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EX-32.1 - EXHIBIT 32.1 - CHARTER FINANCIAL CORPchfn-03312017ex321.htm
EX-31.2 - EXHIBIT 31.2 - CHARTER FINANCIAL CORPchfn-03312017ex312.htm
EX-31.1 - EXHIBIT 31.1 - CHARTER FINANCIAL CORPchfn-03312017ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File No. 001-35870
_____________________________________
CHARTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
_____________________________________
Maryland
90-0947148
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
1233 O.G. Skinner Drive, West Point, Georgia
31833
(Address of Principal Executive Offices)
(Zip Code)
(706) 645-1391
(Registrant’s telephone number)
N/A
(Former name or former address, if changed since last report)
_____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    YES  x    NO   o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o  (Do not check if smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  o    NO  x
The number of shares of the registrant’s common stock outstanding as of May 3, 2017 was 15,072,838.



CHARTER FINANCIAL CORPORATION
TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
 
March 31, 2017
 
September 30, 2016 (1)
Assets
Cash and amounts due from depository institutions
$
18,823,967

 
$
14,472,867

Interest-earning deposits in other financial institutions
121,461,070

 
77,376,632

Cash and cash equivalents
140,285,037

 
91,849,499

Loans held for sale, fair value of $2,385,655 and $2,991,756
2,353,484

 
2,941,982

Certificates of deposit held at other financial institutions
10,511,240

 
14,496,410

Investment securities available for sale
191,482,806

 
206,336,287

Federal Home Loan Bank stock
3,484,600

 
3,361,800

Restricted securities, at cost
279,000

 
279,000

Loans receivable
1,019,172,569

 
1,005,702,737

Unamortized loan origination fees, net
(1,116,362
)
 
(1,278,830
)
Allowance for loan losses
(10,504,538
)
 
(10,371,416
)
Loans receivable, net
1,007,551,669

 
994,052,491

Other real estate owned
1,957,194

 
2,706,461

Accrued interest and dividends receivable
3,502,097

 
3,442,051

Premises and equipment, net
28,397,858

 
28,078,591

Goodwill
29,793,756

 
29,793,756

Other intangible assets, net of amortization
2,336,512

 
2,639,608

Cash surrender value of life insurance
49,848,239

 
49,268,973

Deferred income taxes
5,834,565

 
4,366,522

Other assets
7,178,170

 
4,775,805

Total assets
$
1,484,796,227

 
$
1,438,389,236

Liabilities and Stockholders’ Equity
Liabilities:
 
 
 
Deposits
$
1,201,731,475

 
$
1,161,843,586

Long-term borrowings
50,000,000

 
50,000,000

Floating rate junior subordinated debt
6,656,098

 
6,587,549

Advance payments by borrowers for taxes and insurance
1,809,038

 
2,298,513

Other liabilities
16,186,614

 
14,510,052

Total liabilities
1,276,383,225

 
1,235,239,700

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 15,060,616 shares issued and outstanding at March 31, 2017 and 15,031,076 shares issued and outstanding at September 30, 2016
150,606

 
150,311

Preferred stock, $0.01 par value; 50,000,000 shares authorized at March 31, 2017 and September 30, 2016

 

Additional paid-in capital
84,609,090

 
83,651,623

Unearned compensation – ESOP
(4,673,761
)
 
(5,106,169
)
Retained earnings
130,072,917

 
123,349,890

Accumulated other comprehensive (loss) income
(1,745,850
)
 
1,103,881

Total stockholders’ equity
208,413,002

 
203,149,536

Total liabilities and stockholders’ equity
$
1,484,796,227

 
$
1,438,389,236

__________________________________
(1)
Financial information at September 30, 2016 has been derived from audited financial statements.



See accompanying notes to unaudited condensed consolidated financial statements.
1


CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
Loans receivable
$
11,903,416

 
$
8,863,437

 
$
24,473,319

 
$
18,304,962

Taxable investment securities
1,103,740

 
934,536

 
2,199,640

 
1,881,047

Nontaxable investment securities
4,571

 

 
9,143

 

Federal Home Loan Bank stock
40,309

 
36,149

 
79,519

 
75,077

Interest-earning deposits in other financial institutions
213,310

 
54,047

 
324,127

 
66,438

Certificates of deposit held at other financial institutions
38,775

 

 
81,404

 

Restricted securities
2,679

 

 
5,252

 

Total interest income
13,306,800

 
9,888,169

 
27,172,404

 
20,327,524

Interest expense:
 

 
 

 
 

 
 

Deposits
1,165,459

 
692,218

 
2,323,776

 
1,357,652

Borrowings
362,880

 
545,368

 
749,855

 
1,098,250

Floating rate junior subordinated debt
123,631

 

 
244,422

 

Total interest expense
1,651,970

 
1,237,586

 
3,318,053

 
2,455,902

Net interest income
11,654,830

 
8,650,583

 
23,854,351

 
17,871,622

Provision for loan losses
(150,000
)
 

 
(900,000
)
 

Net interest income after provision for loan losses
11,804,830

 
8,650,583

 
24,754,351

 
17,871,622

Noninterest income:
 

 
 

 
 

 
 

Service charges on deposit accounts
1,700,713

 
1,620,144

 
3,588,524

 
3,372,702

Bankcard fees
1,366,686

 
1,189,181

 
2,649,045

 
2,335,007

Gain on investment securities available for sale
247,780

 

 
247,780

 
35,965

Bank owned life insurance
246,915

 
244,860

 
579,266

 
565,523

Gain on sale of loans
542,824

 
359,750

 
1,274,086

 
707,606

Brokerage commissions
224,567

 
146,430

 
390,563

 
288,145

Recoveries on acquired loans previously covered under FDIC loss share agreements

 
750,000

 
250,000

 
3,625,000

Other
216,671

 
202,538

 
549,737

 
413,495

Total noninterest income
4,546,156

 
4,512,903

 
9,529,001

 
11,343,443

Noninterest expenses:
 

 
 

 
 

 
 

Salaries and employee benefits
6,078,575

 
5,287,339

 
12,212,248

 
10,550,328

Occupancy
1,219,866

 
1,150,155

 
2,543,189

 
2,207,430

Data processing
1,003,974

 
1,045,336

 
1,912,929

 
1,869,852

Legal and professional
387,590

 
678,565

 
671,745

 
1,058,403

Marketing
411,943

 
379,088

 
768,467

 
668,663

Federal insurance premiums and other regulatory fees
197,261

 
210,038

 
362,756

 
433,881

Net cost (benefit) of operations of real estate owned
13,827

 
71,408

 
(345,443
)
 
50,164

Furniture and equipment
228,383

 
161,308

 
402,437

 
329,722

Postage, office supplies and printing
223,317

 
170,670

 
493,702

 
355,382

Core deposit intangible amortization expense
149,435

 
36,154

 
303,097

 
85,138

Other
835,540

 
712,710

 
1,714,092

 
1,371,838

Total noninterest expenses
10,749,711

 
9,902,771

 
21,039,219

 
18,980,801

Income before income taxes
5,601,275

 
3,260,715

 
13,244,133

 
10,234,264

Income tax expense
2,284,480

 
1,117,627

 
4,881,671

 
3,476,898

Net income
$
3,316,795

 
$
2,143,088

 
$
8,362,462

 
$
6,757,366

Basic net income per share
$
0.23

 
$
0.15

 
$
0.59

 
$
0.46

Diluted net income per share
$
0.22

 
$
0.14

 
$
0.55

 
$
0.44

Weighted average number of common shares outstanding
14,322,290

 
14,224,862

 
14,264,248

 
14,557,000

Weighted average number of common and potential common shares outstanding
15,340,320

 
14,909,947

 
15,282,278

 
15,242,085


See accompanying notes to unaudited condensed consolidated financial statements.
2


CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net income
 
$
3,316,795

 
$
2,143,088

 
$
8,362,462

 
$
6,757,366

Reclassification adjustment for net gains realized in net income, net of taxes of $95,643, $0, $95,643 and $13,882, respectively
 
(152,137
)
 

 
(152,137
)
 
(22,083
)
Net unrealized holding losses on investment and mortgage securities available for sale arising during the period, net of taxes of $17,652, $435,825, $(1,791,525) and $(215,100), respectively
 
180,215

 
693,255

 
(2,697,594
)
 
(342,154
)
Comprehensive income
 
$
3,344,873

 
$
2,836,343

 
$
5,512,731

 
$
6,393,129









See accompanying notes to unaudited condensed consolidated financial statements.
3


CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 
Common stock
 
Additional paid-in capital
 
Unearned compensation ESOP
 
Retained earnings
 
Accumulated other comprehensive income (loss)
 
Total stockholders' equity
 
Number of shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2016 (1)
15,031,076

 
$
150,311

 
$
83,651,623

 
$
(5,106,169
)
 
$
123,349,890

 
$
1,103,881

 
$
203,149,536

Net income

 

 

 

 
8,362,462

 

 
8,362,462

Dividends paid, $0.115 per share

 

 

 

 
(1,639,435
)
 

 
(1,639,435
)
Change in other comprehensive income

 

 

 

 

 
(2,849,731
)
 
(2,849,731
)
Allocation of ESOP common stock

 

 
251,610

 
432,408

 

 

 
684,018

Effect of restricted stock awards

 

 
394,097

 

 

 

 
394,097

Stock option expense

 

 
167,640

 

 

 

 
167,640

Issuance of common stock, stock option exercises
23,190

 
232

 
146,064

 

 

 

 
146,296

Issuance of common stock, restricted stock
6,500

 
65

 
(65
)
 

 

 

 

Repurchase of shares
(150
)
 
(2
)
 
(1,879
)
 

 

 

 
(1,881
)
Balance at March 31, 2017
15,060,616

 
$
150,606

 
$
84,609,090

 
$
(4,673,761
)
 
$
130,072,917

 
$
(1,745,850
)
 
$
208,413,002

__________________________________
(1)
Financial information at September 30, 2016 has been derived from audited financial statements.







See accompanying notes to unaudited condensed consolidated financial statements.
4


CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
Six Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
8,362,462

 
$
6,757,366

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Provision for loan losses
(900,000
)
 

Depreciation and amortization
884,887

 
560,799

Accretion and amortization of premiums and discounts, net
511,284

 
567,108

Accretion of fair value discounts related to acquired loans
(1,082,140
)
 
(2,002,161
)
Gain on sale of loans
(1,274,086
)
 
(707,606
)
Proceeds from sale of loans
50,081,954

 
26,184,065

Originations and purchases of loans held for sale
(48,531,190
)
 
(25,292,134
)
Gain on sale of mortgage-backed securities, collateralized mortgage obligations and other investments
(247,780
)
 
(35,965
)
Write down of real estate owned
11,304

 
117,301

Gain on sale of real estate owned
(482,090
)
 
(316,749
)
Loss on sale of fixed assets
51,738

 
5,381

Restricted stock award expense
394,097

 
392,140

Stock option expense
167,640

 
161,353

Increase in cash surrender value of bank owned life insurance
(579,266
)
 
(565,523
)
Changes in assets and liabilities:
 
 
 
(Increase) decrease in accrued interest and dividends receivable
(60,046
)
 
57,185

Increase in other assets
(2,340,356
)
 
(1,113,382
)
Increase (decrease) in other liabilities
2,360,580

 
(8,598,334
)
Net cash provided by (used in) operating activities
7,328,992

 
(3,829,156
)
Cash flows from investing activities:
 
 
 
Proceeds from sales of investment securities available for sale
2,078,436

 
1,231,330

Principal collections on investment securities available for sale
9,320,461

 
10,034,766

Purchase of investment securities available for sale
(12,738,982
)
 

Proceeds from maturities or calls of investment securities available for sale
11,657,491

 

Proceeds from redemption of Federal Home Loan Bank stock

 
1,742,600

Purchase of Federal Home Loan Bank stock
(122,800
)
 
(1,256,000
)
Net decrease in certificates of deposit held at other financial institutions
3,979,000

 

Net (increase) decrease in loans receivable
(12,204,993
)
 
