new issue market is separate and distinct from the market for seasoned stock thrifts in that the pricing ratios for converting issues are computed on a pro forma basis, specifically: (1) the numerator and denominator are both impacted by the conversion offering amount, unlike existing stock issues in which price change affects only the numerator; and (2) the pro forma pricing ratio incorporates assumptions regarding source and use of proceeds, effective tax rates, stock plan purchases, etc. which impact pro forma financials, whereas pricing for existing issues are based on reported financials. The distinction between pricing of converting and existing issues is perhaps no clearer than in the case of the price/tangible book ("P/TB") ratio in that the P/TB ratio of a converting thrift will typically result in a discount to tangible book value whereas in the current market for existing thrifts the P/TB ratio often reflects a premium to tangible book value. Therefore, it is appropriate to also consider the market for new issues, both at the time of the conversion and in the aftermarket. Similar to the overall market for thrift stocks, converting thrift issues have not been well received by the investment community within the past year. Overall, the less favorable market for thrift stocks has significantly limited conversion activity in recent months. In this regard, there has been only one standard conversion offering completed during the last three months (Lawrence Financial Holdings) which completed its conversion at pro forma price/tangible book and core price/earnings ratios of 53.2 percent and 11.7 times, respectively. There has been only one MHC offering completed within the last eight months (Bank Mutual Corp of Wisconsin) which completed its offering in early November at pro forma price/tangible book and core price/earnings ratios of 76.2 percent and 12.9 times, respectively, on a fully converted basis. Bank Mutual also completed an acquisition in connection with its MHC stock offering. Both Lawrence Financial and Bank Mutual have realized appreciation in after market trading. In examining the current pricing characteristics of the conversion offerings completed during the last three months, we note there exists a considerable difference in pricing RP Financial, LC. Page 4.16 ratios compared to the universe of all publicly-traded thrifts. Specifically, the P/TB ratios of the recent conversion are discounted relative to the average of all publicly traded thrift institutions. Overall, the pricing ratios of the higher capitalized but lower earning recently converted thrifts suggest that the investment community has determined to discount their stocks on a book basis until the earnings improve through redeployment and leveraging of the proceeds over the longer term. C. The Acquisition Market ---------------------- Also considered in the valuation was the potential impact on CharterBank's stock price of recently completed and pending acquisitions of other savings institutions operating in Georgia and Alabama. As shown in Exhibit IV-4, there were four Georgia and Alabama thrift acquisitions completed since 1999, and there is currently one acquisition pending of Georgia and Alabama savings institutions. Under other circumstances, the existence of thrift acquisition activity in the Bank's market area might warrant an upward adjustment to value to account for the likelihood of investors placing an acquisition premium on the stock. However, the acquisition activity in CharterBank's market was deemed to have a minimal valuation impact for the following reasons. First, CharterBank's Board of Directors has stated their intention to remain independent following the stock offering, a factor underscored by the Board's decision to reorganize into MHC form. Second, CharterBank could not become an acquisition target for at least one year following a second step conversion, pursuant to current conversion regulations. Finally, the Bank has no immediate intentions to pursue a second step conversion. * * * * * * * * * * * In determining our valuation adjustment for marketing of the issue, we considered trends in the overall thrift market, the new issue market including the new issue market for MHC shares, and the acquisition market which we considered to be not highly applicable to the Bank's valuation. Taking these factors and trends into account, RP Financial concluded that a moderate downward was appropriate in the valuation analysis for purposes of marketing of the issue. RP Financial, LC. Page 4.17 8. Management ---------- CharterBank's management team appears to have experience and expertise in all of the key areas of the Bank's operations. Exhibit IV-5 provides summary resumes of CharterBank's Board of Directors and senior management. The overall financial characteristics of the Bank suggest that the Bank is effectively managed and there appears to be a well-defined organizational structure. The Bank does not currently have any executive management positions that are vacant. Similarly, the returns, capital positions, and other operating measures of the Peer Group companies are indicative of well-managed financial institutions, which have Boards and management teams that have been effective in implementing competitive operating strategies. Therefore, on balance, we concluded no valuation adjustment relative to the Peer Group was appropriate for this factor. 9. Effect of Government Regulation and Regulatory Reform ----------------------------------------------------- As a federally-insured savings bank operating in the MHC form of ownership, CharterBank will operate in substantially the same financial regulatory environment as the Peer Group members -- all of whom are adequately capitalized institutions and are operating with no apparent restrictions. Exhibit IV-6 reflects the Bank's pro forma regulatory capital ratios, indicating that like the Peer Group companies, the Bank will be in compliance with regulatory capital requirements on a pro forma basis. Although operating in the same regulatory environment, the Bank is subject to several other risks in this area related to the Freddie Mac stock investment, most of which do not apply to the Peer Group. For example, there is an ongoing debate regarding the regulation of Freddie Mac's activities and the cost of the implicit federal guarantee on Freddie Mac's debt. While no change in Freddie Mac's status is anticipated over the near term, the ongoing debate in Congress could lead to changes in the way Freddie Mac conducts business, its cost structure, and its long-term earnings prospects, thereby impacting the value of CharterBank's significant Freddie Mac stock investment. In addition, the Bank's aforementioned policies of holding the Freddie Mac stock for investment purposes is partially due to desires to avoid tainting the portfolio as a trading account and triggering the payment of the full tax liability, and there is significant benefit RP Financial, LC. Page 4.18 to the deferral of taxes on the unrealized Freddie Mac stock gains in CharterBank's portfolio. However, maintaining the tax deferral is not without cost as it substantially increases the costs of managing the Freddie Mac stock investment and leads CharterBank to making significant business decisions based on tax as well as business strategies. Overall, we believe the risks faced by the Bank from governmental oversight (related to the Freddie Mac stock) are unique to the Bank and warrant a moderate downward adjustment relative to the Peer Group. Summary of Adjustments - ---------------------- Overall, based on the factors discussed above, we concluded that the Bank's pro forma market value should be discounted relative to the Peer Group as follows: Key Valuation Parameters: Valuation Adjustment ------------------------ -------------------- Financial Condition No Adjustment Profitability, Growth and Viability of Earnings Significant Downward Asset Growth Slight Upward Primary Market Area Moderate Downward Dividends Slight Downward Liquidity of the Shares No Adjustment Marketing of the Issue Moderate Downward Management No Adjustment Effect of Government Regulations and Regulatory Moderate Downward Reform Basis of Valuation - Fully-Converted Pricing Ratios - --------------------------------------------------- As indicated in Chapter III, the valuation analysis included in this section places the Peer Group institutions on equal footing by restating their financial data and pricing ratios on a "fully-converted" basis. We believe there are a number of characteristics of MHC shares that make them different from the shares of fully-converted companies. These factors include: (1) lower aftermarket liquidity in the MHC shares since less than 50 percent of the shares are available for trading; (2) no opportunity for public shareholders to exercise voting control, thus limiting the potential for acquisition speculation in the stock price; (3) the potential pro forma impact of "second step" conversions on the pricing of MHC institutions; (4) the regulatory policies regarding the dividend waiver policy by MHC institutions; and (5) the middle- tier structure maintained by certain MHCs facilitates the ability for stock repurchases. The above RP Financial, LC. Page 4.19 characteristics of MHC shares have provided MHC shares with different trading characteristics versus fully-converted companies. To account for the unique trading characteristics of MHC shares, RP Financial has placed the financial data and pricing ratios of the Peer Group on a fully-converted basis to make them comparable for valuation purposes. Using the per share and pricing information of the Peer Group on a fully-converted basis accomplishes a number of objectives. First, such figures eliminate the distortions resulting when trying to compare institutions that have a different public ownership interests outstanding. Secondly, such an analysis provides ratios that are comparable to the pricing information of fully-converted public companies, and more importantly, are directly applicable to determining the pro forma market value range of the 100 percent ownership interest in CharterBank as an MHC. This technique is validated by the investment community's evaluation of MHC pricing, which also incorporates the pro forma impact of a second step conversion based on the current market price. To calculate the fully-converted pricing information for MHCs, the reported financial information for the public MHCs must incorporate the following assumptions, based on completed second step conversions to date: (1) all shares owned by the MHC are assumed to be sold at the current trading price in a second step conversion; (2) the gross proceeds from such a sale were adjusted to reflect reasonable offering expenses and standard stock based benefit plan parameters that would be factored into a second step conversion of MHC institutions; and (3) net proceeds are assumed to be reinvested at market rates on an after-tax basis. Book value per share and earnings per share figures for the public MHCs were adjusted by the impact of the assumed second step conversion, resulting in an estimation of book value per share and earnings per share figures on a fully-converted basis. Table 4.2 on the following page shows the calculation of per share financial data (fully-converted basis) for each of the public MHC institutions that form the Peer Group. RP Financial, LC. Page 4.20 RP Financial, LC. Page 4.21 Valuation Approaches: Fully-Converted Basis - ------------------------------------------- In applying the accepted valuation methodology promulgated by the OTS and adopted by the FDIC, i.e., the pro forma market value approach, including the fully-converted analysis described above, we considered the three key pricing ratios in valuing CharterBank's to-be-issued stock -- price/earnings ("P/E"), price/book ("P/B"), and price/assets ("P/A") approaches -- all performed on a pro forma basis. In preparing the pro forma analysis, we have adjusted the Bank's trailing twelve month earnings bases, capital, and assets to reflect formation of the MHC, including capitalizing the MHC with $100,000 of cash and 400,000 shares of Freddie Mac stock currently held by the Bank. Since these assets will be held by the MHC solely for the benefit of the mutual depositors, they have been excluded from our calculations of pro forma value for the Bank. In computing the pro forma impact of the conversion and the related pricing ratios, we have incorporated the valuation parameters disclosed in CharterBank's prospectus for reinvestment rate, the effective tax rate and stock benefit plan assumptions (summarized in Exhibits IV-7 and IV-8). Pursuant to the minority stock offering, we have also incorporated the valuation parameters disclosed in CharterBank's prospectus for offering expenses and the stock benefit plans. The assumptions utilized in the pro forma analysis in calculating the Bank's full conversion value are described more fully below. . Conversion Expenses. Offering expenses have been assumed to equal ------------------- 4.0 percent of the gross proceeds, which is typical of the level of offering expenses recorded in offerings that were comparable to the Bank's full conversion value. . Effective Tax Rate. The Bank, in consultation with its outside ------------------ auditors, has determined the marginal effective tax rate on the net reinvestment benefit of the conversion proceeds to be 38.0 percent. . Reinvestment Rate. The pro forma section in the prospectus ----------------- incorporates a 5.11 percent reinvestment rate, equivalent to the one year U.S. Treasury rate prevailing as of December 31, 2000. This calculated rate is reasonably similar to the blended reinvestment rate in the first 12 months of the business plan post-conversion, reflecting the current anticipated use of conversion proceeds, incorporating a flat interest rate scenario. . Stock Benefit Plans. The assumptions for the stock benefit plans, ------------------- i.e., the ESOP and Recognition Plan, are consistent with the structure as approved by the Bank's Board and the disclosure in the pro forma section of the prospectus. Specifically, the ESOP RP Financial, LC. Page 4.22 is assumed to purchase 8.0 percent of the stock in conversion at the initial public offering price, with the Company funded ESOP loan amortized on a straight-line basis over 12 years. The Recognition Plan is assumed to purchase 4.0 percent of the stock in the aftermarket at a price equivalent to the initial public offering price and will be amortized on a straight-line basis over five years. . Investment in Fixed Assets. Consistent with the prospectus, --------------------------- approximately $2.0 million of the conversion proceeds are invested in fixed assets and thus, are withheld from the calculation of reinvestment income. . Capitalization of MHC. Pursuant to the proposed transaction structure, --------------------- the MHC will be capitalized with $100,000 of cash and 400,000 shares of Freddie Mac stock (See Table 1.1 and 1.2 for the pro forma impact of this adjustment to the pre-conversion financial statements). In our estimate of value, we assessed the relationship of the pro forma pricing ratios relative to the Peer Group, recent conversions and MHC offerings. RP Financial's valuation placed an emphasis on the following: . P/E Approach. The P/E approach is generally the best indicator of long-term ------------ value for a reasonably leveraged company's stock. Given the similarities between the Bank's and the Peer Group's earnings composition and overall financial condition, the P/E approach was carefully considered in this valuation. At the same time, recognizing that the Bank will operate with significant excess pro forma capital on a GAAP basis, will operate with a large component of its balance sheet (Freddie Mac stock) generating a moderate dividend yield, and will require some period of time to both fully reinvest the proceeds and pursue its business plan, we also gave considerable weight to other valuation approaches. P/B Approach. P/B ratios have generally served as a useful benchmark in the ------------ valuation of thrift stocks, particularly in the context of an initial public offering, as the earnings approach involves assumptions regarding the use of proceeds. The P/B approach warranted special consideration in the valuation of the Bank because of several noted deficiencies in relying solely on earnings (described above) and because of the unique characteristics of holding the Freddie Mac stock investors. RP Financial thus considered the P/B approach to be a valuable indicator of pro forma value taking into account the pricing ratios under the P/E and P/A approaches. We have applied the P/B approach to the Bank's adjusted December 31, 2000 book value, which includes the marked- to-market value of the Freddie Mac stock as of that date. We have also attempted to consider the volatility in the trading price of Freddie Mac stock by applying the P/B approach to an adjusted book value that considers the Freddie Mac stock marked-to-market using a twelve month average through March 2, 2001 of the trading prices (as opposed to simply the December 31, 2000 trading price). This twelve month average would tend to eliminate the short term swings in the trading price of the Freddie Mac RP Financial, LC. Page 4.23 common stock and would illustrate a more "economic" application of the P/B approach. (Note: this figure would show up in the "P/TB" column of the pricing table.) As a second alternative application of the P/B approach, we performed a similar analysis based on the average of the last ten days closing pricing for Freddie Mac stock to eliminate any near-term trading distortions. . P/A Approach. P/A ratios are generally a less reliable indicator of market ------------ value, as investors typically assign less weight asset and attribute greater weight to book value and earnings - we have also given less weight to the assets approach. Furthermore, this approach as set forth in the regulatory valuation guidelines does not take into account the amount of stock purchases funded by deposit withdrawals, thus understating the pro forma P/A ratio. At the same time, the P/A ratio is an indicator of franchise value, and, in the case of highly capitalized institutions, high P/A ratios may limit the investment community's willingness to pay market multiples for earnings or book value when ROE is expected to be low. The Bank will adopt Statement of Position ("SOP") 93-6, which will cause earnings per share computations to be based on shares issued and outstanding excluding unreleased ESOP shares. For purposes of preparing the pro forma pricing analyses, we have reflected all shares issued in the offering, including all ESOP shares, to capture the full dilutive impact, particularly since the ESOP shares are economically dilutive, receive dividends and can be voted. However, we did consider the impact of the adoption of SOP 93-6 in the valuation. Based on the application of the three valuation approaches, taking into consideration the valuation adjustments discussed above, RP Financial concluded that the pro forma market value of a full conversion offering as of March 2, 2001, was $195,000,000 at the midpoint, equal to 19,500,000 shares at $10.00 per share. 1. Price-to-Earnings ("P/E"). The application of the P/E valuation ------------------------- method requires calculating the Bank's pro forma market value by applying a valuation P/E multiple (fully-converted basis) to the pro forma earnings base. In applying this technique, we considered both reported earnings and a recurring earnings base, that is, earnings adjusted to exclude any one-time non-operating items, plus the estimated after-tax earnings benefit of the reinvestment of the net proceeds. The Bank's reported earnings, incorporating the adjustment to account for the impact of cash and Freddie Mac stock retained by the MHC equaled $511,000. In deriving CharterBank's core earnings, the only adjustments made to reported earnings were to eliminate gains on the sale of loans and investment securities, losses on loan servicing partnerships and the amortization and write-off of goodwill (goodwill has been fully expensed in fiscal 2000). RP Financial, LC. Page 4.24 Incorporating the earnings adjustments made to account for the impact of the MHC reorganization, the Bank's pre-conversion core earnings equaled $4.599 million for the twelve months ended December 31, 2000. As a result of the net loss recorded for the most recent twelve month period, CharterBank pro forma P/E multiple on a reported earnings basis was very high, equal to 50.47 times at the midpoint, equal to a 238 percent premium at the midpoint in comparison to the Peer Group average of 14.93 times. Based on CharterBank's core earnings and incorporating the impact of the pro forma assumptions discussed previously, the Bank's pro forma core P/E multiple (fully- converted basis) at the $195.0 million midpoint value was 24.52 times, which provided for a premium of 61.4 percent relative to the Peer Group's core P/E multiple (fully-converted basis) of 15.19 times (see Table 4.3). The implied premium reflected in the Bank's pro forma core P/E multiple takes into consideration the other pricing ratios and the potential returns which may be generated through the Freddie Mac stock investment in the future (i.e., such returns may be generated through capital appreciation as well as dividend income). The implied premium in the P/E approaches was considered in conjunction with the other valuation approaches in our final conclusion with regard to valuation. 2. Price-to-Book ("P/B"). The application of the P/B valuation method --------------------- requires calculating the Bank's pro forma market value by applying a valuation P/B ratio, derived from the Peer Group's P/B ratio (fully-converted basis), to CharterBank's pro forma book value (fully-converted basis). In applying the P/B approach, we considered both reported book value and book value adjusted to reflect the impact to equity resulting from utilizing a twelve month average price through March 2, 2001, for the Freddie Mac stock price. The pro forma P/B based on the adjusted book value is shown in the column labeled P/TB. (Note: the P/TB column for the Peer Group reflects the price-to-tangible book value ratios.) Based on the $195.0 million midpoint valuation, CharterBank's pro forma P/B ratio based on reported book value was 48.25 percent. Adjusting the Freddie Mac stock price based on a twelve month average price for Freddie Mac ($50.94), CharterBank's pro forma P/B ratio (shown in the "P/TB" column) was 55.26 percent. In comparison to the average P/B and P/TB ratios for the RP Financial, LC. Page 4.25 RP Financial, LC. Page 4.26 Peer Group of 73.37 percent and 76.57 percent, the Bank's ratios reflected discounts of 34.2 percent on a P/B basis and 27.8 percent based on CharterBank's adjusted book value and the Peer Group's tangible book value. (Applying the P/B approach utilizing the trading price of the Freddie Mac stock for the ten trading days through the valuation date of March 2, 2001, the resulting P/B ratio would be 49.08 percent reflecting a discount of 35.9 percent relative to the Peer Group.) The implied discounts under this approach are warranted in view of the valuation adjustments applied to the Bank's value and in view of the premiums generated pursuant to the earnings approach to valuation. 3. Price-to-Assets ("P/A"). The P/A valuation methodology determines ----------------------- market value by applying a valuation P/A ratio (fully-converted basis) to the Bank's pro forma asset base, conservatively assuming no deposit withdrawals are made to fund stock purchases. In all likelihood there will be deposit withdrawals, which results in understating the pro forma P/A ratio which is computed herein. At the midpoint of the valuation range, CharterBank's full conversion value equaled 17.01 percent of pro forma assets. Comparatively, the Peer Group companies exhibited an average P/A ratio (fully-converted basis) of 14.17 percent, which implies a 20.0 percent premium being applied to the Bank's pro forma P/A ratio (fully-converted basis). Technical Analyses - ------------------ As indicated at the beginning of this chapter, RP Financial's analysis of recent conversion and MHC offering pricing characteristics at closing and in the aftermarket has been limited to a "technical" analysis and, thus, the pricing characteristics of recent conversions and MHC offerings is not the primary determinate of value herein. Particular focus was placed on the P/TB approach in this analysis, since the P/E multiples do not reflect the actual impact of reinvestment and the source of the stock proceeds (i.e., external funds vs. deposit withdrawals). The level of conversion activity has recently been very limited and only one MHC offering has been completed in the last eight months. This offering (Bank Mutual) appreciated by 1.1 percent during the first week of trading and is currently trading at 7.5 percent above its IPO price, and exhibits pricing ratios equal to 62.0 percent and 74.0 percent of pro forma fully converted book value and at 12.5 times fully converted core earnings. Accordingly, CharterBank's pro forma RP Financial, LC. Page 4.27 fully converted earnings multiples are at a substantial premium relative to Bank Mutual's pro forma pricing (at conversion and based on current market pricing) but discounted on a Price/book value basis. In addition to the aforementioned technical analysis, because of the unique nature of CharterBank's balance sheet and income statement, primarily owing to the Freddie Mac stock investment, we have considered two alternative approaches to looking at the valuation conclusion. Our primary valuation for the CharterBank valuation continues to be based solely on the approved OTS methodology. However, like the technical analysis of recent conversion discussed above, we believe evaluation of these two alternative technical analyses can provide important support to the conclusions reached herein. The two alternative approaches are intended to address the distortions in CharterBank's balance sheet and income statement resulting from holding the Freddie Mac stock. The first approach involves adjusting CharterBank's balance sheet and income statements to reflect CharterBank's pro rata ownership of the capital and earnings of Freddie Mac based on CharterBank's stock investment. These adjustments provide an alternative valuation perspective based on the "economic" benefits of holding the Freddie Mac stock irrespective of the trading price. The second approach involves adjusting CharterBank's earnings by making an assumption that the entire Freddie Mac stock investment was converted into a market rate interest-earning asset, as opposed to CharterBank earning simply the dividend yield. This second approach is purely hypothetical, since CharterBank's investment policy appears to preclude sales of Freddie Mac stock in the reasonable term. This second approach also, however, provides an alternate earnings base that also has some economic justification. Under both approaches, RP Financial applied the market value approach to the adjusted financial information to yield adjusted pricing ratios, which could then be compared to the current pricing ratios of the Peer Group (see Exhibits IV-12). We considered both the technical analysis of new conversion pricing as well as these two alternative approaches to evaluating the Freddie Mac stock in reaching our valuation conclusion. RP Financial, LC. Page 4.28 Valuation Conclusion - -------------------- Based on the foregoing, it is our opinion that, as of March 2, 2001, the estimated aggregate pro forma market value of the shares to be issued immediately following the conversion, both shares issued publicly as well as to the MHC, was $195,000,000 at the midpoint, equal to 19,500,000 shares at a per share value of $10.00. Pursuant to conversion guidelines, the 15 percent offering range indicates a minimum value of $165,750,000, and a maximum value of $224,250,000. Based on the $10.00 per share offering price determined by the Board, this valuation range equates to an offering of 16,575,000 shares at the minimum to 22,425,000 shares at the maximum. In the event that the appraised value is subject to an increase, up to 25,788,750 shares may be issued at an issue price of $10.00 per share, for an aggregate market value of $257,887,500, without a resolicitation. The Board of Directors have established a public offering range such that the public ownership of the Company will constitute a 20 percent ownership interest of the Company, with the MHC owning the majority of the shares. Accordingly, the offering range to the public of the minority stock will be $33,150,000 at the minimum, $39,000,000 at the midpoint, $44,850,000 at the maximum and $51,577,500 at the supermaximum. The pro forma valuation calculations relative to the Peer Group (fully-converted basis) are shown in Table 4.3 and are detailed in Exhibit IV-7 and Exhibit IV-8; the pro forma valuation calculations relative to the Peer Group based on reported financials are shown in Table 4.4 and are detailed in Exhibits IV-10 and IV-11. RP Financial, LC. LIST OF EXHIBITS Exhibit Number Description - ------ ----------- I-1 Audited Financial Statements I-2 Map of CharterBank's Current and Targeted Markets I-3 Freddie Mac Stock Trading Activity I-4 Key Operating Ratios I-5 Investment Portfolio Composition I-6 Yields and Costs I-7 Net Portfolio Value Analysis I-8 Loan Portfolio Composition I-9 Fixed Rate and Adjustable Rate Loans I-10 Contractual Maturity By Loan Type I-11 Loan Originations, Purchases and Sales I-12 Non-Performing Assets I-13 Loan Loss Allowance Activity I-14 Deposit Composition I-15 Borrowed Funds II-1 Description of Office Facilities II-2 Historical Interest Rates RP Financial, LC. LIST OF EXHIBITS (continued) Exhibit Number Description - ------ ----------- III-1 General Characteristics of Publicly-Traded Institutions IV-1 Stock Prices: As of March 2, 2001 IV-2 Historical Stock Price Indices IV-3 Historical Thrift Stock Indices IV-4 Market Area Acquisition Activity IV-5 Director and Senior Management Summary Resumes IV-6 Pro Forma Regulatory Capital Ratios IV-7 Pro Forma Analysis Sheet - Fully Converted Basis IV-8 Pro Forma Effect of Conversion Proceeds - Fully Converted Basis IV-9 Peer Group Core Earnings Analysis IV-10 Pro Forma Analysis Sheet - Minority Stock Offering IV-11 Pro Forma Effects - Minority Stock Offering IV-12 Technical Analyses V-1 Firm Qualifications Statement EXHIBITS EXHIBIT I-1 CharterBank Audited Financial Statements [Incorporated by Reference] EXHIBIT I-2 CharterBank Map of CharterBank's Current and Targeted Markets EXHIBIT I-3 CharterBank Freddie Mac Stock Trading Activity EXHIBIT I-4 CharterBank Key Operating Ratios EXHIBIT I-5 CharterBank Investment Portfolio Composition EXHIBIT I-6 CharterBank Yields and Costs EXHIBIT I-7 CharterBank Net Portfolio Value Analysis EXHIBIT I-8 CharterBank Loan Portfolio Composition EXHIBIT I-9 CharterBank Fixed Rate and Adjustable Rate Loans EXHIBIT I-10 CharterBank Contractual Maturity By Loan Type EXHIBIT I-11 CharterBank Loan Originations, Purchases and Sales EXHIBIT I-12 CharterBank Non-Performing Assets EXHIBIT I-13 CharterBank Loan Loss Allowance Activity EXHIBIT I-14 CharterBank Deposit Composition EXHIBIT I-15 CharterBank Borrowed Funds EXHIBIT II-1 Description of Office Facilities EXHIBIT II-2 Historical Interest Rates EXHIBIT III-1 General Characteristics of Publicly-Traded Institutions EXHIBIT III-2 Public Market Pricing of All MHC Institutions EXHIBIT IV-1 Stock Prices: As of March 2, 2001 EXHIBIT IV-2 Historical Stock Price Indices EXHIBIT IV-3 Historical Thrift Stock Indices EXHIBIT IV-4 Market Area Acquisition Activity EXHIBIT IV-5 CharterBank Director and Senior Management Summary Resumes EXHIBIT IV-6 CharterBank Pro Forma Regulatory Capital Ratios EXHIBIT IV-7 CharterBank Pro Forma Analysis Sheet - Fully Converted Basis EXHIBIT IV-8 CharterBank Pro Forma Effect of Conversion Proceeds - Fully Converted Basis EXHIBIT IV-9 CharterBank Peer Group Core Earnings Analysis EXHIBIT IV-10 CharterBank Pro Forma Analysis Sheet - Minority Stock Offering EXHIBIT IV-11 CharterBank Pro Forma Effects - Minority Stock Offering EXHIBIT IV-12 CharterBank Technical Analyses EXHIBIT V-1 RP Financial, LC. Firm Qualifications Statement EX-99.2 15 dex992.txt EXHIBIT 99.2 Exhibit 99.2 RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants May 4, 2001 Board of Directors CharterBank 600 Third Avenue West Point, Georgia 31833 Members of the Board: We have completed and hereby provide an updated independent appraisal of the estimated pro forma market value of the common stock of CharterBank, West Point, Georgia ("CharterBank" or the "Bank") in connection with the mutual-to-stock