15,063,990

Proceeds from sale of real estate owned
1,754,670

 
1,056,396

Proceeds from sale of premises and equipment
211,283

 
351,399

 Purchases of premises and equipment, net of dispositions
(914,268
)
 
(1,261,814
)
Net cash provided by investing activities
3,020,298

 
26,962,667

Cash flows from financing activities:
 
 
 
Repurchase of shares
(1,881
)
 
(13,050,503
)
Issuance of common stock
146,296

 

Dividends paid
(1,639,435
)
 
(1,457,384
)
Net increase in deposits
40,070,743

 
52,837,377

Proceeds from Federal Home Loan Bank advances
26,000,000

 
31,000,000

Principal payments on Federal Home Loan Bank advances
(26,000,000
)
 
(43,000,000
)
Net decrease in advance payments by borrowers for taxes and insurance
(489,475
)
 
(475,714
)

See accompanying notes to unaudited condensed consolidated financial statements.
5


CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
continued
 
Six Months Ended March 31,
 
2017
 
2016
Net cash provided by financing activities
38,086,248

 
25,853,776

Net increase in cash and cash equivalents
48,435,538

 
48,987,287

Cash and cash equivalents at beginning of period
91,849,499

 
30,343,225

Cash and cash equivalents at end of period
$
140,285,037

 
$
79,330,512

Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
3,599,873

 
$
2,411,827

Income taxes paid
2,183,170

 
2,530,000

Supplemental disclosure of noncash activities:
 
 
 
Real estate acquired through foreclosure of collateral on loans receivable
$
534,617

 
$
157,659

Issuance of common stock under stock benefit plan
684,018

 
661,364

Unrealized loss on investment securities available for sale, net
(2,849,731
)
 
(364,237
)








See accompanying notes to unaudited condensed consolidated financial statements.
6


CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Nature of Operations
Charter Financial Corporation (“Charter Financial” or the “Company”) is a savings and loan holding company that was incorporated under the laws of the State of Maryland in April 2013 to serve as the holding company for CharterBank ("CharterBank" or "the Bank”). The Bank is a federally-chartered savings bank that was originally founded in 1954 as a federally-chartered mutual savings and loan association.
On April 8, 2013, the Company completed its conversion and reorganization pursuant to which it converted from the mutual holding company form of organization to the stock holding company form of organization. The Company sold 14.3 million shares of common stock for gross offering proceeds of $142.9 million in the offering. Following the conversion and reorganization, the Bank became 100% owned by Charter Financial and Charter Financial became 100% owned by public shareholders.
The Company operates 20 branch offices in Metro Atlanta, the I-85 corridor south to Auburn, Alabama, and the Florida Gulf Coast, including one cashless branch office in Norcross, Georgia.

Note 2: Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Charter Financial and the Bank include the accounts of the Company and the Bank as of March 31, 2017 and September 30, 2016 (derived from audited financial statements), and for the three and six-month periods ended March 31, 2017 and 2016. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements include all necessary adjustments, consisting of normal recurring accruals, necessary for a fair presentation for the periods presented. The results of operations for the three and six-month period ended March 31, 2017, are not necessarily indicative of the results that may be expected for the entire year or any other interim period.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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, the estimates used for fair value acquisition accounting, the estimate of expected cash flows on purchased impaired and other acquired loans, and the assessment for other-than-temporary impairment of investment securities, mortgage-backed securities, collateralized mortgage-backed securities and collateralized mortgage obligations. Certain reclassifications of prior fiscal year balances have been made to conform to classifications used in the current fiscal year. These reclassifications did not change net income or stockholders' equity.

Note 3: Recent Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). Amendments in this ASU affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). This amendment shortens the amortization period for certain callable debt securities held at a premium requiring that the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The company is currently evaluating the impact of this ASU on its Consolidated Financial Statements.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20).Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 is effective for public entities for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities may apply the guidance either retrospectively or modified retrospectively. The

7


Company is currently evaluating the provisions of ASU 2017-05 to determine the potential impact the new standard will have on its Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the second step of the previous FASB guidance for testing goodwill for impairment and is intended to reduce cost and complexity of goodwill impairment testing. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. After determining if the carrying amount of a reporting unit exceeds its fair value, the entity should take an impairment charge of the same amount to the goodwill for that reporting unit, not to exceed the total goodwill amount for that reporting unit. This eliminates the second step of calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323) - Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ASU 2017-03 is an amendment to paragraph 250-10-S99-6 which states that “Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin (SAB) Topic 11.M)”. Registrants should evaluate ASUs that are to be adopted in future periods to determine the appropriate financial statement disclosures that need to be made regarding potential material effects of those standards on financial statements when they are adopted. The Company has improved its disclosures regarding the impact of recently issued accounting standards adopted in a future period will have on its accounting and disclosures in this footnote and will continue to monitor in future filings.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which is intended to provide guidance in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses in order to provide stakeholders with more detailed reporting and less cost to analyze transactions. This ASU provides a screen to determine when a set of assets is not a business. It requires that when substantially all fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set of assets is not a business. If the screen is not met, the amendments in this update provide a framework to assist entities in evaluating whether both an input and a substantive process are present for the set to be a business. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. No disclosures are required at transition and early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which sets forth a "current expected credit loss" ("CECL") model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently in the process of assembling a transition team to assess the adoption of this ASU, which will develop a project plan regarding implementation.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. During the first quarter of the current fiscal year, the Company early adopted this ASU, with no tax impact in the three months ended March 31, 2017 and a $127,000 reduction in income tax expense for the six months ended March 31, 2017.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company is in the process of evaluating its current inventory of leases to determine the impact of adoption of this standard.

8


In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Recognition and Measurement of Financial Assets and Liabilities, which is intended to improve the recognition and measurement of financial instruments by requiring: equity investments (other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU permits early adoption of the instrument-specific credit risk provision. The adoption of ASU 2016-01 is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard was to be effective for annual reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, deferring the effective date for the standard to reporting periods beginning after December 15, 2017. The Company is currently in the process of implementing the new standard, and initial assessments indicate there will not be a material impact to the Company's current accounting policies for revenue recognition.

Note 4: Business Combinations
On April 15, 2016, the Company completed its acquisition of CBS Financial Corporation ("CBS") and its wholly-owned subsidiary, Community Bank of the South, for cash consideration of $55.9 million. In addition to the cash paid by Charter Financial, CBS paid approximately $2.9 million in Stock Appreciation Rights and Stock Options payouts to its holders for a total transaction value of $58.8 million. Upon completion of the acquisition, CBS merged into Charter Financial, and Community Bank of the South merged into CharterBank. The acquisition expanded the bank's presence in the Atlanta market with four branches in Cobb County.
The following table provides a summary of the assets acquired and liabilities assumed of CBS as recorded by the Company. As provided for under GAAP, management has up to one year following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. Once management has finalized the fair value of acquired assets and assumed liabilities within this one-year period, management considers such values to be the Day 1 Fair Values. The fair values shown in the following table have been determined by management to be the Day 1 Fair Values.

9


Purchase Price:
 
 
 
Cash paid to CBS shareholders
 
 
$
58,846,612

Less: Cash paid to Stock Appreciation Rights holders by CBS
 
 
$
(2,940,488
)
Total cash consideration paid by Charter Financial
 
 
$
55,906,124

 
 
 
 
Fair value of assets acquired:
 
 
 
Cash and cash equivalents
$
13,385,564

 
 
Certificates of deposit held at other financial institutions
25,202,320

 
 
Investment securities available for sale
22,198,577

 
 
Loans held for sale
924,000

 
 
Loans receivable, net
300,775,423

 
 
Federal Home Loan Bank stock
545,300

 
 
Restricted securities, at cost
279,000

 
 
Premises and equipment
7,945,313

 
 
Accrued interest and dividends receivable
838,865

 
 
Other real estate owned
454,900

 
 
Core deposit intangible
2,898,000

 
 
Other assets
938,774

 
 
Total assets acquired
376,386,036

 
 
 
 
 
 
Fair value of liabilities assumed:
 
 
 
Deposits
333,719,277

 
 
Federal Home Loan Bank advances
5,000,000

 
 
Floating rate junior subordinated debt
6,519,000

 
 
Advance payments by borrowers for taxes and insurance
134,031

 
 
Other liabilities
576,077

 
 
Total liabilities assumed
$
345,948,385

 
 
 
 
 
 
Fair value of net assets acquired
 
 
30,437,651

Goodwill recognized for CBS
 
 
$
25,468,473

Goodwill of $25.5 million, which is the excess of the merger consideration over the estimated fair value of net assets acquired, was recorded in the CBS acquisition and is the result of expected operational synergies and other factors. A portion of this goodwill is expected to be deductible for tax purposes.
No loans were recognized as credit impaired in the acquisition.
The Company recorded $4.2 million of merger-related expenses during the year ended September 30, 2016. Integration of the acquisition was completed during the fourth quarter of fiscal 2016, and no further merger-related costs have been incurred nor are expected.


10


Note 5: Investment Securities
Investment securities available for sale are summarized as follows:

March 31, 2017
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Other investment securities:
 
 
 
 
 
 
 
State and municipal securities
$
2,461,106

 
$
13,029

 
$
(7,900
)
 
$
2,466,235

Collateralized loan obligations
39,947,912

 
84,408

 
(50,650
)
 
39,981,670

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC certificates
24,290,993

 
201,688

 
(164,528
)
 
24,328,153

FNMA certificates
120,188,449

 
204,169

 
(2,706,928
)
 
117,685,690

GNMA certificates
2,539,102

 
3,076

 
(5,790
)
 
2,536,388

Private-label mortgage securities: (1)
 
 
 
 
 
 
 
Investment grade
685,309

 
86

 
(32,001
)
 
653,394

Split rating (2)
2,852,875

 

 
(121,273
)
 
2,731,602

Non-investment grade
1,162,287

 

 
(62,613
)
 
1,099,674

Total
$
194,128,033

 
$
506,456

 
$
(3,151,683
)
 
$
191,482,806

________________________________
(1)
Credit ratings are current as of March 31, 2017.
(2)
Bonds with split ratings represent securities with both investment and non-investment grades.
 
September 30, 2016
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Other investment securities:
 
 
 
 
 
 
 
State and municipal securities
$
2,483,779

 
$
42,041

 
$
(1,653
)
 
$
2,524,167

Collateralized loan obligations
39,748,828

 
79,464

 
(121,564
)
 
39,706,728

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC certificates
27,432,208

 
592,777

 

 
28,024,985

FNMA certificates
126,292,589

 
1,213,349

 
(102,546
)
 
127,403,392

GNMA certificates
1,509,079

 
3,878

 

 
1,512,957

Private-label mortgage securities:
 
 
 
 
 
 
 
Investment grade
847,064

 
1,100

 
(36,696
)
 
811,468

Split rating (1)
553,376

 

 
(5,390
)
 
547,986

Non-investment grade
5,796,816

 
212,151

 
(204,363
)
 
5,804,604

Total
$
204,663,739

 
$
2,144,760

 
$
(472,212
)
 
$
206,336,287

______________________________
(1)
Bonds with split ratings represent securities with both investment and non-investment grades.

The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2017, 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.
 
Amortized Cost
 
Estimated Fair Value
 
 
 
 
Due within one year
$
504,580

 
$
504,077

Due from one year to five years
1,681,424

 
1,690,145

Due after five years
40,223,012

 
40,253,681

Mortgage-backed securities
151,719,017

 
149,034,903

Total
$
194,128,033

 
$
191,482,806


11


During the six months ended March 31, 2017, $11.7 million in investment securities available for sale were called or matured. No investment securities were called or matured during the six months ended March 31, 2016. Proceeds from sales of investment securities available for sale during the six months ended March 31, 2017 and 2016, were $2.1 million and $1.2 million, respectively. Gross realized gains on the sale of these securities were $247,780 and $36,224 for the six months ended March 31, 2017 and 2016, respectively. No gross realized losses were recognized for the six months ended March 31, 2017 compared to $259 for the six months ended March 31, 2016.
Investment securities available for sale with an aggregate carrying value of $99.3 million and $103.5 million at March 31, 2017 and September 30, 2016, respectively, were available to be pledged to secure Federal Home Loan Bank (“FHLB”) advances. However, no securities were pledged at either period end to secure FHLB advances.
Investment securities available for sale that had been in a continuous unrealized loss position for less than 12 months at March 31, 2017 and September 30, 2016 are as follows:
 
March 31, 2017
 
Amortized Cost
 
Gross Unrealized Losses
 
Estimated Fair Value
Other investment securities:
 
 
 
 
 
State and municipal securities
$
1,345,305

 
$
(7,900
)
 
$
1,337,405

Collateralized loan obligations
$
7,638,765

 
$
(30,019
)
 
$
7,608,746

Mortgage-backed securities:
 
 

 
 
FHLMC certificates
11,924,026

 
(164,528
)
 
11,759,498

FNMA certificates
91,105,877

 
(2,579,515
)
 
88,526,362

GNMA certificates
1,053,380

 
(5,790
)
 
1,047,590

Total
$
113,067,353

 
$
(2,787,752
)
 
$
110,279,601

 
September 30, 2016
 
Amortized Cost
 
Gross Unrealized Losses
 
Estimated Fair Value
Other investment securities:
 
 
 
 
 
State and municipal securities
$
1,025,997

 
$
(1,653
)
 
$
1,024,344

Mortgage-backed securities:
 
 
 
 
 
FNMA certificates
15,742,485

 
(71,197
)
 
15,671,288

Private-label mortgage securities
2,487,651

 
(125,727
)
 
2,361,924

Total
$
19,256,133

 
$
(198,577
)
 
$
19,057,556

Investment securities available for sale that had been in a continuous unrealized loss position for greater than 12 months at March 31, 2017 and September 30, 2016 are as follows:
 
March 31, 2017
 
Amortized Cost
 
Gross Unrealized Losses
 
Estimated Fair Value
Other investment securities:
 
 
 
 
 
Collateralized loan obligations
$
7,492,786

 
$
(20,631
)
 
$
7,472,155

Mortgage-backed securities:
 
 
 
 
 
FNMA certificates
6,110,870

 
(127,413
)
 
5,983,457

Private-label mortgage securities
4,584,788

 
(215,888
)
 
4,368,900

Total
$
18,188,444

 
$
(363,932
)
 
$
17,824,512


12


 
September 30, 2016
 
Amortized Cost
 
Gross Unrealized Losses
 
Estimated Fair Value
Other investment securities:
 
 
 
 
 
Collateralized loan obligations
$
15,469,859

 
$
(121,564
)
 
$
15,348,295

Mortgage-backed securities:
 
 
 
 
 
FNMA certificates
3,923,709

 
(31,349
)
 
3,892,360

Private-label mortgage securities
2,463,439

 
(120,722
)
 
2,342,717

Total
$
21,857,007

 
$
(273,635
)
 
$
21,583,372

At March 31, 2017 the Company had approximately $216,000 of gross unrealized losses on private-label mortgage securities with aggregate amortized cost of approximately $4.6 million. Previously, in fiscal 2011, the Company recognized $380,000 in credit losses on its investment portfolio. During the six months ended March 31, 2017, the Company sold the private label security that had been other-than-temporarily impaired, and now has no such losses in its portfolio of investment securities available for sale.
Regularly, the Company performs an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired other-than-temporarily. The assessment considers many factors including the severity and duration of the impairment, the Company’s intent and ability to hold the security for a period of time sufficient for recovery in value, recent events specific to the industry, and current characteristics of each security such as delinquency and foreclosure levels, credit enhancements, and projected losses and loss coverage ratios. It is possible that the underlying collateral of these securities will perform worse than current expectations, which may lead to adverse changes in cash flows on these securities and potential future other-than-temporary impairment losses. Events that may trigger material declines in fair values for these securities in the future include but are not limited to, deterioration of credit metrics, significantly higher levels of default and severity of loss on the underlying collateral, deteriorating credit enhancement and loss coverage ratios, or further illiquidity. All of these securities were evaluated for other-than-temporary impairment based on an analysis of the factors and characteristics of each security as previously enumerated. The Company considers these unrealized losses to be temporary impairment losses primarily because of continued sufficient levels of credit enhancements and credit coverage levels of less senior tranches to tranches held by the Company.

Note 6: Loans Receivable
Loans outstanding, by portfolio segment, are summarized in the following table:
 
March 31, 2017
 
September 30, 2016
 
 
 
 
1-4 family residential real estate
$
223,215,782

 
$
236,939,555

Commercial real estate
608,206,023

 
595,157,268

Commercial
73,119,051

 
71,865,081

Real estate construction
77,331,705

 
80,500,321

Consumer and other
37,300,008

 
21,240,512

Total loans, net of acquisition fair value adjustments
1,019,172,569

 
1,005,702,737

Unamortized loan origination fees, net
(1,116,362
)
 
(1,278,830
)
Allowance for loan losses
(10,504,538
)
 
(10,371,416
)
Total loans, net
$
1,007,551,669

 
$
994,052,491

Loan Origination and Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Commercial real estate loans are generally made by the Company to entities in Georgia, Alabama, Florida and adjoining states and are secured by properties in these states. Commercial real estate lending involves additional risks compared to one- to four-family residential lending. Repayment of commercial real estate loans often depends on the successful operations and income stream of the borrowers, and commercial real estate loans typically involve larger loan balances to single borrowers or groups of

13


related borrowers compared to residential real estate loans. The Company’s underwriting criteria for commercial real estate loans include maximum loan-to-value ratios, debt coverage ratios, secondary sources of repayment, guarantor requirements, net worth requirements and quality of cash flow. As part of the loan approval and underwriting of commercial real estate loans, management undertakes a cash flow analysis, and generally requires a debt-service coverage ratio of at least 1.15 times. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At March 31, 2017, approximately 29.4% of the outstanding principal balance of the Company’s commercial real estate loans was secured by owner-occupied properties.
The Company makes construction and land development loans primarily for the construction of one- to four-family residences but also for multi-family and nonresidential real estate projects on a select basis. The Company offers construction loans to builders including both speculative (unsold) and pre-sold loans to pre-approved local builders. The number of speculative loans that management will extend to a builder at one time depends upon the financial strength and credit history of the builder. The Company’s construction loan program is expected to remain a modest portion of the loan volume and management generally limits the number of outstanding loans on unsold homes under construction within a specific area.
The Company also originates first and second mortgage loans and home equity lines of credit secured by one- to four-family residential properties within Georgia, Alabama and the Florida panhandle. Management currently originates mortgages at all branch locations, but utilizes a centralized processing location to reduce the underwriting risk. The Company originates both fixed rate and adjustable rate one- to four-family residential mortgage loans. Fixed rate 30 year conforming loans are generally originated for resale into the secondary market and loans that are non-conforming due to property exceptions and that have adjustable rates are generally retained in the Company’s portfolio. The non-conforming loans originated are not considered to be subprime loans and the amount of subprime and low documentation loans held by the Company is not material. The Company also offers home equity lines of credit as a complement to one- to four-family residential mortgage lending. The underwriting standards applicable to home equity credit lines are similar to those for one- to four-family residential mortgage loans, except for slightly more stringent credit-to-income and credit score requirements. Home equity loans are generally limited to 80% of the value of the underlying property unless the loan is covered by private mortgage insurance. At March 31, 2017, the Company had $37.0 million of home equity lines of credit and second mortgage loans.
The Company originates consumer loans that consist of loans on deposits, auto loans, purchased mobile home loans, and various other installment loans. The Company primarily offers consumer loans as an accommodation to customers. Consumer loans tend to have a higher credit risk than residential mortgage loans because they may be secured by rapidly depreciable assets, or may be unsecured. The Company’s consumer lending generally follows accepted industry standards for non-subprime lending, including credit scores and debt to income ratios.
The Company’s commercial business loans are generally limited to terms of five years or less. While management typically collateralizes these loans with a lien on commercial real estate or, much less frequently, with a lien on business assets and equipment, the primary underwriting consideration is the business cash flow. Management also generally requires the personal guarantee of the business owner. Interest rates on commercial business loans are generally higher than interest rates on residential or commercial real estate loans due to the risk inherent in this type of loan. Commercial business loans are generally considered to have more risk than residential mortgage loans or commercial real estate loans because the collateral may be in the form of intangible assets and/or readily depreciable inventory. Commercial business loans may also involve 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, commercial business lending generally requires substantially greater supervision efforts by management compared to residential mortgage or commercial real estate lending.
The Company maintains an internal loan review function that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

14


Nonaccrual and Past Due Loans. An aging analysis of past due loans, segregated by portfolio segment, at March 31, 2017 and September 30, 2016 was as follows:
 
March 31, 2017
 
September 30, 2016
 
 
 
 
Current
$
1,013,465,376

 
$
998,370,863

Accruing past due loans:
 
 
 
30-89 days past due
 
 
 
1-4 family residential real estate
1,127,098

 
1,101,667

Commercial real estate
1,763,436

 
604,724

Commercial
42,563

 
50,712

Real estate construction
459,093

 

Consumer and other
104,714

 
335,062

Total 30-89 days past due
3,496,904

 
2,092,165

90 days or greater past due (1)
 
 
 
1-4 family residential real estate

 
449,901

Commercial real estate
600,324

 
929,944

Commercial

 
124,553

Real estate construction

 

Consumer and other

 

Total 90 days or greater past due
600,324

 
1,504,398

Total accruing past due loans
4,097,228

 
3,596,563

Nonaccruing loans: (2)
 
 
 
1-4 family residential real estate
1,027,551

 
930,121

Commercial real estate
478,165

 
2,705,439

Commercial
67,419

 
99,751

Real estate construction

 

Consumer and other
36,830

 

Nonaccruing loans
1,609,965

 
3,735,311

Total loans
$
1,019,172,569

 
$
1,005,702,737

________________________________
(1)
Acquired loans in the amount of $600,000 and $1.5 million at March 31, 2017 and September 30, 2016, respectively, are regarded as accruing loans and included in this section. These loans which are accounted for under ASC 310-30 are reported as accruing loans because of the ongoing recognition of accretion income established at the time of acquisition.
(2)
Acquired loans in the amount of $2.7 million and $2.5 million at March 31, 2017 and September 30, 2016, respectively, are regarded as accruing loans and excluded from the nonaccrual section due to the ongoing recognition of accretion income established at the time of acquisition.

Impaired Loans. The Company evaluates “impaired” loans, which include nonperforming loans and accruing troubled debt restructured loans having risk characteristics that are unique to an individual borrower, on a loan-by-loan basis with balances above a specified level. For smaller loans, the allowance is calculated based on the credit grade utilizing historical loss experience and other qualitative factors.

15


Impaired loans for the periods ended March 31, 2017 and September 30, 2016, segregated by portfolio segment, are presented below. There were $131,955 and $47,955 of recorded allowances for loan losses on impaired loans at March 31, 2017 and September 30, 2016, respectively.
 
 
 
 
 
 
 
Three Months Ended 
 March 31, 2017
 
Six Months Ended 
 March 31, 2017
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
 
Average Investment in Impaired Loans
 
Interest Income Recognized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential real estate
$
1,407,850

 
$
2,016,068

 
$

 
$
1,424,691

 
$
5,346

 
$
1,438,908

 
$
11,103

Commercial real estate (1)
6,113,555

 
6,975,893

 
104,955

 
6,156,038

 
64,462

 
6,201,854

 
132,204

Commercial
67,419

 
244,042

 

 
74,944

 

 
83,213

 

Real estate construction

 

 

 

 

 

 

Consumer and other (2)
36,830

 
37,915

 
27,000

 
37,615

 

 
38,340

 
32

Total impaired loans
$
7,625,654

 
$
9,273,918

 
$
131,955

 
$
7,693,288

 
$
69,808

 
$
7,762,315

 
$
143,339

________________________________
(1)
Commercial real estate loans with related allowances totaling $104,955 had a recorded investment of $1,220,405 and unpaid principal balance of $1,213,101 at March 31, 2017. During the three and six months ended March 31, 2017, the Company had an average investment in such loans of $1,226,059 and $1,228,862, respectively, and recorded $8,734 and $19,712 of interest income on the loans, respectively.
(2)
Consumer and other loans with related allowances totaling $27,000 had a recorded investment of $30,092 and unpaid principal balance of $31,055 at March 31, 2017. During the three and six months ended March 31, 2017, the Company had an average investment in such loans of $30,763 and $31,297, respectively, and recorded $0 and $32 of interest income on the loans, respectively.
The recorded investment in accruing troubled debt restructured loans (“TDRs”) at March 31, 2017 totaled $5.1 million and is included in the impaired loan table above.
 