conversion transaction described below. This updated Appraisal is furnished pursuant to the conversion regulations promulgated by the Office of Thrift Supervision ("OTS"), and has been prepared in accordance with the written valuation guidelines promulgated by the OTS, most recently updated as of October 21, 1994. Specifically, this updated Appraisal has been prepared in accordance with the "Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization" of the OTS, as successor to the Federal Home Loan Bank Board ("FHLBB"), dated as of October 21, 1994; and applicable regulatory interpretations thereof. Our original appraisal report, dated March 2, 2001 (the "Original Appraisal"), is incorporated herein by reference. As in the preparation of our Original Appraisal, we believe the data and information used herein is reliable; however, we cannot guarantee the accuracy and completeness of such information. Plan of Reorganization and Stock Issuance ----------------------------------------- The Bank's Board of Directors has unanimously adopted a plan to reorganize into the mutual holding company form of organization (the "Reorganization"). As part of the Reorganization, CharterBank will: (1) form a mutual holding company and issue a 20 percent minority interest through an offering by a mid-tier holding company; (2) operate the Bank's approved reinsurance activities under the mid-tier holding company; and (3) allocate the Bank's current investment in common stock of the Federal Home Loan Mortgage Corporation ("Freddie Mac") among the various operating entities in the new organization to provide sufficient capitalization for the separate anticipated business activities. - -------------------------------------------------------------------------------- Washington Headquarters Rosslyn Center Telephone: (703) 528-1700 1700 North Moore Street, Suite 2210 Fax No.: (703) 528-1788 Arlington, VA 22209 Toll-Free No.: (866) 723-0594 www.rpfinancial.com E-Mail: mai1@rpfinancia1.com Board of Directors CharterBank May 4, 2001 Page 2 1. Plan of MHC Reorganization and Stock Issuance ------- ------------------------------------- The Bank will reorganize into a three level organization structure. At the top level will be a newly formed federal mutual holding company called First Charter, MHC (the "MHC") that will retain a majority ownership interest in the Bank. At the middle level will be a newly formed federal corporation called Charter Financial Corporation (the "Company") that will own a 100% interest in the bottom level companies. And at the bottom level will be the Bank and Charter Insurance Company ("CIC"). Concurrent with the Reorganization, the Company will issue a majority of its common stock to the MHC and offer for sale a minority ownership interest of its common stock to the Bank's Eligible Account Holders, Supplemental Eligible Account Holders and tax-qualified plans of the Bank including the employee stock ownership plan ("ESOP"). Any shares that are not sold in the Subscription Offering may be offered for sale in the Community Offering and subsequently, if appropriate, to the public in a Syndicated Community Offering or Public Offering. The above structure reflects a "two-tier" mutual holding company structure, given the two levels of holding companies, a "mid-tier" stock holding company and a "top-tier" mutual holding company. The number of shares of common stock to be sold in the Offering will approximate 20 percent of the total shares. The number of shares issued to the MHC will approximate 80 percent of the total shares. 2. Charter Insurance Company ------- ----------------- Charter Insurance Company ("CIC"), a recently formed reinsurance subsidiary, reinsures a portion of the Bank's loan originations which carry private mortgage insurance ("PMI") issued by Mortgage Guaranty Insurance Company ("MGIC"), a market leader in the PMI business. In conjunction with the Reorganization, CIC, currently held in a subsidiary of the Bank, will become a direct 100 percent owned subsidiary of the Company. The Bank's current investment in its insurance subsidiary is approximately $450,000. 3. Allocation of Freddie Mac Common Stock ------------- ------------------------ The Bank currently holds 5,055,000 shares of Freddie Mac common stock with an approximate market value of $203.9 million as of March 31, 2001, net of the related deferred tax liability (the value of the Freddie Mac holdings is subject to change daily based on market conditions). In conjunction with the Reorganization, the Freddie Mac stock will be allocated among the various operating entities to provide sufficient capitalization for their separate anticipated business activities. The Freddie Mac shares will be allocated as follows: (a) 400,000 shares will be placed at the MHC level as part of the MHC's initial capitalization; (b) 400,000 shares will be placed at CIC as part of this insurance subsidiary's capitalization; (c) 1,700,000 shares will be owned directly by the Company; and (d) 2,555,000 shares, more than half of the Bank's current holdings, will be retained by the Bank. ********* Board of Directors CharterBank May 4, 2001 Page 3 Immediately after consummation of the Reorganization, it is not anticipated that the Company will engage in any business activity other than ownership of the Bank and CIC. The assets and liabilities of the Company will be substantially equivalent to those of the Bank prior to the Reorganization, except for the $100,000 of cash and 400,000 shares of Freddie Mac stock that will be placed at the MHC level and will thus be excluded from consideration in the conclusions of the Appraisal. Limiting Factors and Considerations - ----------------------------------- Our valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of the Common Stock. Moreover, because such valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change time to time, no assurance can be given that persons who purchase shares of common stock in the Conversion will thereafter be able to buy or sell such shares at prices related to the foregoing valuation of the estimated pro forma market value thereof. RP Financial's updated valuation was determined based on the financial condition and operations of the Bank as of March 31, 2001, the date of the most recent financial data included in the Company's Prospectus. RP Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by RP Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities. RP Financial maintains a policy which prohibits RP Financial, its principals or employees from purchasing stock of its client financial institutions. This valuation will be updated as provided for in the conversion regulations and guidelines. These updates will consider, among other things, any developments or changes in the Bank's financial performance and condition, management policies, and current conditions in the equity markets for thrift shares. These updates may also consider changes in other external factors which impact value including, but not limited to: various changes in the legislative and regulatory environment for financial institutions, the stock market and the market for thrift stocks, and interest rates. Should any such new developments or changes be material, in our opinion, to the valuation of the shares, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained in the update at the date of the release of the update. Discussion of Relevant Considerations - ------------------------------------- 1. Financial Results ----------------- Table 1 presents summary balance sheet and income statement details for the twelve months ended December 31, 2000 and updated unaudited financial information through March 31, 2001. The "As Adjusted" columns reflect the impact of the MHC formation, including Board of Directors CharterBank May 4, 2001 Page 5 adjustments to reflect the $100,000 of cash and 400,000 shares of Freddie Mac stock retained by the MHC. Consistent with the methodology employed in the Original Appraisal analysis, it is the "As Adjusted" assets and capital figures that will be considered in the pro forma valuation analysis The overall composition of CharterBank's updated balance sheet was comparable to the December 31, 2000 data, although the balance of total assets and investments reflects shrinkage. The shrinkage is attributable in part, to ongoing runoff of higher cost wholesale deposit funds and borrowings. Updated reported earnings for the trailing twelve months ended March 31, 2001 increased modestly but remained at comparatively low levels. Growth Trends ------------- CharterBank's total assets decreased by $75.6 million over the three months ended March 31, 2001, largely attributable to the utilization of available cash flow to fund the repayment of maturing wholesale funds (both deposits and borrowings). The decline in the price of Freddie Mac stock (from $68.88 as of December 31, 2000, to $64.83 per share as of March 31, 2001) led to a decline in the balance of Freddie Mac stock equal to $20.5 million over the corresponding time frame. Capital decreased from $257.5 million as of December 31, 2000, to $246.6 million as of March 31, 2001, largely reflecting the impact of the after-tax reduction in value of Freddie Mac stock and notwithstanding the retention of earnings over the quarter. Loans Receivable ---------------- The balance of loans receivable decreased from $254.1 million, as of December 31, 2000, to $247.4 million, as of March 31, 2001, equal to 26.5 percent of total assets. The decline in the loan portfolio balance, notwithstanding recent efforts to expand loan origination volumes, is reflective of the growth characteristics as well as the small overall size of the Bank's primary market area. Investments and Mortgage-Backed Securities ------------------------------------------ The balance of investment and mortgage-backed securities ("MBS") declined by approximately $62.3 million, reflecting both cashflow generated through the portfolio which was utilized to pay down maturing wholesale borrowings and deposits as well as sales. In this regard, a significant portion of the securities sold were long term fixed rate securities -- management undertook sales to lessen interest rate risk exposure. Freddie Mac Stock ----------------- CharterBank's Freddie Mac stock ownership was unchanged over the quarter and equaled 5,055,000 shares with a market value of approximately $327.7 million ($64.83 per share) and a cost basis of approximately $1.40 per share. As discussed in the Original Appraisal, while the unrealized gain in the Freddie Mac stock has substantially bolstered the Bank's capital and earnings, the Bank is proposing to reorganize in a mutual holding company structure and will retain a portion of the stock at the MHC and mid-tier level so as to more efficiently manage Board of Directors CharterBank May 4, 2001 Page 6 its Freddie Mac stock investment as well as the Bank's retail operations. The appraisal will take into account the amount of Freddie Mac stock placed at the MHC level. Management has in the past, and will continue in the future, to evaluate on an ongoing basis the merits of the investment in the Freddie Mac stock. Management proposes to retain 2,555,000 shares of Freddie Mac stock at the Bank level in the MHC Reorganization. Based on current market conditions, tax consideration, and other factors, there are no plans to sell the Bank's Freddie Mac stock holdings at this time. As indicated in the Bank's Prospectus, the policy of holding Freddie Mac stock is based partially on concerns that any sales out of the portfolio (for capital management or other purposes) could taint the Freddie Mac stock as a trading portfolio for tax purposes, potentially triggering the payment of the full deferred tax liability related to the Freddie Mac gains. This factor, along with other considerations, has caused the Bank to adopt the current policy of retaining the Freddie Mac stock for investment. Since the unrealized after-tax gain on Freddie Mac stock is not included in Tier I capital for regulatory purposes, the decision to hold the Freddie Mac stock as an investment would preclude using the unrealized gains to fund dividends. Funding Structure ----------------- Deposit balances decreased by $26.1 million over the three months ended March 31, 2001. The reduction in deposit balance largely stems from the runoff of higher cost wholesale deposits including brokered and credit union CDs. The level of borrowings and wholesale deposits have fluctuated in recent periods based on a number of factors including the ability to generate funds through the retail operations and the relative all inclusive costs of deposits or borrowings at the time the funds are needed. Additionally, it has been CharterBank's practice to utilize wholesale funding when such funds may be reinvested into investment securities at an adequate risk-adjusted spread as determined by management. Important from the perspective of the valuation, wholesale deposits and borrowings represent a volatile funding element whose cost can vary considerably based on prevailing market conditions. Additionally, most of the wholesale funds in CharterBank's portfolio are short term in nature, thus requiring the Bank to continually access the capital markets to replace maturing funds. Equity ------ After-tax earnings of $1.5 million during the three months ended March 31, 2001, were more than offset by the impact of a downward equity adjustment on the available for sale portfolios resulted in a reduction of equity to $249.2 million. At the same time, assets declined at a faster pace than did equity such that the Bank's capital ratio increased modestly from 25.49 percent of assets as of December 31, 2000, to 26.66 percent of assets as of March 31, 2001. Importantly, as discussed in the Original Appraisal, while the net unrealized gains on investments including Freddie Mac stock are included as capital pursuant to generally accepted accounting principles ("GAAP"), it is not an element of core capital in the calculation of the Bank's compliance with its minimum regulatory capital requirements. Thus, while CharterBank possesses a strong capital ratio, its core capital level is much lower. One factor leading the Bank to restructure into the mutual holding company form of ownership is the ability to raise outside Board of Directors CharterBank May 4, 2001 Page 7 core capital without selling Freddie Mac stock. In this regard, it is management's stated intention to hold the Freddie Mac stock for the long-term, so as to continue to benefit from the growth of Freddie Mac's core business and to continue to defer the payment of income taxes as long as possible. Income and Expense Trends ------------------------- Table 1 also shows the Bank's historical income statements for twelve months ended December 31, 2000 and updated information as of March 31, 2001. The "As Adjusted" columns reflect the impact of the MHC formation, and it is the adjusted earnings figures from this colunm that will be considered in the pro forma valuation analysis. CharterBank's earnings reflect relatively limited change based on updated financial data as reported earnings increased very slightly while core or adjusted earnings decreased slightly. Overall, net income increased from $749,000 for the twelve months ended December 31, 2000 to $834,000 for the twelve months ended March 31, 2001. Over the corresponding time frame, CharterBank's adjusted earnings declined modestly from $4.8 million, equal to 0.52 percent of assets for the twelve months ended December 31, 2000, to $4.7 million, equal to 0.49 percent of average assets for the twelve months ended March 31, 2001. As discussed in the Original Appraisal, the income data for CharterBank is reflective of several significant features of its operations: (1) the impact of the wholesale investment and funding on the Bank's operating ratios (i.e., spreads and margins are thin and the ratio of other income and expenses are low reflecting the limited level of fees and expenses generated through wholesale operations); (2) the returns on the Bank's retail operations are low as a result of the relatively high overhead costs attributable to the retail banking operations; and (3) CharterBank's Freddie Mac stock investment provides the Bank with the opportunity to generate equity growth through capital appreciation in the Freddie Mac stock but revenue flowing through the income statement is limited to common stock