 
 
 
 
 
 
Year Ended September 30, 2016
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
 
 
 
 
 
 
 
 
 
 
1-4 family residential real estate
$
1,042,504

 
$
1,644,044

 
$

 
$
1,108,660

 
$
10,113

Commercial real estate (1)
7,177,709

 
8,814,954

 
47,955

 
7,489,531

 
325,540

Commercial
99,751

 
269,707

 

 
131,506

 

Real estate construction

 

 

 

 

Total impaired loans
$
8,319,964

 
$
10,728,705

 
$
47,955

 
$
8,729,697

 
$
335,653

________________________________
(1)
Commercial real estate loans with related allowances totaling $47,955 had a recorded investment and unpaid principal balance of $120,174 at September 30, 2016. During the year ended September 30, 2016, the Company had an average investment in such loans of $97,131 and recorded $3,931 of interest income on the loans.
The recorded investment in accruing TDRs at September 30, 2016 totaled $4.6 million and is included in the impaired loan table above.
Loans are classified as restructured by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The Company only restructures loans for borrowers in financial difficulty that have presented a viable business plan to fully pay off all obligations, including outstanding debt, interest, and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans. The concessions granted on TDRs generally include terms to reduce the interest rate or extend the term of the debt obligation.
Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of concession are initially classified as accruing TDRs if the loan is reasonably assured of repayment and performance is

16


expected in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the concession date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. TDRs are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower’s financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).
For the six month periods ended March 31, 2017 and 2016, the following table presents a breakdown of the types of concessions determined to be TDRs during the period by loan class.
 
Accruing Loans
 
Nonaccrual Loans
 
Six Months Ended March 31, 2017
 
Six Months Ended March 31, 2017
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Payment structure modification:
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential real estate
5
 
$
335,006

 
$
335,006

 
 
$

 
$

Commercial real estate
2
 
515,639

 
515,639

 
 

 

Consumer and other
 

 

 
1
 
32,138

 
32,138

Total
7
 
$
850,645

 
$
850,645

 
1
 
$
32,138

 
$
32,138

 
Accruing Loans
 
Nonaccrual Loans
 
Six Months Ended March 31, 2016
 
Six Months Ended March 31, 2016
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Payment structure modification:
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential real estate
1
 
$
26,118

 
$
26,118

 
 
$

 
$

Commercial real estate
 

 

 
1
 
271,107

 
193,500

Total
1
 
$
26,118

 
$
26,118

 
1
 
$
271,107

 
$
193,500

At March 31, 2017, restructured loans with a modified balance of $5.1 million were accruing and $136,831 were nonaccruing, while restructured loans with a modified balance of $7.3 million were accruing and $332,588 were nonaccruing at March 31, 2016. As of March 31, 2017, there was one loan in the amount of $271,107 that was restructured within the past twelve months and subsequently defaulted. There was one loan in the amount of $108,861 that defaulted within twelve months of its restructure at March 31, 2016.
Acquired Impaired Loans. The following table documents changes in the accretable discount on acquired credit impaired loans during the six months ended March 31, 2017 and 2016:
 
Six Months Ended March 31, 2017
 
Six Months Ended March 31, 2016
 
 
 
 
Balance, beginning of period
$
462,071

 
$
3,391,288

Loan accretion
(322,657
)
 
(1,962,562
)
Balance, end of period
$
139,414

 
$
1,428,726

The following table presents the outstanding balances and related carrying amounts for all purchase credit impaired loans at the periods ended March 31, 2017 and September 30, 2016:

17


 
March 31, 2017
 
September 30, 2016
 
 
 
 
Unpaid principal balance
$
19,959,502

 
$
22,666,947

Carrying amount
18,425,308

 
21,118,977

Acquired Performing Loans. Included within total loans are acquired performing loans shown net of fair value discounts in the amount of $233.0 million and $286.1 million at March 31, 2017 and September 30, 2016, respectively. These fair value discounts are being amortized over the remaining lives of the respective loans and totaled $1.9 million and $2.6 million at March 31, 2017 and September 30, 2016, respectively.
Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including the level of classified loans, net charge-offs, nonperforming loans (see details above) and the general economic conditions in its market areas.
The Company utilizes a risk rating system to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. The risk grade for each individual loan is determined by the loan officer and other approving officers at the time of loan origination and is adjusted from time to time to reflect an ongoing assessment of loan risk. Risk grades are reviewed quarterly for all substandard, nonaccrual and TDR loans, and annually as part of the Company's internal loan review process. In addition, individual loan risk grades are reviewed in connection with all renewals, extensions and modifications.
The following table presents the risk grades of the loan portfolio, segregated by class of loans:
March 31, 2017
 
1-4 family residential real estate
 
Commercial real estate
 
Commercial
 
Real estate construction
 
Consumer and other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Pass (1-4)
$
217,718,161

 
$
569,940,740

 
$
72,551,926

 
$
77,331,705

 
$
37,203,612

 
$
974,746,144

Special Mention (5)
1,334,032

 
12,101,250

 
69,067

 

 

 
13,504,349

Substandard (6)
4,163,589

 
26,164,033

 
498,058

 

 
96,396

 
30,922,076

Doubtful (7)


 


 


 


 


 

Loss (8)


 


 


 


 


 

Total loans
$
223,215,782

 
$
608,206,023

 
$
73,119,051

 
$
77,331,705

 
$
37,300,008

 
$
1,019,172,569

September 30, 2016
 
1-4 family residential real estate
 
Commercial real estate
 
Commercial
 
Real estate construction
 
Consumer and other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Pass (1-4)
$
231,606,989

 
$
552,056,562

 
$
71,053,118

 
$
79,347,882

 
$
21,171,121

 
$
955,235,672

Special Mention (5)
1,314,543

 
11,699,353

 
73,878

 
38,159

 

 
13,125,933

Substandard (6)
4,018,023

 
31,401,353

 
738,085

 
1,114,280

 
69,391

 
37,341,132

Doubtful (7)

 

 

 

 

 

Loss (8)

 

 

 

 

 

Total loans
$
236,939,555

 
$
595,157,268

 
$
71,865,081

 
$
80,500,321

 
$
21,240,512

 
$
1,005,702,737

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense and is an amount that management believes will be adequate to absorb losses on existing loans that become uncollectible, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrower’s ability to repay. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance.
Management’s allowance for loan losses methodology is a loan classification-based system. Management bases the required reserve on a percentage of the loan balance for each type of loan and classification level. 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 the loan loss history of the last seven years. Reserve percentages are also adjusted based upon our estimate of the effect that the current economic environment will have on each type of loan.

18


Management segments its allowance for loan losses into the following four major categories: (1) specific reserves; (2) general allowances for Classified/Watch loans; (3) general allowances for loans with satisfactory ratings; and (4) an unallocated amount. Risk ratings are initially assigned in accordance with CharterBank’s loan and collection policy. An organizationally independent department reviews risk grade assignments on an ongoing basis. Management reviews current information and events regarding a borrowers’ financial condition and strengths, cash flows available for debt repayment, the related collateral supporting the loan and the effects of known and expected economic conditions. When the evaluation reflects a greater than normal risk associated with the individual loan, management classifies the loan accordingly. If the loan is determined to be impaired, management allocates a portion of the allowance for loan losses for that loan based on the fair value of the collateral, if the loan is considered collateral-dependent, as the measure for the amount of the impairment. Impaired and Classified/Watch loans are aggressively monitored.
The allowances for loans by credit grade are further subdivided by loan type. Charter Financial has developed specific quantitative allowance factors to apply to each loan which considers loan charge-off experience over the most recent seven years by loan type. In addition, loss estimates are applied for certain qualitative allowance factors that are subjective in nature and require considerable judgment on the part of management. Such qualitative factors include economic and business conditions, the volume of past due loans, changes in the value of collateral of collateral-dependent loans, and other economic uncertainties. An unallocated component of the allowance is also established for potential losses that exist in the remainder of the portfolio, but have yet to be identified.
The Company incorporates certain refinements and improvements to its allowance for loan losses methodology from time to time. During the current quarter and the prior fiscal year, the Company made minor refinements to the qualitative risk factors but no significant changes to its allowance methodology. The adjustments in the Company's methodology were not material to the overall allowance or provision for the three and six months ended March 31, 2017 or for the fiscal year ended September 30, 2016.
An unallocated allowance is generally maintained in a range of 4% to 12% of the total allowance in recognition of the imprecision of the estimates and other factors. In times of greater economic downturn and uncertainty, the higher end of this range is provided.
The Company recorded net recoveries of $1.0 million during the six months ended March 31, 2017. With asset quality remaining strong, and the continued trend of net recoveries, the Company recorded a negative provision of $900,000 in order to limit the reserve build to $133,000 during the six months ended March 31, 2017. A negative provision of $250,000 was recorded during the fiscal year ended September 30, 2016, while no negative provision was recorded during the six months ended March 31, 2016.
The following tables present an analysis of the allowance for loan losses by portfolio segment and changes in the allowance for loan losses for the three and six months ended March 31, 2017 and 2016. The total allowance for loan losses is disaggregated into those amounts associated with loans individually evaluated and those associated with loans collectively evaluated, as well as loans acquired with deteriorated credit quality.
 
Three Months Ended March 31, 2017
 
1-4 family real estate
 
Commercial real estate
 
Commercial
 
Real estate construction
 
Consumer and other
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
773,060

 
$
7,099,906

 
$
769,665

 
$
670,504

 
$
158,477

 
$
1,027,616

 
$
10,499,228

Charge-offs
(92,136
)
 

 

 

 
(10,858
)
 

 
(102,994
)
Recoveries
25,506

 
85,342

 
140,374

 

 
7,082

 

 
258,304

Provision
83,343

 
109,007

 
(194,379
)
 
(267,324
)
 
39,560

 
79,793

 
(150,000
)
Ending balance
$
789,773

 
$
7,294,255

 
$
715,660

 
$
403,180

 
$
194,261

 
$
1,107,409

 
$
10,504,538

 
Three Months Ended March 31, 2016
 
1-4 family real estate
 
Commercial real estate
 
Commercial
 
Real estate construction
 
Consumer and other
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
692,210

 
$
7,202,979

 
$
564,645

 
$
461,423

 
$
36,850

 
$
737,280

 
$
9,695,387

Charge-offs
(42,779
)
 
(132,936
)
 
(24,627
)
 

 
(4,377
)
 

 
(204,719
)
Recoveries
64,047

 
88,779

 
193,232

 
5,000

 
8,773

 

 
359,831

Provision
121,677

 
(343,195
)
 
(114,430
)
 
101,554

 
12,702

 
221,692

 

Ending balance
$
835,155

 
$
6,815,627

 
$
618,820

 
$
567,977

 
$
53,948

 
$
958,972

 
$
9,850,499


19


 
Six Months Ended March 31, 2017
 
1-4 family real estate
 
Commercial real estate
 
Commercial
 
Real estate construction
 
Consumer and other
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
779,288

 
$
7,346,130

 
$
600,258

 
$
516,556

 
$
79,140

 
$
1,050,044

 
$
10,371,416

Charge-offs
(92,136
)
 
(49,097
)
 

 

 
(11,804
)
 

 
(153,037
)
Recoveries
137,420

 
754,425

 
271,169

 

 
23,145

 

 
1,186,159

Provision
(34,799
)
 
(757,203
)
 
(155,767
)
 
(113,376
)
 
103,780

 
57,365

 
(900,000
)
Ending balance
$
789,773

 
$
7,294,255

 
$
715,660

 
$
403,180

 
$
194,261

 
$
1,107,409

 
$
10,504,538


 
Six Months Ended March 31, 2016
 
1-4 family real estate
 
Commercial real estate
 
Commercial
 
Real estate construction
 
Consumer and other
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
708,671

 
$
7,787,165

 
$
473,342

 
$
503,112

 
$
16,222

 
$

 
$
9,488,512

Charge-offs
(53,620
)
 
(132,936
)
 
(25,131
)
 

 
(7,599
)
 

 
(219,286
)
Recoveries
80,693

 
180,442

 
302,231

 
5,000

 
12,907

 

 
581,273

Provision (1)
99,411

 
(1,019,044
)
 
(131,622
)
 
59,865

 
32,418

 
958,972

 

Ending balance
$
835,155

 
$
6,815,627

 
$
618,820

 
$
567,977

 
$
53,948

 
$
958,972

 
$
9,850,499

 
Balance at March 31, 2017
 
1-4 family real estate
 
Commercial real estate
 
Commercial
 
Real estate construction
 
Consumer and other
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$
104,955

 
$

 
$

 
$
27,000

 
$

 
$
131,955

Other loans not individually evaluated
789,773

 
7,189,300

 
715,660

 
403,180

 
167,261

 
1,107,409

 
10,372,583

Ending balance
$
789,773

 
$
7,294,255

 
$
715,660

 
$
403,180

 
$
194,261

 
$
1,107,409

 
$
10,504,538

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts collectively evaluated for impairment
$
219,333,237

 
$
589,866,645

 
$
69,326,842

 
$
77,331,705

 
$
37,263,178

 
 
 
$
993,121,607

Amounts individually evaluated for impairment
1,407,850

 
6,113,555

 
67,419

 

 
36,830

 
 
 
7,625,654

Amounts related to loans acquired with deteriorated credit quality
2,474,695

 
12,225,823

 
3,724,790

 

 

 
 
 
18,425,308

Ending balance
$
223,215,782

 
$
608,206,023

 
$
73,119,051

 
$
77,331,705

 
$
37,300,008

 
 
 
$
1,019,172,569


20


 
Balance at September 30, 2016
 
1-4 family real estate
 
Commercial real estate
 
Commercial
 
Real estate construction
 
Consumer and other
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$
47,955

 
$

 
$

 
$

 
$

 
$
47,955

Other loans not individually evaluated
779,288

 
7,298,175

 
600,258

 
516,556

 
79,140

 
1,050,044

 
10,323,461

Ending balance
$
779,288

 
$
7,346,130

 
$
600,258

 
$
516,556

 
$
79,140

 
$
1,050,044

 
$
10,371,416

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts collectively evaluated for impairment
$
232,761,343

 
$
573,936,063

 
$
67,825,557

 
$
80,500,321

 
$
21,240,512

 
 
 
$
976,263,796

Amounts individually evaluated for impairment
1,042,504

 
7,177,709

 
99,751

 

 

 
 
 
8,319,964

Amounts related to loans acquired with deteriorated credit quality
3,135,708

 
14,043,496

 
3,939,773

 

 

 
 
 
21,118,977

Ending balance
$
236,939,555

 
$
595,157,268

 
$
71,865,081

 
$
80,500,321

 
$
21,240,512

 
 
 
$
1,005,702,737

Included within the above loan amounts are acquired loans, both performing and purchased credit impaired, which are shown net of fair value discounts. The total acquired net loan amounts reflected in the above tables were $251.3 million and $306.8 million at March 31, 2017 and September 30, 2016, respectively. The total remaining fair value discounts related to the acquired loans totaled $2.0 million and $3.1 million at March 31, 2017 and September 30, 2016, respectively.

Note 7: Income Per Share
Basic net income per share for the three and six months ended March 31, 2017 and 2016 was computed by dividing net income to common shareholders by the weighted average number of shares of common stock outstanding, which consists of issued shares less unallocated employee stock ownership plan (“ESOP”) shares and unvested restricted shares.
Diluted net income per share for the three and six months ended March 31, 2017 and 2016 was computed by dividing net income by weighted average shares outstanding plus potential common shares resulting from dilutive stock options and unvested restricted shares, determined using the treasury stock method.
 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income
$
3,316,795

 
$
2,143,088

 
$
8,362,462

 
$
6,757,366

Denominator:
 

 
 

 
 
 
 
Weighted average common shares outstanding
14,322,290

 
14,224,862

 
14,264,248

 
14,557,000

Common stock equivalents
1,018,030

 
685,085

 
1,018,030

 
685,085

Diluted shares
15,340,320

 
14,909,947

 
15,282,278

 
15,242,085

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.23

 
$
0.15

 
$
0.59

 
$
0.46

Diluted
$
0.22

 
$
0.14

 
$
0.55

 
$
0.44

For the three and six months ended March 31, 2017 and 2016 there were 802,653 and 427,251, respectively, of dilutive stock options. Additionally, for the three and six months ended March 31, 2017 and 2016, there were 215,377 and 257,834 shares, respectively, of dilutive unvested restricted stock. There were no shares which were subject to options issued with exercise prices in excess of the average market value per share during the periods ended March 31, 2017 and 2016.


21


Note 8: Employee Benefits
The Company has a 2002 stock option plan which allows for stock option awards of the Company’s common stock to eligible directors and key employees of the Company. The option price is determined by a committee of the board of directors at the time of the grant and may not be less than 100% of the market value of the common stock on the date of the grant. For options granted under the 2002 stock option plan, when granted, the options vest over periods of up to four or five years from grant date or upon death, disability, or qualified retirement. All options must be exercised within a 10-year period from grant date. The Company may grant either incentive stock options, which qualify for special federal income tax treatment, or non-qualified stock options, which do not receive such tax treatment. The Company’s stockholders have authorized 882,876 shares for the plan, of which 132,840 have been issued or retired upon the exercise of the option granted under the plan, 585,397 are granted and outstanding and no shares are available to be granted at March 31, 2017 within this plan. All share and share amounts related to employee benefits have been updated to reflect the completion of the second-step conversion on April 8, 2013 at a conversion ratio of 1.2471. As of March 31, 2017, 587,605 shares have vested under this plan. During the six months ended March 31, 2017, 11,224 options from this plan vested.
In addition to the plan above, on December 19, 2013, the Company's stockholders approved the 2013 Equity Incentive Plan, which allows for stock option awards of the Company’s common stock to eligible directors and key employees of the Company. The option price is determined by a committee of the board of directors at the time of the grant and may not be less than 100% of the market value of the common stock on the date of the grant. When granted, the options vest from one year to five years from grant date or upon death or disability. All options must be exercised within a 10-year period from the grant date. The Company may grant either incentive stock options, which qualify for special federal income tax treatment, or non-qualified stock options, which do not receive such tax treatment. The Company’s stockholders have authorized 1,428,943 shares for the plan, of which 5,000 were retired, 1,075,680 were granted and outstanding as of March 31, 2017, with the remaining 348,263 shares available to be granted at March 31, 2017. During the six months ended March 31, 2017, 194,335 options from this plan vested. As of March 31, 2017, 583,005 shares have vested under this plan.
The following table summarizes activity for shares under option and weighted average exercise price per share:
 
Shares
 
Weighted average exercise price/share
 
Weighted average remaining life (years)
 
 
 
 
 
 
Options outstanding – September 30, 2016
1,693,968

 
$
10.14

 
6
Options exercised
(23,190
)
 
8.02

 
3
Options forfeited
(9,701
)
 
11.13

 
6
Options granted

 

 
0
Options outstanding – March 31, 2017
1,661,077

 
$
10.17

 
5
Options exercisable – March 31, 2017
1,112,776

 
$
9.74

 
5
The stock price at March 31, 2017 was greater than the exercise prices on 1,661,077 options outstanding and therefore had an intrinsic value of $15,788,190. The total intrinsic value of all 1,112,776 shares exercisable at March 31, 2017 was $11,055,008.

22


Stock option expense was $167,640 and $161,353 for the six months ended March 31, 2017 and 2016, respectively. The following table summarizes information about the options outstanding at March 31, 2017:
 
Number of options outstanding at
March 31, 2017
 
 
 
Remaining contractual life in years
 
 
 
Exercise price per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
338,619

 
 
 
 
2
 
 
 
$
8.82

 
 
 
174,594

 
 
 
 
3
 
 
 
$
8.18

 
 
 
60,960

 
 
 
 
4
 
 
 
$
7.22

 
 
 
6,236

 
 
 
 
5
 
 
 
$
7.34

 
 
 
4,988

 
 
 
 
5
 
 
 
$
7.79

 
 
 
971,680

 
 
 
 
7
 
 
 
$
10.89

 
 
 
30,000

 
 
 
 
9
 
 
 
$
12.66

 
 
 
3,000

 
 
 
 
9
 
 
 
$
13.16

 
 
 
68,000

 
 
 
 
9
 
 
 
$
13.31

 
 
 
3,000

 
 
 
 
10
 
 
 
$
13.30

 
 
 
1,661,077

 
 
 
 
 
 
 
 
 
 
In addition to the above, the Company implemented the Charter Financial Corporation 2013 Equity Incentive Plan as described above, which has 571,577 shares authorized, and the Company has granted 366,592 shares of restricted stock to key employees and directors, including 6,500 during the current year. During the six months ended March 31, 2017, 72,015 shares vested. The remaining 204,985 shares are available to be granted at March 31, 2017.
 
Shares
 
Weighted average grant date fair 
value per award
 
 
 
 
Unvested restricted stock awards - September 30, 2016
216,062

 
$
10.89

Granted
6,500

 
18.06

Vested
72,015

 
10.89

Canceled or expired

 

Unvested restricted stock awards – March 31, 2017
150,547

 
$
11.20

Grants subsequent to December 1, 2013 will be expensed to the scheduled vesting.

Note 9: Commitments and Contingent Liabilities
In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby letters of credit. At March 31, 2017, commitments to extend credit and standby letters of credit totaled $182.7 million. The Company does not anticipate any material losses as a result of these transactions.
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, none of these matters should have a material adverse effect on the Company’s financial position or results of operation.

Note 10: Fair Value of Financial Instruments and Fair Value Measurement
Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accounting standards also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The applicable standard describes three levels of inputs that may be used to measure fair value: Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date; Level 2- Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data; Level 3- Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient

23


significance to warrant a transfer between levels. For example, changes in market activity or the addition of new unobservable inputs could, in the Company’s judgment, cause a transfer to either a higher or lower level. For the three months ended March 31, 2017, there were no transfers between levels.
All of the Company’s available for sale securities fall into Level 2 of the fair value hierarchy. These securities are priced via independent service providers. In obtaining such valuation information, the Company has evaluated the valuation methodologies used to develop the fair values.
At March 31, 2017, the Company holds, as part of its investment portfolio, available for sale securities reported at fair value consisting of state and municipal securities, collateralized loan obligations (“CLO”), mortgage-backed securities and collateralized mortgage obligations. The fair value of the majority of these securities is determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications. Inputs include benchmark yields, reported trades, issuer spreads, prepayment speeds and other relevant items. These are inputs used by a third-party pricing service used by the Company. To validate the appropriateness of the valuations provided by the third party, the Company regularly updates its understanding of the inputs used and compares valuations to an additional third party source.
The Company also holds assets available for sale reported at fair value and included in other assets on the Company's balance sheet, consisting of one former branch, a parcel of land adjacent to a current branch and a parcel of land initially acquired as a proposed branch site. These assets are included in other assets on the Company's condensed consolidated statements of financial condition. The fair value of these assets is determined using current appraisals adjusted at management’s discretion to reflect any decline in the fair value of the properties since the time the appraisal was performed. Appraisal values are reviewed and monitored internally and fair value is reassessed at least quarterly or more frequently when circumstances occur that indicate a change in fair value. All of the Company’s assets held for sale fall into level 3 of the fair value hierarchy.
Assets and Liabilities Measured on a Recurring Basis:
Assets and liabilities measured at fair value on a recurring basis are summarized below.
 