dividends which are relatively modest (i.e., Freddie Mac's cash return is comparatively low). As a result of the foregoing, CharterBank's core earnings are relatively modest. Net Interest Income ------------------- CharterBank's net interest income decreased slightly for the most recent trailing 12 month period, both in dollar terms and as a percent of average assets. Specifically, net interest income inclusive of Freddie Mac stock dividends equaled $16.8 million, or 1.78 percent of average assets based ori updated financial data. Non-Interest Income ------------------- Non-interest income also decreased modestly based on updated financial data through March 31, 2001. Specifically, non-interest income declined by $63,000, to equal $1.3 million or 0.13 percent of average assets. Board of Directors CharterBank May 4, 2001 Page 8 Operating Expense ----------------- CharterBank's operating expenses remained relatively stable based on updated financial, and equaled $11.1 million, or 1.17 percent of average assets for the twelve months ended March 31, 2001. As described in the Original Appraisal, while CharterBank maintains a very low operating expense ratio in comparison to industry averages, the operating expense ratio is distorted somewhat by the large amount of assets and liabilities requiring little or no expense to manage. Such assets, including Freddie Mac stock and wholesale investments, comprised more than 70 percent of the balance sheet as of March 31, 2001 and the related cost to manage assets was comparatively modest in relation to managing the Bank's retail and other functions. Thus, excluding such assets, the Bank's cost structure is actually relatively high and is an important cause of the moderate operating returns posted by the Bank. Operating expenses are expected to increase following the Conversion as a result of the expense of the stock-related benefit plans, the cost related to operating as a public company and as a result of long-term plans to continue to expand the branch network. With regard to the latter factor, the Bank has tentative plans to substantially enhance the LaGrange office and open a new office in Auburn, Alabama in fiscal 2001. Longer term, CharterBank plans to open additional offices in other nearby areas in its targeted market, potentially resulting in the addition of four to five new offices over the next three to four years. Based on CharterBank's business plan estimates, the incremental expenses related to branching and opening new ATMs is expected to approximate $270,000 in fiscal 2001 and estimated to increase to $1.9 million annually by fiscal 2003. While such figures are preliminary estimates, they provide an indication of the Bank's intent to expand and to incur short-term costs with the objective of enhancing long-term earnings growth. Efficiency Ratio ---------------- CharterBank's efficiency ratio (operating expenses as a percent of the sum of net interest income and other operating income) of approximately 61.38 percent for the most recent 12 months reflected an increase from the 60.49 percent ratio reported for the twelve months ended December 31, 2000, with the deterioration reflecting the decline in net interest and non-interest income. Provisions ---------- Provisions for loan losses increased modestly to $1.5 million, equal to 0.16 percent of average assets, primarily as a result of loan growth as well as the changing composition of the loan portfolio. The trend towards higher provisions over the last several fiscal years is reflective of growth in the level of asset quality problems (largely acquired in the Citizens acquisition) and to the changing loan portfolio composition which now includes a greater level of high risk-weight loans. Net Non-Operating Expense ------------------------- Net non-operating expenses declined in the most recent quarter, from $3.8 million for the twelve months ended December 31, 2000, to $3.4 million for the twelve months ended March 31, 2001. The reduction is attributable to a higher level of gains realized on the sale of loans and Board of Directors CharterBank May 4, 2001 Page 9 securities, largely as a result of the decline in market interest rate levels, which offset other non-operating losses including the writeoff of the remaining goodwill balance. 2. Peer Group Financial Comparisons -------------------------------- Tables 2 and 3 present updated financial characteristics and operating results for CharterBank, the Peer Group and all publicly-traded savings institutions. CharterBank's ratios are based on financial data through March 31, 2001 while the Peer Group's ratios are based on financial data through December 31, 2000. Financial Condition ------------------- In general, the comparative balance sheet ratios for the Bank and the Peer Group did not vary significantly from the ratios examined in the earlier appraisal analysis. In this regard, the significant disparities between the Bank's and the Peer Group's balance sheet remain (i.e., the large wholesale element of the Bank's balance sheet and CharterBarik's higher GAAP capital ratio). In this regard, the significant wholesale element of the Bank's asset base continues to be evidenced in the data which shows that whole loans comprised only 26.5 percent of CharterBank's assets based on updated financial data, which remains well below the Peer Group average of 64.1 percent. CharterBank's net worth base of 26.7 percent was above the Peer Group's average net worth ratio of 12.9 percent. The Bank's pro forma capital position (consolidated with the holding company) will increase with the addition of the stock proceeds, with such increases offset to an extent by the impact of the MHC retaining 400,000 shares of Freddie Mac stock. At the same time, the Bank's core capital ratios, which are important with regard to CharterBank's ability to expand the balance sheet and pay dividends are much lower, equal to only 8.80 percent of adjusted assets as of March 31, 2001. CharterBank' s funding liabilities reflected some important differences in relation to the Peer Group as follows: (1) retail funding sources were limited as the principal sources of interest-bearing liabilities primarily consisted of wholesale borrowings and deposits; and (2) the ratio of interest- bearing liabilities was low owing to CharterBank's strong capital position and the presence of the net deferred tax liability, the largest component of which resulted from unrealized gains on Freddie Mac stock. Overall, deposits equaled only 19.8 percent of assets for CharterBank in comparison to an average of 72.2 percent for the Peer Group, while borrowings totaled 37.7 percent and 13.5 percent of assets for the Bank and the Peer Group, respectively. Total interest-bearing liabilities maintained by the Bank and the Peer Group, as a percent of assets, equaled 57.5 and 85.7 percent, respectively. As discussed above, the lower level of interest-bearing liabilities for CharterBank is the result of its high capital ratio and to the presence of a large deferred tax liability which is non-interest bearing. While these characteristics benefit CharterBank's operations and operating returns, the reliance on high cost interest-sensitive wholesale borrowings and deposits offsets many of these benefits and are a factor in the Bank's modest returns on core operations. Board of Directors CharterBank May 4, 2001 Page 10 Board of Directors CharterBank May 4, 2001 Page 11 Updated growth rates for the Bank reflect the impact of recent shrinkage while the Peer Group's ratios continue to reflect moderate growth (the Bank's growth rates are annualized rates for the six months ended March 31, 2001 while the Peer Group's growth rates are for the twelve months ended December 31, 2000). Specifically, most key balance sheet aggregates for CharterBank such as assets, investments, loans and deposits reflect recent shrinkage while the comparable growth rates for the Peer Group reflect moderate growth. Capital growth reported by CharterBank continued to be very strong, as net worth increased by 43.70 percent. In contrast, the Peer Group's capital growth rate remained much lower, as reported equity increased by 3.96 percent for the most recent twelve month period. Importantly, the increase in capital is primarily attributable to changes in the other accumulated comprehensive income account as CharterBank operated with a modest level of earnings over the most recent six month period. At the same time, the Peer Group's modest capital growth rate reflects the impact of dividend payments and stock repurchases and would otherwise have been higher absent these capital management strategies. Income and Expense Trends ------------------------- Table 3 displays comparable statements of operations for the Bank and the Peer Group, based on results updated for the most recent publicly available disclosures. As discussed in the Original Appraisal, CharterBank's operating ratios are different from the majority of savings institutions reflecting the following significant features of CharterBank's operations: (1) the impact of the wholesale investment and funding on the Bank's operating ratios (i.e., spreads and margins are thin and the ratio of other income and expenses are low reflecting the limited level of fees and expenses generated through wholesale operations); (2) the returns on the Bank's retail operations are low as a result of the relatively high overhead costs attributable to the retail banking operations; and (3) CharterBank's Freddie Mac stock investment provides the Bank with the opportunity to generate equity growth through capital appreciation in the Freddie Mac stock investment but revenue flowing through the income statement is limited to common stock dividends which are relatively modest (i.e., Freddie Mac's cash return is modest). Largely as a result of the foregoing, CharterBank's profitability remained below the Peer Group average, equal to 0.09 percent of average assets for the twelve months ended March 31, 2001, while the Peer Group's earnings equaled 0.83 percent of average assets. The moderate level of earnings for CharterBank was the result of the Bank's moderate core earnings levels as discussed above and the amortization and writeoff of CharterBank's remaining goodwill balance in fiscal 2000. CharterBank's weaker core operating returns were the result of the thin spreads and margins on the Bank's leveraging activities and weak returns from CharterBank's retail banking operations Neither CharterBank nor the Peer Group's net interest margin changed significantly incorporating updated financial data (the net interest margin equaled 1.78 percent and 3.25 percent of assets for the Bank and Peer Group, respectively). The Peer Group's advantage is the result of both higher asset yields and a more favorable cost of funds. Loan loss provisions for CharterBank remain in excess of the Peer Group average (0.16 percent for CharterBank versus an average of 0.13 percent for the Peer Group). Board of Directors CharterBank May 4, 2001 Page 12 Board of Directors charterBank May 4, 2001 Page 13 CharterBank continues to generate lower levels of non-interest income relative to the Peer Group, equal to 0.13 percent and 0.44 percent of average assets, respectively. CharterBank continued to maintain a lower operating expense ratio, equal to 1.17 percent of average assets versus an average of 2.27 percent for the Peer Group. As discussed in the Original Appraisal, while CharterBank maintains a very low operating expense ratio in comparison to industry averages, the operating expense ratio is distorted somewhat by the large amount of assets and liabilities requiring little or no expense to manage. In this regard, more than 70 percent of CharterBank's March 31, 2001 balance sheet were comprised of investments (primarily Freddie Mac stock, MBS and CMOs) which entail limited management and overhead expense. Excluding such assets, the Bank's cost structure is actually relatively high and is an important cause of the moderate operating returns posted on CharterBank's retail banking operations. On a post-offering basis, the Bank's operating expenses can be expected to increase with the addition of stock benefit plans, with such expenses already impacting the Peer Group's operating expenses. Additionally, CharterBank's cost structure is expected to increase as the Bank upgrades the LaGrange office, opens a new office in Auburn and branches into new areas within its targeted markets over the longer term. Taking together the components of core net income through a review of the efficiency ratio (operating expenses divided by net interest income and non- interest operating income) indicates that Peer Group's and Bank's efficiency ratios remain comparable, equal to 61.52 percent versus 61.38 percent for CharterBank. CharterBank's effective tax rate, equal to 59.06 percent based on updated financial data, remains above the Peer Group average equal to 34.60 percent. The Bank's tax rate exhibits volatility as its financial taxable income is subject to numerous adjustments, including adjustments for charitable contribution carryforwards and exclusions for dividend income. 3. Stock Market Conditions ----------------------- Since the date of the first update, the performance of the overall stock market has been mixed. Following a general increase in stocks during early March as bargain hunters entered the market, the market again headed downward as major companies continued to issue earnings warnings and as a result of a sell-off in the Tokyo stock market. The bleak outlook for first quarter earnings by a number of the bellwether technology stocks spurred a two-day sell-off in the NASDAQ of more than 11 percent and the S&P 500 fell 4.3 percent on March 12th, putting that index into "bear-market" territory. Disappointment of only a 0.50 percent rate-cut by the Federal Reserve at its March 20th meeting prompted a new wave of selling, particularly in technology stocks. Signs of a stronger economy supported a late-March rally, which was again cut short by more earnings warnings in the technology sector. The first quarter of 2001 concluded as the worst first quarter ever for the NASDAQ and the worst first quarter for the DJIA in 23 years. On March 30, 2001, the DJIA closed at 9878.78, a decline of 8.4 percent since year end 2000. Comparatively, the NASDAQ declined 25.5 percent in the first quarter. Stocks continued to slide in early-April 2001, amid fears that first quarter earnings would contain more bad surprises and generally fall short of reduced expectations. Board of Directors CharterBank May 4, 2001 Page 14 However, favorable earnings reports by Dell Computer Corporation and Alcoa served as a catalyst to one of the largest one-day gains in stock market history on April 5/th/, with the DJIA and NASDAQ posting gains of 4.2 percent and 8.9 percent, respectively. The upward momentum in stock was sustained into mid- April, as investors gained confidence that the economy would improve in the second half of the years. Stocks raced higher following a surprise inter-meeting rate cut by the Federal Reserve on April 18th The Federal Reserve cited slowing business investment and falling profits in its decision to lower rates by 50 basis points a month ahead of its regularly scheduled meeting. On May 4, 2001, the DJIA closed at 10951.24 or 4.6 percent higher since the date of the Original Appraisal and the NASDAQ closed at 2191.53 or 3.5 percent higher since the date of the Original Appraisal. Since the date of the Original Appraisal, the market for thrift issues has also been mixed. After trading in a narrow range through mid-March, a sell- off in large U.S. banks rippled through the thrift sector as well. Most of the sell-off was attributable to concerns over U.S. bank exposure to troubled Japanese banks, which would only indirectly impact the thrift sector to the extent such problems would impact the U.S. economy. The Federal Reserve's implementation of a third rate cut at its March meeting had little impact on thrift stocks, as thrift stocks followed the broader market lower following the rate cut. However, aided by the decline in short-term interest rates that provided for a steeper yield curve, thrift stocks moved higher at the end of the first quarter. After following the broader market lower in early-April, thrifts stock recovered slightly in mid-April and generally outperformed bank stocks. The more favorable performance by thrifts was supported