March 31, 2017
 
Estimated Fair Value
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
State and municipal securities
$
2,466,235

 
$

 
$
2,466,235

 
$

Collateralized loan obligations
39,981,670

 

 
39,981,670

 

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC certificates
24,328,153

 

 
24,328,153

 

FNMA certificates
117,685,690

 

 
117,685,690

 

GNMA certificates
2,536,388

 

 
2,536,388

 

Private-label mortgage securities:
 
 
 
 
 
 
 
Investment grade
653,394

 

 
653,394

 

Split rating (1)
2,731,602

 

 
2,731,602

 

Non-investment grade
1,099,674

 

 
1,099,674

 

Total investment securities available for sale
191,482,806

 

 
191,482,806

 

Mortgage servicing rights
1,132,377

 

 
1,132,377

 

Assets held for sale
712,300

 

 

 
712,300

Total recurring assets at fair value
$
193,327,483

 
$

 
$
192,615,183

 
$
712,300

__________________________________
(1)
Bonds with split ratings represent securities with both investment and non-investment grades.

24


 
September 30, 2016
 
Estimated Fair Value
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
State and municipal securities
$
2,524,167

 
$

 
$
2,524,167

 
$

Collateralized loan obligations
39,706,728

 

 
39,706,728

 

Mortgage–backed securities:
 
 
 
 
 
 
 
FHLMC certificates
28,024,985

 

 
28,024,985

 

FNMA certificates
127,403,392

 

 
127,403,392

 

GNMA certificates
1,512,957

 

 
1,512,957

 

Private-label mortgage securities:
 
 
 
 
 
 
 
Investment grade
811,468

 

 
811,468

 

Split rating (1)
547,986

 

 
547,986

 

Non-investment grade
5,804,604

 

 
5,804,604

 

Total investment securities available for sale
206,336,287

 

 
206,336,287

 

Mortgage servicing rights
820,557

 

 
820,557

 

Assets held for sale
975,300

 

 

 
975,300

Total recurring assets at fair value
$
208,132,144

 
$

 
$
207,156,844

 
$
975,300

__________________________________
(1)
Bonds with split ratings represent securities with both investment and non-investment grades.

When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the losses below include changes in fair value due in part to observable factors that are part of the valuation methodology.
A reconciliation of the beginning and ending balances of Level 3 assets and liabilities recorded at fair value on a recurring basis is as follows:
 
Six Months Ended March 31, 2017
 
Six Months Ended March 31, 2016
 
 
 
 
Fair value, beginning balance
$
975,300

 
$
1,657,084

Sales
(263,000
)
 
(356,780
)
Fair value, ending balance
$
712,300

 
$
1,300,304

Assets and Liabilities Measured on a Nonrecurring Basis:
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below.
 
 
 
 Fair Value Measurements Using:
 
Estimated Fair Value
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
March 31, 2017
 
 
 
 
 
 
 
Impaired loans
$
1,911,740

 
$

 
$

 
$
1,911,740

Other real estate owned
1,957,194

 

 

 
1,957,194

September 30, 2016
 
 
 
 
 
 
 
Impaired loans
$
2,875,691

 
$

 
$

 
$
2,875,691

Other real estate owned
2,706,461

 

 

 
2,706,461


25


Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect write-downs that are based on the market price or current appraised value of the collateral, adjusted to reflect local market conditions or other economic factors. After evaluating the underlying collateral, the fair value of the impaired loans is determined by allocating specific reserves from the allowance for loan and lease losses to the loans. Thus, the fair value reflects the loan balance as adjusted by partial chargedowns less the specifically allocated reserve. Certain collateral-dependent impaired loans are reported at the fair value of the underlying collateral. Impairment is measured based on the fair value of the collateral, which is typically derived from appraisals that take into consideration prices in observed transactions involving similar assets and similar locations. Each appraisal is updated on an annual basis, either through a new appraisal or through the Company’s comprehensive internal review process. Appraised values are reviewed and monitored internally and fair value is re-assessed at least quarterly or more frequently when circumstances occur that indicate a change in fair value. The fair value of impaired loans that are not collateral dependent is measured using a discounted cash flow analysis considered to be a Level 3 input.
OREO is initially accounted for at fair value, less estimated costs to dispose of the property. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan and lease losses at the time of foreclosure. A provision is charged to earnings for subsequent losses on OREO when market conditions indicate such losses have occurred. The ability of the Company to recover the carrying value of OREO is based upon future sales of the real estate. The ability to effect such sales is subject to market conditions and other factors beyond the Company's control, and future declines in the value of the real estate would result in a charge to earnings. The recognition of sales and gain on sales is dependent upon whether the nature and terms of the sales, including possible future involvement of the Company, if any, meet certain defined requirements. If those requirements are not met, sale and gain recognition is deferred. OREO represents real property taken by the Company either through foreclosure or through a deed in lieu thereof from the borrower. The fair value of OREO is based on property appraisals adjusted at management’s discretion to reflect a further decline in the fair value of properties since the time the appraisal analysis was performed. It has been the Company’s experience that appraisals may become outdated due to the volatile real-estate environment. Appraised values are reviewed and monitored internally and fair value is re-assessed at least quarterly or more frequently when circumstances occur that indicate a change in fair value. Therefore, the inputs used to determine the fair value of OREO and repossessed assets fall within Level 3. The Company may include within OREO other repossessed assets received as partial satisfaction of a loan. These assets are not material and do not typically have readily determinable market values and are considered Level 3 inputs.
The following table provides information describing the valuation processes used to determine recurring and nonrecurring fair value measurements categorized within Level 3 of the fair value hierarchy at March 31, 2017:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
General Range (Discount)
 
Weighted Average Discount
Impaired Loans
$
1,911,740

 
Property appraisals
 
Management discount for property type and recent market volatility
 
21%
 
 
73%
 
39%
OREO
$
1,957,194

 
Property appraisals
 
Management discount for property type and recent market volatility
 
9%
 
 
61%
 
25%
Assets Held for Sale
$
712,300

 
Valuation analysis
 
Management discount for property type and recent market volatility
 
0%
 
 
53%
 
42%
Included in the Company's portfolio of other real estate owned is approximately $476,000 and $618,000 of foreclosed residential real estate property at March 31, 2017 and September 30, 2016, respectively. The Company had $195,000 in consumer mortgage loans collateralized by residential real estate in the process of foreclosure at March 31, 2017, while $536,000 in consumer mortgage loans collateralized by residential real estate were in the process of foreclosure at September 30, 2016.
Accounting standards require disclosures of fair value information about financial instruments, whether or not recognized in the Statement of Condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair value is 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. 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. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented herein are based on pertinent information available to management as of March 31, 2017 and September 30, 2016.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

26


CASH AND CASH EQUIVALENTS – The carrying amount approximates fair value because of the short maturity of these instruments.
CERTIFICATES OF DEPOSIT HELD AT OTHER FINANCIAL INSTITUTIONS – The fair value of certificates of deposit held at other financial institutions 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.
INVESTMENTS AVAILABLE FOR SALE, FHLB STOCK, AND RESTRICTED SECURITIES – 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. The FHLB stock and restricted securities are considered restricted stock and are carried at cost which approximates their fair value.
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 determined using available market information and specific borrower information.
LOANS HELD FOR SALE – Loans held for sale are carried at the lower of cost or market value. The fair values of loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.
MORTGAGE SERVICING RIGHTS – The Company has the rights to service a portfolio of Fannie Mae ("FNMA") and other government guaranteed loans sold on a servicing retained basis. Servicing rights are measured at fair value when the loan is sold and subsequently measured at fair value on a recurring basis utilizing Level 2 inputs. Management uses a model operated and maintained by a third party to calculate the present value of future cash flows using the third party's market-based assumptions. The future cash flows for each asset are based on the asset's unique characteristics and the third party's market-based assumptions for prepayment speeds, default and voluntary prepayments. Adjustments to fair value are recorded as a component of "Gain on sale of loans" in the consolidated statements of income.
ASSETS HELD FOR SALE – The fair value of assets held for sale by the Company is generally based on the most recent appraisals of the asset or other market information as it becomes available to management.
DEPOSITS – The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and checking accounts, is equal to the amount payable on demand. 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.
BORROWINGS – The fair value of the Company’s FHLB advances is estimated based on the discounted value of contractual cash flows. The fair value of securities sold under agreements to repurchase approximates the carrying amount because of the short maturity of these borrowings. The discount rate is estimated using rates quoted for the same or similar issues or the current rates offered to the Company for debt of the same remaining maturities.
FLOATING RATE JUNIOR SUBORDINATED DEBT - The fair value of the Company's floating rate junior subordinated debt is based primarily upon discounted cash flows using rates for securities with similar terms and remaining maturities.
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE AND PAYABLE – The carrying amount of accrued interest and dividends receivable on loans and investments and payable on borrowings and deposits approximate their fair values.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT – The value of these unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. Since no significant credit exposure existed, and because such fee income is not material to the Company's financial statements at March 31, 2017 and at September 30, 2016, the fair value of these commitments is not presented.
Many of the Company's assets and liabilities are short-term financial instruments whose carrying amounts reported in the Statement of Condition approximate fair value. These items include cash and due from banks, interest-bearing bank balances, federal funds sold, other short-term borrowings and accrued interest receivable and payable balances. The estimated fair value of the Company’s remaining on-balance sheet financial instruments as of March 31, 2017 and September 30, 2016 is summarized below:

27


 
March 31, 2017
 
 
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total Estimated Fair Value
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
140,285,037

 
$
140,285,037

 
$
140,285,037

 
$

 
$

Certificates of deposit held at other financial institutions
10,511,240

 
10,511,240

 

 
10,511,240

 

Investments available for sale
191,482,806

 
191,482,806

 

 
191,482,806

 

FHLB stock
3,484,600

 
3,484,600

 

 
3,484,600

 

Restricted securities, at cost
279,000

 
279,000

 

 
279,000

 

Loans receivable, net
1,007,551,669

 
1,000,112,410

 

 

 
1,000,112,410

Loans held for sale
2,353,484

 
2,385,655

 

 
2,385,655

 

Mortgage servicing rights
1,132,377

 
1,132,377

 

 
1,132,377

 

Assets held for sale
712,300

 
712,300

 

 

 
712,300

Accrued interest and dividends receivable
3,502,097

 
3,502,097

 

 
615,665

 
2,886,432

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
1,201,731,475

 
$
1,204,801,372

 
$

 
$
1,204,801,372

 
$

FHLB advances
50,000,000

 
50,912,409

 

 
50,912,409

 

Floating rate junior subordinated debt
6,656,098

 
6,656,098

 

 
6,656,098

 

Accrued interest payable
427,809

 
427,809

 

 
427,809

 


28


 
September 30, 2016
 
 
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total Estimated Fair Value
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
91,849,499

 
$
91,849,499

 
$
91,849,499

 
$

 
$

Certificates of deposit held at other financial institutions
14,496,410

 
14,496,410

 

 
14,496,410

 

Investments available for sale
206,336,287

 
206,336,287

 

 
206,336,287

 

FHLB stock
3,361,800

 
3,361,800

 

 
3,361,800

 

Restricted securities, at cost
279,000

 
279,000

 

 
279,000

 

Loans receivable, net
994,052,491

 
994,739,059

 

 

 
994,739,059

Loans held for sale
2,941,982

 
2,991,756

 

 
2,991,756

 

Mortgage servicing rights
820,557

 
820,557

 

 
820,557

 

Assets held for sale
975,300

 
975,300

 

 

 
975,300

Accrued interest and dividends receivable
3,442,051

 
3,442,051

 

 
611,010

 
2,831,041

Financial liabilities:
 