by their lower exposure to the credit cycle and the more positive effect that the rate cuts would have on their margins. While the announced merger between First Union and Wachovia had little impact on the overall market for thrift and bank stocks, financial stocks gained on news of the surprise rate cut by the Federal Reserve in mid- April. The largest gains tended to in the large-cap stocks. On May 4, 2001, the SNL Index for all publicly-traded thrifts closed at 881.2, an increase of 2.7 percent since the date of the Original Appraisal. Conversely, the SNL MHC index closed at 951.2, reflecting a decline of 1.7 percent since the date of the Original Appraisal. Consistent with the major thrift pricing indices, the pricing measures for all publicly-traded thrifts and the Peer Group shows modest change since the date of the Original Appraisal. Since the date of the Original Appraisal, the Peer Group's P/E ratio on a fully converted basis increased by approximately 4.3 percent while the P/Core Earnings multiple increased by 1.6 percent. The fully converted P/B and P/TB increased in a range of 1 to 2 percent over the corresponding time frame. The pricing ratios for all SAIF-insured institutions has also increased modestly, with the PIE, P/Core Earnings and P/B increasing in a range of 0.2 percent to 6.1 percent. Board of Directors CharterBank May 4, 2001 Page 15 Average Pricing Characteristics At March 2, At May 4, % 2001 2001 Change ---- ---- ------ Peer Group (Fully Converted Basis) - ---------------------------------- Price/Earnings (x) 14.93x 15.57x 4.3% Price/Core Earnings (x) 15.19 15.44 1.6 Price/Book (%) 73.37% 74.47% 1.5 Price/Tangible Book (%) 76.57 77.68 1.4 Price/Assets (%) 14.17 14.26 0.6 Publicly-Traded SAIF-Insured Thrifts - ------------------------------------ Price/Earnings (x) 13.79x 14.30x 3.7% Price/Core Earnings (x) 14.26 15.13 6.1 Price/Book (%) 102.22% 103.54% 1.3 Price/Tangible Book (%) 108.96 109.15 0.2 Price/Assets (%) 10.52 10.75 2.2 The "new issue" market is separate and distinct from the market for seasoned issues like the Peer Group companies. Accordingly, as discussed in the Original Appraisal, RP Financial has considered the pro forma pricing and trading level of recently converted companies in this updated appraisal. The level of converting issues remains limited and there have been no new mutual holding companies formed which have subsequently sold stock since the date of the Original Appraisal. There have been four full stock conversions completed in the last three months, three of which have been subsequently publicly traded. The four transactions had an average P/TB of 57.6 percent and average P/B multiple based on core earnings of 12.8 times. The three recently converted thrifts which are publicly traded (Citizens First Bancorp of MI, First BancTrust Corp of IL, and Chesterfield Financial Corp.) are currently priced at 81.2 percent of pro forma book value and 16.7 times earnings, which reflects an average 31 percent price appreciation in the aftermarket. Summary of Adjustments - ---------------------- Based on the foregoing, there are no changes to the valuation parameters established in the Original Appraisal and as summarized below. Board of Directors CharterBank May4, 2001 Page 16 Key Valuation Parameters: Valuation Adjustment ------------------------- -------------------- Financial Condition No Adjustment Profitability, Growth and Viability of Earnings Significant Downward Asset Growth Slight Upward Primary Market Area Moderate Downward Dividends Slight Downward Liquidity of the Shares No Adjustment Marketing of the Issue Moderate Downward Management No Adjustment Effect of Government Regulations and Moderate Downward Regulatory Reform There were no material changes in the updated financial conditions of the Bank and the Peer Group of public MHCs, and the differences between the Bank's and the Peer Group remained the same as discussed in the Original Appraisal. While there has been a modest reduction in the Bank's equity, primarily owing to the decline in Freddie Mac stock, the adjusted equity based on the average trading price for Freddie Mac stock over the year ended May 4, 2001, has increased. The factors concerning the valuation parameters of primary market area, dividends, liquidity of the shares, management and effect of government regulation and regulatory reform did not change since the Original Appraisal date. Accordingly, those parameters were not discussed further in this update. The general market for thrift stocks and the Peer Group has increased slightly while conversion activity remains very limited. Overall, taking into account the foregoing factors, particularly the limited change in the Peer Group's fully converted pricing ratios as well as the limited change in the market overall, we believe that the Bank's pro forma valuation on a fully converted basis should remain unchanged. Valuation Approaches - -------------------- In applying the accepted valuation methodology promulgated by the OTS and adopted by the FDIC, i.e., the pro forma market value approach, including the fully-converted analysis described above, we considered the three key pricing ratios in valuing CharterBank's to-be-issued stock -- price/earnings ("P/E"), price/book ("P/B"), and price/assets ("P/A") approaches --all performed on a pro forma basis. In preparing the pro forma analysis, we have adjusted the Bank's trailing twelve month earnings bases, capital, and assets to reflect formation of the MHC, including capitalizing the MHC with $100,000 of cash and 400,000 shares of Freddie Mac stock currently held by the Bank. Since these assets will be held by the MHC solely for the benefit of the mutual depositors, they have been excluded from our calculations of pro forma value for the Bank. In computing the pro forma impact of the conversion and the related pricing ratios, we have incorporated the valuation parameters disclosed in CharterBank's prospectus for reinvestment rate, the effective tax rate and stock benefit plan assumptions (summarized in Exhibits 2 and 3). Pursuant to the minority stock offering, we have also incorporated the valuation parameters disclosed in CharterBank's prospectus for offering expenses and the stock benefit plans Board of Directors CharterBank May 4, 2001 Page 17 Consistent with the Original Appraisal, this updated appraisal continues to be based primarily on fundamental analysis techniques applied to the Peer Group, including the P/E approach, the P/B approach and the P/A approach. The updated appraisal also incorporates a technical analysis of recently completed stock conversions, including principally the P/B approach which (as discussed in the Original Appraisal) is the most meaningful pricing ratio as the pro forma P/E ratios reflect an assumed reinvestment rate and do not yet reflect the actual use of proceeds. Based on the foregoing, we have concluded that the pro forma market value range of CharterBank's stock is unchanged. Therefore, as of May 4, 2001, RP Financial concluded that the pro forma market value of CharterBank's stock as a mutual holding company on a fully-converted basis, is equal to $195,000,000. P/E Approach. The application of the P/E valuation method requires ------------ calculating the Bank's pro forma market value by applying a valuation P/E multiple (fully-converted basis) to the pro forma earnings base. In applying this technique, we considered both reported earnings and a recurring earnings base, that is, earnings adjusted to exclude any one-time non-operating items, plus the estimated after-tax earnings benefit of the reinvestment of the net proceeds. The Bank's reported earnings, incorporating the adjustment to account for the impact of cash and Freddie Mac stock retained by the MHC equaled $569,000. In deriving CharterBank's core earnings, the only adjustments made to reported earnings were to eliminate gains on the sale of loans and investment securities, losses on loan servicing partnerships and the amortization and write-off of goodwill (goodwill has been fully expensed in fiscal 2000). Incorporating the earnings adjustments made to account for the impact of the MHC reorganization, the Bank's preconversion core earnings equaled $4.396 million for the twelve months ended March 31, 2001. In applying the P/E approach, RP Financial's valuation conclusions were based on the Bank's and the Peer Group's recurring or "core" earnings estimates, which eliminated the effects of one-time non-recurring items from the earnings of each. Based on CharterBank's core earnings, and incorporating the impact of the pro forma assumptions discussed previously, the Bank's core P/E multiple at the $195.0 million midpoint value (full conversion) equaled 28.99 times (versus the 24.52 times midpoint valuation in the Original Appraisal). Comparatively, the Peer Group posted an average core P/E multiple of 15.44 times (fully converted basis), which indicated a premium of 87.8 percent in the Bank's core P/E multiple (versus a premium of 61.4 percent as indicated in the Original Appraisal). The implied conversion pricing ratios relative to the Peer Group's pricing ratios are indicated in Table 4, and the updated pro forma calculations are detailed in Exhibits 2 and 3. P/B Approach. The application of the P/B valuation method requires ------------ calculating the Bank's pro forma market value by applying a valuation P/B ratio, derived from the Peer Group's P/B ratio (fully-converted basis), to CharterBank's pro forma book value (fully-converted basis). In applying the P/B approach, we considered both reported book value and book value adjusted to reflect the impact to equity resulting from utilizing a twelve month average price through May 4, 2001, for the Freddie Mac stock price. The pro forma P/B based on the adjusted book value is shown in the column labeled P/TB. (Note: the P/TB column for the Peer Group reflects the Board of Directors CharterBank May 4, 2001 Page 18 price-to-tangible book value ratios.) Based on the $195.0 million midpoint valuation, CharterBank's pro forma P/B ratio based on reported book value was 49.15 percent. Adjusting the Freddie Mac stock price based on a twelve month average price for Freddie Mac ($54.21), CharterBank's pro forma P/B ratio (shown in the "P/TB" column) was 53.22 percent. In comparison to the average P/B and P/TB ratios for the Peer Group of 74.47 percent and 77.68 percent, the Bank's ratios reflected discounts of 34.0 percent on a P/B basis and 31.5 percent based on CharterBank's adjusted book value and the Peer Group's tangible book value. The foregoing discounts fell within the range of discounts (34.2 percent to 27.8 percent as established in the Original Appraisal). Applying the P/B approach utilizing the trading price of the Freddie Mac stock for the ten trading days through the valuation date of May 4, 2001, the resulting P/B ratio would be 49.23 percent reflecting a discount of 36.6 percent relative to the Peer Group (as compared to 35.9 percent in the Original Appraisal). As was described in the Original Appraisal, the implied discounts under the book value approach are warranted in view of the valuation adjustments applied to the Bank's value and in view of the premiums generated pursuant to the earnings approach to valuation. 3. P/A Approach. P/A ratios are generally not as a reliable indicator of ------------ market value, as investors do not place significant weight on total assets as a determinant of market value. Investors typically place significantly greater weight on book value and earnings -- which have received greater weight in our valuation analysis. At the $195.0 million midpoint of the valuation range, CharterBank exhibited a pro forma P/A ratio of 18.18 percent. In comparison to the Peer Group's average P/A ratio of 14.26 percent (fully converted basis), CharterBank's P/A ratio indicated a premium of 27.5 percent (versus a premium of 20.0 percent at the fully-converted midpoint valuation in the Original Appraisal). Summary - ------- Based on the foregoing, we have concluded that CharterBank's estimated pro forma market value is unchanged from the level in the Original Appraisal. Accordingly, it is our opinion, as of May 4, 2001, the estimated aggregate pro forma market value of the offering shares in a full stock conversion, was $195,000,000 at the midpoint, equal to 19,500,000 shares at a per share value of $10.00. Pursuant to conversion guidelines, the 15 percent offering range indicates a minimum value of $165,750,000, and a maximum value of $224,250,000. Based on the $10.00 per share offering price determined by the Board, this valuation range equates to an offering of 16,575,000 shares at the minimum to 22,425,000 shares at the maximum. In the event that the appraised value is subject to an increase, up to 25,788,750 shares may be issued at an issue price of $10.00 per share, for an aggregate market value of $257,887,500, without a resolicitation. The Board of Directors have established a public offering range such that the public ownership of the Company will constitute a 20 percent ownership interest of the Company, with the MHC owning the majority of the shares. Accordingly, the offering range to the public of the minority stock will be $33,150,000 at the minimum, $39,000,000 at the midpoint, $44,850,000 at the maximum and $51,577,500 at the supermaximum. The pro forma valuation calculations relative to the Peer Group (fully-converted basis) are shown in Table 4 and Board of Directors CharterBank May 4, 2001 Page 19 are detailed in Exhibit 2 and Exhibit 3; the pro forma valuation calculations relative to the Peer Group based on reported financials are shown in Table 5 and are detailed in Exhibits 4 and 6. Respectfully submitted, RP FINANCIAL, LC. William E. Pommerening Chief Executive Officer James P. Hennessey Senior Vice President RP Financial, LC. LIST OF EXHIBITS Exhibit Number Description ------ ----------- 1 Stock Prices: As of May 4, 2001 2 Pro Forma Analysis Sheet -- Fully Converted Basis 3 Pro Forma Effect of Conversion Proceeds -- Fully Converted Basis 4 Pro Forma Analysis Sheet -- Minority Stock Offering 5 Pro Forma Effect of Stock Proceeds -- Minority Stock Offering 6 Firm Qualifications Statement EX-99.3 16 dex993.txt EXHIBIT 99.3 Exhibit 99.3 CharterBank PROPOSED MAILING AND INFORMATIONAL MATERIALS INDEX ----- 1. Dear Member Letter * 2. Dear Member Letter for Non Eligible States 3. Dear Friend Letter - Eligible Account Holders who are no longer Members * 4. Dear Potential Investor Letter * 5. Dear Customer Letter - Used as a Cover Letter for States Requiring "Agent" Mailing * 6. Proxy Request 7. Invitation Wafer * 8. Tombstone 9. Mailing Insert/Lobby Poster 10. Invitation Letter - Informational Meetings 11. Dear Subscriber/Acknowledgment Letter - Initial Response to Stock Order Received 12. Dear Charter Shareholder - Confirmation Letter 13. Dear Interested Investor - No Shares Available Letter 14. Welcome Shareholder Letter - For Initial Certificate Mailing 15. Dear Interested Subscriber Letter - Subscription Rejection 16. Letter for Sandler O'Neill Mailing to Clients * * Accompanied by a Prospectus Note: Items 1 through 9 are produced by the Financial Printer and Items 10 through 16 are produced by the conversion center. [CharterBank] Dear Member: The Board of Directors of CharterBank has voted unanimously in favor of a plan to reorganize from a federally chartered mutual savings and loan association into a "two-tiered" mutual holding company. As part of this reorganization, CharterBank will convert to a federal mutual holding company to be known as First Charter, MHC, and will establish Charter Financial Corp., a federal corporation as a majority-owned subsidiary. Charter Financial Corp. will be the parent corporation of CharterBank (in stock form) following the reorganization. We are reorganizing so that CharterBank will be structured in the form of ownership used by a growing number of savings institutions. To accomplish the reorganization, your participation is extremely important. On behalf of the Board, I ask that you help us meet our goal by reading the enclosed material and then casting your vote in favor of the plan of reorganization and mailing your signed proxy card immediately in the enclosed WHITE postage-paid envelope marked "PROXY RETURN." Should you choose to attend the Special Meeting of Members and wish to vote in person, you may do so by revoking any previously executed proxy. If you have an IRA or other Qualified Plan account for which CharterBank acts as trustee and we do not receive a proxy from you, CharterBank, as trustee for such account, intends to vote in favor of the plan of reorganization on your behalf. If the plan of reorganization is approved let me assure you that: . Deposit accounts will continue to be federally insured to the same extent permitted by law. . Existing deposit accounts and loans will not undergo any change. . Voting for approval will not obligate you to buy any shares of common stock. As a qualifying account holder, you may also take advantage of your nontransferable rights to subscribe for shares of Charter Financial Corp. common stock on a priority basis, before the stock is offered to the general public. The enclosed proxy statement and prospectus describes the stock offering and the operations of CharterBank. If you wish to purchase stock, please complete the stock order and certification form and mail it, along with full payment for the shares (or appropriate instructions authorizing withdrawal from a deposit account with CharterBank) to CharterBank in the enclosed COLOR postage-paid envelope marked "STOCK ORDER RETURN," or return it to any full service branch office of CharterBank. Your order must be physically received by CharterBank no later than 4:00 p.m. Eastern time on________, June __, 2001. Please read the prospectus carefully before making an investment decision. As part of the reorganization, Charter Financial Corp. intends to adopt a stock option plan and management recognition plan for the benefit of its officers, directors and employees. In order to adopt these stock benefit plans at this time, Office of Thrift Supervision regulations require that we must give stockholders the opportunity to vote for or against the stock option plan and the management recognition plan on the stock order form. Therefore, to implement the benefit plans, your participation is extremely important. We urge you to vote "YES" for the Stock Option Plan and the Management Recognition Plan in Box 12 of the stock order and certification form. If you wish to use funds in your IRA or Qualified Plan at CharterBank to subscribe for common stock, please be aware that federal law requires that such funds first be transferred to a self-directed retirement account with a trustee other than CharterBank. The transfer of such funds to a new trustee takes time, so please make arrangements as soon as possible. If you have any questions after reading the enclosed material, please call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m. Please note that the conversion center will be closed from 12:00 noon Friday, May 25 through 12:00 noon Tuesday, May 29, in observance of the Memorial Day holiday. Sincerely, Robert L. Johnson President and Chief Executive Officer The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. This is not a offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus. #1 [CharterBank] Dear Member: The Board of Directors of CharterBank has voted unanimously in favor of a plan to reorganize from a federally chartered mutual savings and loan association into a "two-tiered" mutual holding company. As part of this reorganization, CharterBank will convert to a federal mutual holding company to be known as First Charter, MHC, and will establish Charter Financial Corp., a federal corporation as a majority-owned subsidiary. Charter Financial Corp. will be the parent corporation of CharterBank (in stock form) following the reorganization. We are reorganizing so that CharterBank will be structured in the form of ownership used by a growing number of savings institutions. To accomplish the reorganization, your participation is extremely important. On behalf of the Board, I ask that you help us meet our goal by reading the enclosed material and then casting your vote in favor of the plan of reorganization and mailing your signed proxy card immediately in the enclosed postage-paid envelope marked "PROXY RETURN." Should you choose to attend the Special Meeting of Members and wish to vote in person, you may do so by revoking any previously executed proxy. If you have an IRA or other Qualified Plan for which CharterBank acts as trustee and we do not receive a proxy from you, CharterBank, as trustee for such account, intends to vote in favor of the plan of reorganization on your behalf. If the plan of reorganization is approved let me assure you that: . Deposit accounts will continue to be federally insured to the same extent permitted by law. . Existing deposit accounts and loans will not undergo any change. We regret that we are unable to offer you common stock in the subscription offering, because the laws of your state or jurisdiction require us to register either (1) the to-be-issued common stock of Charter Financial Corp., or (2) an agent of CharterBank to solicit the sale of such stock, and the number of eligible subscribers in your state or jurisdiction does not justify the expense of such registration. If you have any questions after reading the enclosed material, please call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m. Please note that the conversion center will be closed from 12:00 noon Friday, May 25 through 12:00 noon Tuesday, May 29, in observance of the Memorial Day holiday. Sincerely, Robert L. Johnson President and Chief Executive Officer The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus. #2 [CharterBank] Dear Friend of CharterBank: CharterBank is in the process of reorganizing from a federally chartered mutual savings and loan association into a "two-tiered" mutual holding company. As part of this reorganization, CharterBank will convert to a federal mutual holding company to be known as First Charter, MHC, and will establish Charter Financial Corp., a federal corporation as a majority-owned subsidiary. Charter Financial Corp. will be the parent corporation of CharterBank (in stock form) following the reorganization. We are reorganizing so that CharterBank will be structured in the form of ownership used by a growing number of savings institutions. As a former account holder, you may take advantage of your nontransferable rights to subscribe for shares of Charter Financial Corp. common stock on a priority basis, before the stock is offered to the general public. The enclosed prospectus describes the stock offering and the operations of CharterBank. If you wish to purchase stock, please complete the stock order and certification form and mail it, along with full payment for the shares (or appropriate instructions authorizing withdrawal from a deposit account with CharterBank) to CharterBank in the enclosed postage-paid envelope marked "STOCK ORDER RETURN," or return it to any full service branch office of CharterBank. Your order must be physically received by CharterBank no later than 4:00 p.m. Eastern time on ________, June xx, 2001. Please read the prospectus carefully before making an investment decision. As part of the reorganization, Charter Financial Corp. intends to adopt a stock option plan and management recognition plan for the benefit of its officers, directors and employees. In order to adopt these stock benefit plans at this time, Office of Thrift Supervision regulations require that we must give stockholders the opportunity to vote for or against the stock option plan and the management recognition plan on the stock order form. Therefore, to implement the benefit plans, your participation is extremely important. We urge you to vote "YES" for the Stock Option Plan and the Management Recognition Plan in Box 12 of the stock order and certification form. If you have any questions after reading the enclosed material, please call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m. Please note that the conversion center will be closed from 12:00 noon Friday, May 25 through 12:00 noon Tuesday, May 29, in observance of the Memorial Day holiday. Sincerely, Robert L. Johnson President and Chief Executive Officer The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. This is not a offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus. #3 [Charter Financial Corp.] Dear Potential Investor: We are pleased to provide you with the enclosed material regarding the reorganization of CharterBank from a federally chartered mutual savings and loan association into a "two-tiered" mutual holding company. As part of this reorganization, CharterBank will convert to a federal mutual holding company to be known as First Charter, MHC, and will establish Charter Financial Corp., a federal corporation as a majority-owned subsidiary. Charter Financial Corp. will be the parent corporation of CharterBank (in stock form) following the reorganization. This information packet includes the following: PROSPECTUS: This document provides detailed information about CharterBank's operations, the proposed stock offering by Charter Financial Corp., a holding company formed by CharterBank to become its parent company upon completion of the reorganization. Please read it carefully prior to making an investment decision. STOCK ORDER AND CERTIFICATION FORM: Use this form to subscribe for common stock and return it, together with full payment for the shares (or appropriate instructions authorizing withdrawal from a deposit account with the Bank) to CharterBank in the enclosed postage-paid envelope. Your order must be physically received by the Bank no later than 4:00 p.m., Eastern time on ________, June xx, 2001. As part of the reorganization, Charter Financial Corp. intends to adopt a stock option plan and management recognition plan for the benefit of its officers, directors and employees. In order to adopt these stock benefit plans at this time, Office of Thrift Supervision regulations require that we must give stockholders the opportunity to vote for or against the stock option plan and the management recognition plan on the stock order form. Therefore, to implement the benefit plans, your participation is extremely important. We urge you to vote "YES" for the Stock Option Plan and the Management Recognition Plan in Box 12 of the stock order and certification form. We are pleased to offer you this opportunity to become one of our charter shareholders. If you have any questions regarding the reorganization or the prospectus, please call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m. Sincerely, Robert L. Johnson President and Chief Executive Officer The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. This is not a offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus. #4 [SANDLER O'NEILL & PARTNERS, L.P. LETTERHEAD] Dear Customer of CharterBank: At the request of CharterBank, we have enclosed material regarding the offering of common stock in connection with the reorganization of CharterBank from a federally chartered mutual savings and loan association into a "two-tiered" mutual holding company. As part of this reorganization, CharterBank will convert to a federal mutual holding company to be known as First Charter, MHC, and will establish Charter Financial Corp., a federal corporation as a majority-owned subsidiary. Charter Financial Corp. will be the parent corporation of CharterBank (in stock form) following the reorganization. These materials include a prospectus and a stock order and certification form, which offer you the opportunity to subscribe for shares of common stock of Charter Financial Corp. We recommend that you read this material carefully. If you decide to subscribe for shares, you must return the properly completed and signed stock order and certification form, along with full payment for the shares (or appropriate instructions authorizing withdrawal from a deposit account with CharterBank) to CharterBank in the accompanying COLOR postage-paid envelope marked "STOCK ORDER RETURN." Your order must be physically received by CharterBank, no later than 4:00 p.m., Eastern time on _______, June xx, 2001. If you have any questions after reading the enclosed material, please call the conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., and ask for a Sandler O'Neill representative. As part of the reorganization, Charter Financial Corp. intends to adopt a stock option plan and management recognition plan for the benefit of its officers, directors and employees. In order to adopt these stock benefit plans at this time, Office of Thrift Supervision regulations require that we must give stockholders the opportunity to vote for or against the stock option plan and the management recognition plan on the stock order form. Therefore, to implement the benefit plans, your participation is extremely important. We urge you to vote "YES" for the Stock Option Plan and the Management Recognition Plan in Box 12 of the stock order and certification form. We have been asked to forward these documents to you in view of certain requirements of the securities laws of your jurisdiction. We should not be understood as recommending or soliciting in any way any action by you with regard to the enclosed material. Sincerely, Sandler O'Neill & Partners, L.P. The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. This is not a offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus. Enclosure #5 - -------------------------------------------------------------------------------- PROXY REQUEST CharterBank Logo ------------------------- WE NEED YOUR VOTE ------------------------- Dear Customer of CharterBank: Your vote on our plan of reorganization has not yet been received. Your vote is very important to us. Please vote and mail the enclosed proxy today. - -------------- Remember: Voting does not obligate you to buy stock. Your Board of Directors has approved the plan of reorganization and urges you to vote in favor of the plan. Your deposit accounts or loans with CharterBank will not be affected in any way. Deposit accounts will continue to be federally insured to the legal maximum. A postage-paid envelope is enclosed with the proxy form. If you have any questions, please call our conversion center at (xxx) xxx-xxxx. Sincerely, CharterBank Please vote today by returning all proxy forms received. --- #6 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- You're Invited -------------- We cordially invite you to attend one of our community meetings to learn more about the subscription, direct community and syndicated community offerings which give you the opportunity to purchase newly issued shares from our to-be- formed holding company, Charter Financial Corp. . Members of senior management will discuss CharterBank's operations, past performance and financial history. . You will be able to meet one-on-one with CharterBank officers to ask questions. . There will be no sales pressure. You will receive Charter Financial Corp.'s stock offering materials. Then you decide if the stock purchase matches your investment objectives. Community meetings have been scheduled in the West Point area. Location and dates are shown on the reverse side of this card. For meeting times and to make a reservation, or to receive a prospectus and a stock order form, please call our conversion center at (xxx)-xxx-xxxx Monday thru Friday, 10:00 a.m. to 4:00 p.m. (LOGO) Charter Financial Corp. (Proposed Holding Company for CharterBank) ------------------------ Community Meetings ------------------------ June__, 2001 Location Street Address City, State June__, 2001 Location Street Address City, State June__, 2001 Location Street Address City, State (Logo) Charter Financial Corp. (Proposed Holding Company for CharterBank) The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. This is not a offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus. - -------------------------------------------------------------------------------- #7 Charter Financial Corp. Is Offering Stock WE INVITE YOU TO PARTICIPATE IN OUR FUTURE Charter Financial Corp. is a federally chartered corporation that is offering shares of its common stock in connection with the reorganization of CharterBank into a mutual holding company. 