 
 
 


 


 


Deposits
$
1,161,843,586

 
$
1,165,687,674

 
$

 
$
1,165,687,674

 
$

FHLB advances
50,000,000

 
52,282,107

 

 
52,282,107

 

Floating rate junior subordinated debt
6,587,549

 
6,587,549

 

 
6,587,549

 

Accrued interest payable
709,629

 
709,629

 

 
709,629

 


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the financial condition and results of operations at and for the three and six months ended March 31, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” “potential, ” “seek,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to, general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities, including identifying suitable acquisition opportunities; the adverse effect of a breach of our computer system; our ability to successfully integrate acquired entities; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board; and changes in our organization, compensation and benefit plans. Additional factors are discussed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016 under Part I Item 1A. “Risk Factors,” and in the Company’s other filings with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-

29


looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Overview
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities, mortgage-backed securities, collateralized mortgage obligations and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of deposits and FHLB advances.
Our principal business consists of attracting deposits from the general public and investing those funds primarily in loans. We make commercial real estate loans, loans secured by first mortgages on owner-occupied, one- to four-family residences, consumer loans, loans secured by first mortgages on non-owner-occupied one- to four-family residences, construction loans secured by one- to four-family residences, commercial business loans and multi-family real estate loans. While our primary business is the origination of loans funded through retail deposits, we also invest in certain investment securities and mortgage-backed securities, and use FHLB advances and other borrowings as additional funding sources or for contingency funding.
The Company is significantly affected by prevailing general and local economic conditions, particularly market interest rates, and by government policies concerning, among other things, monetary and fiscal affairs and the federal regulation of financial institutions. Following the November 2016 presidential election, small business and investor optimism have risen considerably, though the long term impact of the new administration's policies remains to be determined. Deposit balances are influenced by a number of factors, including interest rates paid on competing personal investment products, the level of personal income, and the personal rate of savings within our market areas. Lending activities are influenced by the demand for housing and other loans, changing loan underwriting guidelines, as well as interest rate pricing competition from other lending institutions. The primary sources of funds for lending activities include deposits, loan repayments, investment income, borrowings, and funds provided from operations.
On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. Generally, deposit pricing is based upon a survey of competitors in the Bank’s market areas, and the need to attract funding and retain maturing deposits.
Net income was $3.3 million and $8.4 million for the three and six months ended March 31, 2017, respectively, compared to $2.1 million and $6.8 million for the three and six months ended March 31, 2016, respectively.
Atlanta Metro Expansion
As announced on April 15, 2016, the Company completed its merger with CBS Financial Corporation (“CBS”), the parent company of Community Bank of the South. Prior to the merger, Community Bank of the South operated four branches located in Smyrna and Marietta, Georgia. Upon completion of the merger, $376.4 million of total assets, $300.8 million of total loans and $333.7 million of total deposits were added to the Company's balance sheet. With the consummation of the merger, approximately 60% of the Company's loans and deposits are in the Atlanta Combined Statistical Area (“CSA”). Full conversion and integration of Community Bank of the South into CharterBank was completed in July 2016. Additionally, a banking location serving the demographically desirable Buckhead market in Atlanta moved into its permanent facility during our second fiscal quarter of 2017. These additions to our franchise provide access to attractive population centers and the potential for corresponding growth. We continue to have capital for additional growth which may include further acquisitions.

Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016, the Company considers its critical accounting policies to be the allowance for loan losses, other-than-temporary impairment of investment securities, real estate owned, goodwill and other intangible assets, deferred income taxes, and estimation of fair value. There have been no material changes in our critical accounting policies during the six months ended March 31, 2017.

Comparison of Financial Condition at March 31, 2017 and September 30, 2016
Assets. Total assets increased $46.4 million to $1.5 billion at March 31, 2017. This increase in assets was due primarily to a continued surge in retail deposits as a result of our efforts to increase transaction accounts and the corresponding cash increase. Net loans increased $13.5 million, or 1.4%, to $1.0 billion at March 31, 2017, from $994.1 million at September 30, 2016.

30


Cash and cash equivalents. Cash and cash equivalents increased $48.4 million to $140.3 million at March 31, 2017, up from $91.8 million at September 30, 2016. This increase was primarily due to a $39.9 million increase in deposits and a combined $23.1 million in principal collections, sales and calls of investment securities available for sale, partially offset by outlays of cash of $12.7 million to purchase investment securities available for sale.
Loans. At March 31, 2017, net loans were $1.0 billion, or 67.9% of total assets, compared with $994.1 million, or 69.1% of total assets, at September 30, 2016. The increase was attributable in part to $19.4 million of purchases of manufactured housing loans from a national lender during the six months ended March 31, 2017.
chfn-033120_chartx35916.jpg
________________________________
Loans are shown net of deferred loan fees, allowance for loan losses, nonaccretable differences and accretable discounts.

Investment Securities Portfolio. At March 31, 2017, our investment securities portfolio totaled $191.5 million, compared to $206.3 million at September 30, 2016. The decrease was attributable to $9.3 million in principal paydowns, $11.7 million in maturities or calls, $2.1 million in sales and a $4.3 million decrease in unrealized gains on available for sale securities. These decreases were offset partially by the purchase of $12.7 million in securities during the first six months of fiscal 2017.
During fiscal 2016 and the first six months of fiscal 2017, we have had no additional other-than-temporary impairment charges on non-agency collateralized mortgage backed securities. Through March 31, 2017, we had recorded a cumulative $380,000 of other-than-temporary impairment charges with respect to one private label security. That security was sold during the six months ended March 31, 2017, leaving no other-than-temporary impairment in the Company's portfolio of investment securities available for sale.
Bank Owned Life Insurance. We invest in bank owned life insurance to provide us with a funding source for our benefit plan obligations. Bank owned life insurance also generally provides us noninterest income that is non-taxable. The total cash surrender values of bank owned life insurance policies at March 31, 2017 and September 30, 2016 were $49.8 million and $49.3 million, respectively.
Deposits. Total deposits increased $39.9 million to $1.2 billion at March 31, 2017. The increase was attributable to a continued surge in deposits. Transaction accounts increased by $35.3 million, reflecting our successful efforts over recent years to increase our checking accounts, while retail certificates of deposit increased $4.0 million during the six months ended March 31, 2017. Money market accounts decreased $478,000. At March 31, 2017, $1.1 billion of deposits were retail deposits. We currently have $36.8 million deposits classified as wholesale deposits, most of which are brokered deposits, with others from an internet funding service assumed in the CBS acquisition. The following table shows deposit fees earned and deposit balances by category for the quarter end periods indicated:

31


 
 
 
Deposit Balances
 
Deposit & Bankcard Fees
 
Checking
 
Savings
 
Money Market
 
Total Core Deposits (1)
 
Retail Certificates of Deposit
 
Wholesale Certificates of Deposit
 
Total Deposits
 

 
(dollars in thousands)
March 31, 2017
$
3,067

 
$
513,294

 
$
64,868

 
$
242,375

 
$
820,537

 
$
344,401

 
$
36,793

 
$
1,201,731

December 31, 2016
3,170

 
481,841

 
61,300

 
265,316

 
808,457

 
341,108

 
36,782

 
1,186,347

September 30, 2016
3,179

 
478,028

 
63,824

 
242,853

 
784,705

 
340,362

 
36,777

 
1,161,844

June 30, 2016
3,110

 
472,123

 
62,810

 
247,165

 
782,098

 
336,394

 
36,753

 
1,155,245

March 31, 2016
2,809

 
353,834

 
54,317

 
146,109

 
554,260

 
206,832

 
30,600

 
791,692

December 31, 2015
2,898

 
331,570

 
50,017

 
131,997

 
513,584

 
200,061

 
30,589

 
744,234

September 30, 2015
2,767

 
327,373

 
50,566

 
127,215

 
505,154

 
198,124

 
35,577

 
738,855

June 30, 2015
2,679

 
328,961

 
51,292

 
125,468

 
505,721

 
197,750

 
30,767

 
734,238

March 31, 2015
2,507

 
328,012

 
49,848

 
122,990

 
500,850

 
205,118

 
30,835

 
736,803

__________________________________
(1)
Non-GAAP financial measure. See Non-GAAP Financial Measures for more information.
Borrowings. Our borrowings consist of advances from the FHLB of Atlanta as well as floating rate junior subordinated debt assumed in the acquisition of CBS. FHLB borrowings totaled $50.0 million at both March 31, 2017 and September 30, 2016, respectively.
Based upon actual collateral pledged, excluding cash, additional advances of $80.8 million were available along with securities available for sale with lendable collateral value of $96.3 million that were also available to be pledged at March 31, 2017.
At March 31, 2017, approximately $72.4 million of credit was available to us at the Federal Reserve Bank of Atlanta based on loan collateral pledged. The line of credit at the Federal Reserve Bank of Atlanta was not used other than during periodic testing to ensure the line was functional.
Floating rate junior subordinated debt assumed in the CBS acquisition totaled $9.3 million, with purchase accounting discounts reducing the book value to $6.7 million and $6.6 million at March 31, 2017 and September 30, 2016, respectively.
Stockholders’ Equity. At March 31, 2017, total stockholders’ equity totaled $208.4 million, or $13.67 per net share, a $5.3 million increase from September 30, 2016 due to $8.4 million of net income and a $684,000 increase from the release of the Company's ESOP shares, as well as $146,000 of stock option exercises. These increases were partially offset by a $2.8 million decrease in other comprehensive income on the Company's portfolio of investment securities available for sale during the six months ended March 31, 2017. Tangible book value, a Non-GAAP Measure (see Non-GAAP measures for further information), increased to $11.70 per share at March 31, 2017 compared with $11.36 per share at September 30, 2016.

Comparison of Operating Results for the Three Months Ended March 31, 2017 and March 31, 2016
General. Net income increased $1.2 million to $3.3 million for the quarter ended March 31, 2017 from $2.1 million for the quarter ended March 31, 2016. The increase was primarily due to increased loan interest income and deposit fee income from the acquisition of CBS, an increase of $183,000 in gain on sale of loans, a $248,000 gain on the sale of investment securities available for sale and a negative provision of $150,000, partially offset by $750,000 of recoveries on loans formerly covered by loss sharing agreements during the prior-year period. Net interest income increased $3.0 million, primarily due to a 42.7% increase in the average balance of loans receivable for the three months ended March 31, 2017 compared with the prior-year quarter.
Interest Income. Total interest income increased $3.4 million, or 34.6%, to $13.3 million for the quarter ended March 31, 2017 from $9.9 million for the quarter ended March 31, 2016. This increase was attributable to an increase in loan interest income excluding accretion of $3.5 million. The average balance of loans receivable for the three months ended March 31, 2017 increased $301.0 million to $1.0 billion, compared with $704.5 million in the prior-year period, primarily attributable to the acquisition of CBS, which brought in $300.8 million of net loans to the Company's portfolio. Yield on loans fell 29 basis points to 4.74% during the three months ended March 31, 2017, compared to 5.03% during the prior-year period as higher-yielding acquired loans paid off as well as a drop of $475,000 in accretion of acquired loan discounts.