3,315,000 - 4,485,000 shares of Charter Financial Corp. are being offered at a price of $10.00 per share. If you would like to learn more about our stock offering, or consider becoming a stockholder of Charter Financial Corp., we invite you to obtain a prospectus and attend one of our convenient and informative community meetings. These will be held on the following dates and at the locations below. ___, June ___, 2001 ___, June ___, 2001 ____, June, ____, 2001 Location Location Location Street Address, Street Address Street Address City, State City, State City, State For meeting times and to make a reservation, or to receive a prospectus and a stock order form, please call our conversion center at (xxx) xxx-xxxx. - -------------------------------------------------------------------------------- Charter Financial Corp. (LOGO) - -------------------------------------------------------------------------------- This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus. - -------------------------------------------------------------------------------- CharterBank Logo Please Support Us ----------------- Vote Your Proxy Card Today If you have more than one account, you may have received more than one proxy depending upon the ownership structure of your accounts. Please vote, sign and return all proxy cards that you received. - -------------------------------------------------------------------------------- [Charter Financial Corp.] June__, 2001 Dear _________: We are pleased to announce that the Board of Directors of CharterBank has voted in favor of a plan to reorganize from a federally chartered mutual savings and loan association into a "two-tiered" mutual holding company. As part of this reorganization, CharterBank will convert to a federal mutual holding company to be known as First Charter, MHC, and will establish Charter Financial Corp., a federal corporation as a majority-owned subsidiary. Charter Financial Corp. will be the parent corporation of CharterBank (in stock form) following the reorganization. We are reorganizing so that CharterBank will be structured in the form of ownership used by a growing number of savings institutions. You are cordially invited to join members of our senior management team at an community meeting to be held on___ at 7:30 P.M. to learn more about the reorganization and the stock offering. A member of our staff will be calling to confirm your interest in attending the meeting. If you would like additional information regarding the meeting or our reorganization, please call our conversion center number at (xxx) xxx-xxx, Monday through Friday between the hours of 10:00 a.m. to 4:00 p.m. Sincerely, Robert L. Johnson President and Chief Executive Officer The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank , Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus. [Charter Financial Corp.] June__, 2001 Dear Subscriber: We hereby acknowledge receipt of your order for shares of common stock in Charter Financial Corp. At this time, we cannot confirm the number of shares of Charter Financial Corp. common stock that will be issued to you. Such allocation will be made in accordance with the plan of reorganization following completion of the stock offering. If you have any questions, please call our conversion center at (xxx) xxx-xxxx. Sincerely, Charter Financial Corp. Conversion Center The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. [Charter Financial Corp.] June__, 2001 Dear Charter Shareholder: We appreciate your interest in the stock offering of Charter Financial Corp. Due to the excellent response from our Eligible Account Holders, we are unable to complete all orders in full. Consequently, in accordance with the provisions of the plan of reorganization, you were allocated ______ shares at a price of $10.00 per share. If your subscription was paid for by check, a refund of any balance due you with interest will be mailed to you promptly. The purchase date and closing of the transaction occurred on __________ XX, 2001. Trading will commence on the Nasdaq National Market under the symbol" "on __________ XX, 2001. Your stock certificate will be mailed to you shortly. We thank you for your interest in Charter Financial Corp., and welcome you as a charter shareholder. Sincerely, Charter Financial Corp. Conversion Center The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. [Charter Financial Corp.] ____________________, 2001 Dear Interested Investor: We recently completed our subscription and direct community offerings. Unfortunately, due to the excellent response from our Eligible Account Holders, stock was not available for our Supplemental Eligible Account Holders, Other Members or community friends. If your subscription was paid for by check, a refund of any balance due you with interest will be mailed to you promptly. We appreciate your interest in Charter Financial Corp. and hope you become an owner of our stock in the future. The stock trades on the Nasdaq National Market under the symbol " ". Sincerely, Charter Financial Corp. Conversion Center The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. [Charter Financial Corp.] ____________________, 2001 Welcome Shareholder: We are pleased to enclose the stock certificate that represents your share of ownership in Charter Financial Corp., the holding company of CharterBank and a majority-owned subsidiary of First Charter, MHC. Please examine your stock certificate to be certain that it is properly registered. If you have any questions about your certificate, you should contact the Transfer Agent immediately at the following address: Transfer Agent Address Telephone Number Also, please remember that your certificate is a negotiable security which should be stored in a secure place, such as a safe deposit box or on deposit with your stockbroker. On behalf of the Board of Directors of Charter Financial Corp., First Charter, MHC, CharterBank and employees, I would like to thank you for supporting our offering. Sincerely, Robert L. Johnson President and Chief Executive Officer The shares of common stock offered in the reorganization are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. [Charter Financial Corp.] ____________________, 2001 Dear Interested Subscriber: We regret to inform you that CharterBank and Charter Financial Corp., the holding company for CharterBank, have decided not to accept your order for shares of Charter Financial Corp. common stock in our direct community offering. This action is in accordance with our plan of reorganization which gives CharterBank and Charter Financial Corp. the absolute right to reject the subscription of any community member, in whole or in part, in the community offering. Enclosed is a check representing your subscription and interest earned thereon. Sincerely, Charter Financial Corp. Conversion Center [ SANDLER O'NEILL & PARTNERS, L.P. LETTERHEAD ] ______, 2001 To Our Friends: We are enclosing the offering material for Charter Financial Corp., a majority- owned subsidiary of First Charter, MHC and the proposed holding company for CharterBank, which is now in the process of reorganizing into a mutual holding company. Sandler O'Neill & Partners, L.P. is managing the subscription offering, which will conclude at 4:00 p.m., Eastern time on June ___ , 2001. Sandler O'Neill is also providing conversion agent and proxy solicitation services for CharterBank. In the event that all the stock is not subscribed for in the subscription offering and direct community offering, Sandler O'Neill will form and manage a syndicate of broker/dealers to sell the remaining stock. Members of the general public, other than residents of ______, are eligible to participate. If you have any questions about this transaction, please do not hesitate to call or write. Sincerely, SANDLER O'NEILL & PARTNERS, L.P. The shares of Common Stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by First Charter, MHC, CharterBank, Charter Financial Corp., the Federal Deposit Insurance Corporation or any other government agency. This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus. [LOGO]: Charter Financial Corp. Subscription & Direct Community Offering Stock Order Form ---------------------------------------------------------------- Bank use -------- --------------------------------- ------------------------------ IMPORTANT-PLEASE NOTE: A CharterBank properly completed original Conversion Center stock order form must be used XXXXXXXXXXX to subscribe for common stock. XXXXXX, XX XXXXX Copies of this form are not (XXX) XXX-XXXX required to be accepted. Please ------------------------------ read the Stock Ownership Guide Expiration Date and Stock Order Form Instructions for Stock Order Forms: as you complete this form. ______, _____ ___, 2001 4:00 p.m., Eastern Time ------------------------------- ==================================================================================================================================== (1) Number of Shares (2) Total Payment Due - ------------------------ --------------------- The minimum number of shares that may be subscribed for is 25 Subscription Price and the maximum number of shares that may be subscribed for in - ------------------------ X $ 10.00 = --------------------- the subscription offering is 100,000 shares. See Instructions. ==================================================================================================================================== [_] (3) Employee/Officer/Director Information (6) Purchaser Information Check here if you are an employee, officer or director of a. [_] Check here if you are an Eligible Account Holder with a CharterBank or a member of such person's immediate family deposit account(s) totalling $50.00 or more on September 30, living in the same household. 1999. List account(s) below. ==================================================================== b. [_] Check here if you are a Supplemental Eligible Account (4) Method of Payment/Check --------------------- Holder with a deposit account(s) totalling $50.00 or Enclosed is a check, bank draft or Check Amount more on March 31, 2001. List account(s) below. money order made payable to CharterBank in the amount indicated in this box. --------------------- c. [_] Check here if you are an Other Member with a deposit ==================================================================== account(s) or a loan(s) on ______ ___, 2001. List account(s) or loan(s) below. (5) Method of Payment/Withdrawal The undersigned authorizes withdrawal from the following -------------------------------------------------------------- account(s) at CharterBank. There is no early withdrawal penalty Account Title (Names on Accounts) Account Number(s) Bank Use for this form of payment. Individual Retirement Accounts or -------------------------------------------------------------- Qualified Plans maintained at CharterBank cannot be used unless special transfer arrangements are made. -------------------------------------------------------------- - -------------------------------------------------------------------- Account Number(s) Withdrawal Amount(s) Bank Use -------------------------------------------------------------- - -------------------------------------------------------------------- -------------------------------------------------------------- - -------------------------------------------------------------------- -------------------------------------------------------------- - -------------------------------------------------------------------- PLEASE NOTE: FAILURE TO LIST ALL YOUR ACCOUNTS MAY RESULT IN THE LOSS OF PART OR ALL OF YOUR SUBSCRIPTION RIGHTS. IF - -------------------------------------------------------------------- ADDITIONAL SPACE IS NEEDED, PLEASE UTILIZE THE BACK OF THIS Total Withdrawal Amount STOCK ORDER FORM. ==================================================================================================================================== (7) Stock Registration/Form of Stock Ownership [_] Individual [_] Joint Tenants [_] Tenants in Common [_][_][_]-[_][_]-[_][_][_][_] [_] Fiduciary (i.e. trust, estate, etc.) [_] Company/Corp/Partnership [_] Uniform Transfers to Minors [_] IRA or other Qualified Act Plan - Beneficial Owners SS# (8) Name(s) in which stock is to be registered (PLEASE PRINT CLEARLY) - ADDING THE NAMES OF OTHER PERSON(S) WHO ARE NOT OWNERS OF YOUR QUALIFYING ACCOUNT(S) WILL RESULT IN YOUR ORDER BECOMING NULL AND VOID. - ------------------------------------------------------------------------------------------------------------------------------------ Name(s) Social Security # or Tax ID - ------------------------------------------------------------------------------------------------------------------------------------ Name(s) continued Social Security # or Tax ID - ------------------------------------------------------------------------------------------------------------------------------------ Street Address County of Residence - ----------------------------------------------------------------------------------------------------------------------------------- City State Zip code - ----------------------------------------------------------------------------------------- (9) Telephone - Daytime ( ) Evening ( ) - ----------------------------------------------------------------------------------------- ==================================================================================================================================== [_] (10) NASD Affiliation - Check [_] (11) Associates/Acting in (12) Stock Benefit Plans - here if you are a member of Concert - Check here and complete Mark your vote here for the stock benefit the National Association of the reverse side of this form, if you plans that Charter Financial Corp. intends to Securities Dealers, Inc. ("NASD"), or any associates or persons acting implement as part of the reorganization. a person affiliated, or associated, in concert with you have submitted Proposal 1 Stock Option Plan................ with an NASD member. (see Item #10 other orders for shares. [_] YES [_] NO [_] ABSTAIN on reverse side of this form. Proposal 2 Management Recognition Plan...... [_] YES [_] NO [_] ABSTAIN ==================================================================================================================================== (13) Acknowledgment - To be effective, this stock order form and accompanying certification form must BANK USE ONLY be properly completed and physically received by CharterBank no later than 4:00 p.m., Eastern time, ================= on ______ ______ XX, 2001, unless extended; otherwise this stock order form and all subscription rights will be void. The undersigned agrees that after receipt by CharterBank, this stock order form may not be modified, withdrawn or canceled without CharterBank's consent and if authorization to withdraw ================= from deposit accounts at CharterBank has been given as payment for shares; the amount authorized for withdrawal shall not otherwise be available for withdrawal by the undersigned. Under penalty of perjury, I hereby certify that the Social Security or Tax ID Number and the information provided on this stock order ----------------- form is true, correct and complete, and I am not subject to back-up withholding, and that I am purchasing BANK USE ONLY shares solely for my own account and that there is no agreement or understanding regarding the sale or ================= transfer of such shares, or my right to subscribe for shares. It is understood that this stock order form will be accepted in accordance with, and subject to, the terms and conditions of the plan of reorganization of the Bank described in the accompanying prospectus. The undersigned hereby acknowledges receipt of the prospectus at least 48 hours prior to delivery of this stock order form to the Bank. Federal regulations prohibit any person from transferring, or entering into any agreement, directly or indirectly, to transfer the legal or beneficial ownership of subscription rights or the underlying securities to the account of another. CharterBank and Charter Financial Corp. will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve such transfer. ---------------------------------------------------- ----------------------------------------------------------- Signature Date Signature Date ---------------------------------------------------- ----------------------------------------------------------- THE CERTIFICATION FORM ON THE REVERSE SIDE MUST BE SIGNED ====================================================================================================================================
Item (6) a, b, c - (continued) Item (10) - (continued) - --------------------------------- ------------------ ------------ Account Title (Names on Accounts) Account Number(s) Bank use , a member of the immediate family of any such person to - --------------------------------- ------------------ ------------ whose support such person contributes, directly or indirectly, or the holder of an account in which an NASD - --------------------------------- ------------------ ------------ member or person associated with an NASD member has a beneficial interest. To comply with conditions under - --------------------------------- ------------------ ------------ which an exemption from the NASD's Interpretation With Respect to Free-Riding and Withholding is available, you - --------------------------------- ------------------ ------------ agree, if you have checked the NASD Affiliation box, (i) not to sell, transfer or hypothecate the stock for a - --------------------------------- ------------------ ------------ period of three months following issuance, and (ii) to report this subscription in writing to the applicable NASD member within one day of payment therefor. Item (11) - (continued) "Associate" is defined as: (i) any corporation or organization (other List below all other orders submitted by you or Associates than First Charter, MHC, Charter Financial Corp, CharterBank or any (as defined) or by persons acting in concert with you. majority-owned subsidiary thereof) of which such person is an - ------------------------------------ --------------------- officer, director of partner or is, directly or indirectly, the Name(s) listed on other stock order Number of Shares beneficial owner of 10% or more of any class of equity securities of forms Ordered the corporation or organization; (ii) any trust or other estate in - ------------------------------------ --------------------- which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary - ------------------------------------ --------------------- capacity (exclusive of any of any tax-qualified employee stock benefit plan); (iii) any person who is related by blood or marriage - ------------------------------------ --------------------- such person, and (i) lives in the same home as such person; or (ii) is a director or senior officer of CharterBank or any affiliate - ------------------------------------ --------------------- thereof; and (iv) any person Acting in Concert with any of the persons or entities specified in clauses (i) through (iii) above; provided, however, that any Tax-Qualified or Non-Tax-Qualified Employee Stock Benefit Plan shall not be deemed to be an Associate of any director or officer of First Charter, MHC, Charter Financial Corp. of CharterBank, First Charter, MHC or Charter Financial Corp., CharterBank in its sole discretion may determine the persons that are Associates of other persons. Directors of Charter Financial Corp., First Charter, MHC and CharterBank shall not be deemed to be Associates solely as a result of their membership on any such board or boards. - ------------------------------------------------------------------------------------------------------------------------------------ YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK CERTIFICATION FORM I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, AND IS NOT INSURED OR GUARANTEED BY FIRST CHARTER, MHC, CHARTER FINANCIAL CORP., CHARTERBANK, THE FEDERAL GOVERNMENT OR BY ANY GOVERNMENT AGENCY. THE ENTIRE AMOUNT OF AN INVESTOR'S PRINCIPAL IS SUBJECT TO LOSS. If anyone asserts that this security is federally insured or guaranteed, or is as safe as an insured deposit, I should call the Office of Thrift Supervision, Regional Director of the Southeast Regional Office at (404) 888-0771. I further certify that, before purchasing the common stock, par value $0.01 per share, of Charter Financial Corp. (the "Company"), the proposed holding company for CharterBank, I received a prospectus of the Company dated _________, 2001 relating to such offer of common stock. The Prospectus that I received contains disclosure concerning the nature of the common stock being offered by the Company and describes in the "Risk Factors" section beginning on page _____ the risks involved in the investment in this common stock, including but not limited to the: 1. A decrease in the market value of our Freddie Mac stock investment may reduce our earnings and capital. 2. We have a significant deferred tax liability on our Freddie Mac Stock investment. If it became payable, this tax liability would significantly adversely effect our liquidity, ability to hold Freddie Mac stock and earnings. 3. If our dividend income exceeds our taxable income for any given year, we will lose potential tax benefits associated with the dividends received deduction. 4. Our earnings may be reduced if we are required to take our bad debt reserve into income. 5. A decrease in our sources of funds may affect our ability to fund loans. This would reduce our earnings. 6. Our local economy may affect our future growth possibilities. 7. Our return on average equity will be low compared to other companies. This could hurt the trading price of our common stock. 8. Because we intend to pursue conservative and locally-based business goals, our earnings may not increase significantly, which could negatively affect the price of your stock. 9. If recent stock market volatility continues, the price of your stock may be negatively affected. 10. There is no guarantee than an active trading market for your stock will develop. 11. A decrease in demand for mortgage, commercial and consumer loans may lower our earnings. 12. Because we intend to increase our commercial real estate lending, our lending risk will increase and downturns in the real estate market or local economy could adversely impact our earnings. 13. Because our loans are concentrated in the states of Georgia and Alabama, downturns in the economy or real estate market in our market area will adversely impact our earnings. 14. Because we plan to expand our traditional and nontraditional delivery channels, our expense base will increase. This will reduce our earnings in the short term. 15. Changing interest rates may adversely affect our earnings. 16. The implementation of stock-based benefits will increase our future compensation expense, reduce our earnings and cause dilution. 17. Because First Charter, MHC will own a majority of Charter Financial's common stock. First Charter, MHC will be able to prevent transactions you might be in favor of, including a sale or merger of Charter Financial. 18. Because banking reform legislation may increase competition, it may reduce our earnings. (By Executing this Certification Form the Investor is Not Waiving Any Rights Under the Federal Securities Laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934) ------------------------------------------------------- ------------------------------------------------------- Signature Date Signature Date ------------------------------------------------------- ------------------------------------------------------- Name (Please Print) Name (Please Print) ------------------------------------------------------- ------------------------------------------------------- THIS CERTIFICATION MUST BE SIGNED IN ORDER TO PURCHASE STOCK - -----------------------------------------------------------------------------------------------------------------------------------
[Logo] Charter Financial Corp. - -------------------------------------------------------------------------------- Stock Ownership Guide Individual Include the first name, middle initial and last name of the shareholder. Avoid the use of two initials. Please omit words that do not affect ownership rights, such as "Mrs.", "Mr.", "Dr.", "special account", "single person", etc. - -------------------------------------------------------------------------------- Joint Tenants Joint tenants with right of survivorship may be specified to identify two or more owners. When stock is held by joint tenants with right of survivorship, ownership is intended to pass automatically to the surviving joint tenant(s) upon the death of any joint tenant. All parties must agree to the transfer or sale of shares held by joint tenants. - -------------------------------------------------------------------------------- Tenants in Common Tenants in common may also be specified to identify two or more owners. When stock is held by tenants in common, upon the death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased co-tenant. All parties must agree to the transfer or sale of shares held by tenants in common. - -------------------------------------------------------------------------------- Uniform Transfers to Minors Act ("UTMA") Stock may be held in the name of a custodian for a minor under the Uniform Transfers to Minors Act of each state. There may be only one custodian and one minor designated on a stock certificate. The standard abbreviation for Custodian is "CUST", while the Uniform Transfers to Minors Act is "UTMA". Standard U.S. Postal Service state abbreviations should be used to describe the appropriate state. For example, stock held by John Doe as custodian for Susan Doe under the Georgia Uniform Transfers to Minors Act will be abbreviated John Doe, CUST Susan Doe UTMA GA (use minor's social security number). - -------------------------------------------------------------------------------- Fiduciaries Information provided with respect to stock to be held in a fiduciary capacity must contain the following: . The name(s) of the fiduciary. If an individual, list the first name, middle initial and last name. If a corporation, list the full corporate title (name). If an individual and a corporation, list the corporation's title before the individual. . The fiduciary capacity, such as administrator, executor, personal representative, conservator, trustee, committee, etc. . A description of the document governing the fiduciary relationship, such as a trust agreement or court order. Documentation establishing a fiduciary relationship may be required to register your stock in a fiduciary capacity. . The date of the document governing the relationship, except that the date of a trust created by a will need not be included in the description. . The name of the maker, donor or testator and the name of the beneficiary. An example of fiduciary ownership of stock in the case of a trust is: John Doe, Trustee Under Agreement Dated 10-1-87 for Susan Doe. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Stock Order Form Instructions Items 1 and 2 - Number of Shares and Total Payment Due Fill in the number of shares that you wish to purchase and the total payment due. The amount due is determined by multiplying the number of shares by the subscription price of $10.00 per share. The minimum purchase in the subscription offering is 25 shares. As more fully described in the plan of reorganization outlined in the prospectus, the maximum purchase in the subscription offering is $1,000,000 (100,000 shares), and the maximum purchase in the community offering (if held) by any person, is $1,000,000 (100,000 shares). However, no person, together with associates and persons acting in concert with such person, may purchase in the aggregate more than $1,650,000 (165,000 shares) of common stock. - -------------------------------------------------------------------------------- Item 3 - Employee/Officer/Director Information Please check this box to indicate whether you are an employee, officer or director of CharterBank or a member of such person's immediate family living in the same household. - -------------------------------------------------------------------------------- Item 4 - Method of Payment by Check Payment for shares may be made in cash (only if delivered by you in person to a full service branch office of CharterBank) or by check, bank draft or money order payable to CharterBank. Your funds will earn interest at the CharterBank's passbook rate of interest until the reorganization is completed. (DO NOT MAIL CASH TO PURCHASE STOCK!) Please indicate the total check(s) amount in this box if your method of payment is by check, bank draft or money order. - -------------------------------------------------------------------------------- Item 5 - Method of Payment by Withdrawal If you pay for your stock by a withdrawal from a deposit account at CharterBank, indicate the account number(s) and the amount of your withdrawal authorization for each account. The total amount withdrawn should equal the amount of your stock purchase. There will be no penalty assessed for early withdrawals from certificate accounts used for stock purchases. This form of payment may not be used if your account is an Individual Retirement Account or Qualified Plan. - -------------------------------------------------------------------------------- Item 6 - Purchaser Information a. Please check this box if you are an Eligible Account Holder with a deposit account(s) totalling $50.00 or more on September 30, 1999. b. Please check this box if you are a Supplemental Eligible Account Holder with a deposit account(s) totalling $50.00 or more on March 31, 2001. c. Please check this box if you are an Other Member with a deposit account(s) or a loan(s) on _____ __, 2001. Please list all names and all account numbers on accounts you had at these dates in order to insure proper identification of your purchase rights. Please note: Failure to list all your accounts or loans may result in the loss of part or all of your subscription rights. - -------------------------------------------------------------------------------- Items 7, 8 and 9 - Stock Registration/Form of Stock Ownership, Names and Telephone Number The stock transfer industry has developed a uniform system of shareholder registrations that will be used in the issuance of your Charter Financial Corp. common stock. Please complete items 7, 8 and 9 as fully and accurately as possible, and be certain to supply your social security or Tax I.D. number(s) and your daytime and evening telephone number(s). We may need to call you if we cannot execute your order as given. If you have any questions regarding the registration of your stock, please consult your legal advisor. Stock ownership must be registered in one of the ways described above under "Stock Ownership Guide". Adding the names of other persons who are not owners of your qualifying account(s) will result in your order becoming null and void. - -------------------------------------------------------------------------------- Items 11-Associates Acting in Concert Item 10 - NASD Affiliation Please Please check this box if you or any check this box if you are a member associate (as defined on the reverse side of the NASD or if this item of the stock order form) or person acting otherwise applies to you. in concert with you has submitted another order for shares and complete the reverse side of the stock order form. - -------------------------------------------------------------------------------- Item 12 - Stock Benefit Plans For a description of the stock benefit plans see "Future Stock Benefit Plans" in the prospectus. The Board of Directors recommends a vote "YES" for approval of the Stock Option Plan and the Management Recognition Plan listed in Item 12 of the stock order form. - -------------------------------------------------------------------------------- Item 13 - Acknowledgement Please sign and date the stock order form and certification form where indicated. Before you sign, review the stock order form, including the acknowledgement, and the certification form. Normally, one signature is required. An additional signature is required only when payment is to be made by withdrawal from a deposit account that requires multiple signatures to withdraw funds. - -------------------------------------------------------------------------------- You may mail your completed stock order form and certification form in the envelope that has been provided, or you may deliver your stock order form and certification form to any full service branch office of CharterBank. Your stock order form and certification form, properly completed, and payment in full (or withdrawal authorization) at the subscription price must be physically received by CharterBank no later than 4:00 p.m., Eastern time, on _________, ______ __, 2001 or it will become void. If you have any remaining questions, or if you would like assistance completing your stock order form and certification form, you may call our conversion center at (XXX) XXX-XXXX, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m. The conversion center will be closed for bank holidays. - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----