32


The table below shows acquired loan discount accretion included in income over the past six years and for the quarters ended March 31, 2017 and December 31, 2016, and the remaining discount to be recognized as of March 31, 2017:
 
 
Loan Accretion (Amortization)
 
 
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
 
 
1Q 2017
 
2Q 2017
 
 
Remaining
 
 
(in thousands)
NCB
 
 
$
2,272

 
$
751

 
$
844

 
$
239

 
$
68

 
$

 
 
$

 
$

 
 
$

MCB
 
 
5,742

 
3,740

 
3,086

 
3,110

 
2,621

 
751

 
 

 

 
 

FNB
 
 
252

 
4,497

 
4,993

 
3,245

 
3,256

 
2,250

 
 
192

 
130

 
 
139

CBS
 
 

 

 

 

 

 
1,370

 
 
532

 
228

 
 
1,866

Total
 
 
8,266

 
8,988

 
8,923

 
6,594

 
5,945

 
4,371

 
 
724

 
358

 
 
2,005

Amortization (1)
 
 

 

 

 
(3,507
)
 
(2,387
)
 

 
 

 

 
 

Net
 
 
$
8,266

 
$
8,988

 
$
8,923

 
$
3,087

 
$
3,558

 
$
4,371

 
 
$
724

 
$
358

 
 
$
2,005

__________________________________
(1)
Based on revised estimated cash flows related to previously covered loans, $2.4 million of the FDIC indemnification asset was amortized as an offset to loan interest income in the year ended September 30, 2015 and $3.5 million in the year ended September 30, 2014. Loss share agreements with the FDIC were terminated in the fourth quarter of fiscal 2015.
Interest on taxable investment securities, which consisted of taxable state and municipal securities, CLOs, mortgage-backed securities and private-label mortgage securities, increased $169,000 to $1.1 million for the quarter ended March 31, 2017 from $935,000 for the quarter ended March 31, 2016. This increase was primarily attributable to an increase of $21.1 million in the average balance of taxable securities. Interest on nontaxable investment securities, which consisted of nontaxable state and municipal securities, was $5,000 for the quarter ended March 31, 2017.
Interest on interest-bearing deposits in other financial institutions increased $159,000 to $213,000 for the quarter ended March 31, 2017, compared to the same period in 2016 due to a $58.6 million increase in the average balance of such deposits combined with the Federal Reserve's decision to increase interest rates in December 2015 and again in December 2016.
Interest on certificates of deposits held at other financial institutions was $39,000 during the quarter ended March 31, 2017, compared to $0 during the prior-year quarter, as these were acquired in the CBS acquisition.
The following table shows selected average yield and cost information for the quarter end periods indicated:
 
 Three Months Ended
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
 
 
 
 
 
 
 
 
 
 
Yield on loans
4.74%
 
5.01%
 
5.07%
 
5.20%
 
5.03%
Yield on securities
2.25%
 
2.24%
 
2.21%
 
2.13%
 
2.14%
Yield on assets
4.02%
 
4.21%
 
4.33%
 
4.48%
 
4.26%
 
 
 
 
 
 
 
 
 
 
Cost of deposits
0.46%
 
0.46%
 
0.46%
 
0.43%
 
0.42%
Cost of CDs
0.89%
 
0.89%
 
0.87%
 
0.79%
 
0.89%
Cost of interest bearing checking
0.15%
 
0.14%
 
0.15%
 
0.12%
 
0.12%
Cost of bank rewarded checking
0.19%
 
0.20%
 
0.19%
 
0.20%
 
0.20%
Cost of savings
0.04%
 
0.04%
 
0.04%
 
0.06%
 
0.03%
Cost of MMDA
0.30%
 
0.30%
 
0.30%
 
0.31%
 
0.25%
Cost of borrowings
2.90%
 
3.10%
 
3.10%
 
3.54%
 
4.36%
Cost of subordinated debt
7.45%
 
7.32%
 
7.18%
 
7.53%
 
—%
Cost of liabilities
0.62%
 
0.63%
 
0.63%
 
0.63%
 
0.70%
 
 
 
 
 
 
 
 
 
 
Loan/deposit spread
4.28%
 
4.55%
 
4.61%
 
4.77%
 
4.61%
Asset/liability spread
3.40%
 
3.58%
 
3.70%
 
3.85%
 
3.56%
Interest Expense. Total interest expense increased $414,000 to $1.7 million for the quarter ended March 31, 2017, compared to $1.2 million for the prior year quarter. While the cost of interest-bearing liabilities fell by eight basis points during the three

33


months ended March 31, 2017, the average balances increased $353.7 million to $1.1 billion compared to the prior year quarter. Both increases were largely attributable to the acquisition of CBS.
Interest expense on deposits increased $473,000, or 68.4%, to $1.2 million for the quarter ended March 31, 2017, compared to $692,000 for the quarter ended March 31, 2016. The increase was primarily due to a $347.1 million, or 52.6%, increase in average interest-bearing deposits as a result of the CBS acquisition and the Company's continued surge in legacy deposits. The cost of money market accounts increased to $195,000, up $106,000 over the prior year quarter, due to an increase of $116.7 million, or 81.7%, in the average balance of money market accounts and a 5 basis point increase in average cost to 0.30%. The average balance on certificates of deposit increased $146.2 million, or 62.5%, for the quarter ended March 31, 2017, while the cost of CDs increased $325,000, or 62.6%, to $844,000 for the quarter ended March 31, 2017, from $519,000 for the quarter ended March 31, 2016. Interest expense on FHLB advances decreased $182,000 to $363,000 for the quarter ended March 31, 2017 compared to $545,000 for the quarter ended March 31, 2016, due to the renegotiation of a $25.0 million advance from 4.30% to 3.43% in March of 2017, as well as the expiration in May 2016 of a $25.0 million advance costing 4.33% which was extended for an additional five years at 1.76%. Interest expense on the Company's floating rate junior subordinated debt, which was assumed in the CBS acquisition, was $124,000 for the quarter ended March 31, 2017, at an average cost of 7.45%.
Net Interest Income. Net interest income increased $3.0 million, or 34.7%, to $11.7 million for the quarter ended March 31, 2017, from $8.7 million for the quarter ended March 31, 2016. The net increase was due to an increase in interest income of $3.4 million to $13.3 million for the current year quarter, offset partially by an increase in total interest expense of $414,000 to $1.7 million compared to the prior year quarter. Net interest income included $358,000 of net purchase discount accretion income for the quarter ended March 31, 2017, compared to $833,000 for the quarter ended March 31, 2016. Additionally, the year over year increase in average loans of $301.0 million, resulting largely from the additions to the Company's portfolio from the CBS acquisition, contributed to the increase in net interest income.
Despite an increase of $347.1 million, or 52.6%, in the average balance of interest-bearing deposits during the quarter ended March 31, 2017 compared to the prior year period, total interest expense increased only 33.5%. The increase in interest-bearing deposits reflects the deposits assumed in the acquisition of CBS as well as the Company's continued surge in legacy deposits. As the table below indicates, our net interest margin decreased 20 basis points to 3.52% for the quarter ended March 31, 2017 from 3.72% for the prior year quarter, while our net interest rate spread decreased 16 basis points to 3.40% for the second quarter of fiscal 2017 from 3.56% for the second quarter of fiscal 2016. Additionally, net interest margin excluding the effects of purchase accounting was 3.41% for the quarter ended March 31, 2017 compared to 3.36% for the quarter ended March 31, 2016. At March 31, 2017, there was $2.0 million of discount remaining to accrete into interest income over the remaining life of the acquired loans. Of that balance, $139,000 relating to the acquisition of the First National Bank of Florida ("FNB"), pursuant to a loss-share agreement with the FDIC, will be accreted into income over the next two quarters, while $1.9 million related to the acquisition of CBS will be accreted into income over the remaining lives of the loans.

34


 
For the Three Months Ended March 31,
 
2017
 
2016
 
Average Balance
 
Interest
 
Average Yield/Cost (10)
 
Average Balance
 
Interest
 
Average Yield/Cost (10)
 
(dollars in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits in other financial institutions
$
105,705

 
$
213

 
0.81
%
 
$
47,144

 
$
54

 
0.46
%
Certificates of deposit held at other financial institutions
11,893

 
39

 
1.30

 

 

 

FHLB common stock and other equity securities
3,393

 
40

 
4.75

 
3,007

 
36

 
4.81

Taxable investment securities
195,694

 
1,104

 
2.26

 
174,637

 
934

 
2.14

Nontaxable investment securities (1)
1,588

 
5

 
1.15

 

 

 

Restricted securities
279

 
3

 
3.84

 

 

 

Loans receivable (1)(2)(3)(4)
1,005,473

 
11,545

 
4.59

 
704,452

 
8,031

 
4.56

Accretion, net, of acquired loan discounts (5)
 
 
358

 
0.14

 
 
 
833

 
0.47

Total interest-earning assets
1,324,025

 
13,307

 
4.02

 
929,240

 
9,888

 
4.26

Total noninterest-earning assets
137,189

 
 
 
 

 
98,710

 
 
 
 

Total assets
$
1,461,214

 
 
 
 

 
$
1,027,950

 
 
 
 

Liabilities and Equity:
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Interest bearing checking
$
251,150

 
$
94

 
0.15
%
 
$
181,581

 
$
55

 
0.12
%
Bank rewarded checking
53,653

 
26

 
0.19

 
48,859

 
25

 
0.20

Savings accounts
62,718

 
6

 
0.04

 
52,907

 
4

 
0.03

Money market deposit accounts
259,470

 
195

 
0.30

 
142,777

 
89

 
0.25

Certificate of deposit accounts
380,198

 
844

 
0.89

 
233,980

 
519

 
0.89

Total interest-bearing deposits
1,007,189

 
1,165

 
0.46

 
660,104

 
692

 
0.42

Borrowed funds
50,011

 
363

 
2.90

 
50,000

 
545

 
4.36

Floating rate junior subordinated debt
6,634

 
124

 
7.45

 

 

 

Total interest-bearing liabilities
1,063,834

 
1,652

 
0.62

 
710,104

 
1,237

 
0.70

Noninterest-bearing deposits
174,904

 
 
 
 

 
106,304

 
 
 
 

Other noninterest-bearing liabilities
15,137

 
 
 
 

 
13,235

 
 
 
 

Total noninterest-bearing liabilities
190,041

 
 
 
 

 
119,539

 
 
 
 

Total liabilities
1,253,875

 
 
 
 

 
829,643

 
 
 
 

Total stockholders' equity
207,339

 
 
 
 

 
198,307

 
 
 
 

Total liabilities and stockholders' equity
$
1,461,214

 
 
 
 

 
$
1,027,950

 
 
 
 

Net interest income
 

 
$
11,655

 
 

 
 

 
$
8,651

 
 

Net interest-earning assets (6)
 

 
$
260,191

 
 

 
 

 
$
219,136

 
 

Net interest rate spread (7)
 

 
 

 
3.40
%
 
 

 
 

 
3.56
%
Net interest margin (8)
 

 
 

 
3.52
%
 
 

 
 

 
3.72
%
Net interest margin, excluding the effects of purchase accounting (9)
 
 
 
 
3.41
%
 
 
 
 
 
3.36
%
Ratio of average interest-earning assets to average interest-bearing liabilities
 
 
 
 
124.46
%
 
 
 
 
 
130.86
%
__________________________________
(1)
Tax exempt or tax-advantaged securities and loans are shown at their contractual yields and are not shown at a tax equivalent yield.
(2)
Includes net loan fees deferred and accreted pursuant to applicable accounting requirements.
(3)
Interest income on loans is interest income as recorded in the income statement and, therefore, does not include interest income on nonaccrual loans.
(4)
Interest income on loans excludes discount accretion on acquired loans.
(5)
Accretion of accretable purchase discount on loans acquired.
(6)
Net interest-earning assets represent total average interest-earning assets less total average interest-bearing liabilities.
(7)
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.
(8)
Net interest margin represents net interest income as a percentage of average interest-earning assets.
(9)
Net interest margin, excluding the effects of purchase accounting, a non-GAAP measure (See Non-GAAP Financial Measures for further information), represents net interest income excluding accretion of acquired loan discounts as a percentage of average net interest earning

35


assets excluding loan accretable discounts in the amount of $2.2 million and $2.0 million for the three months ended March 31, 2017 and March 31, 2016, respectively.
(10)
Annualized.

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rates (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The combined column represents the net change in volume between the two periods multiplied by the net change in rate between the two periods. The net column represents the sum of the prior columns.
 
For the Three Months Ended March 31, 2017
Compared to the Three Months Ended March 31, 2016
 
Increase/(Decrease) Due to
 
Volume
 
Rate
 
Combined
 
Net
 
(dollars in thousands)
Interest Income:
 
 
 
 
 
 
 
Interest-earning deposits in other financial institutions
$
67

 
$
41

 
$
51

 
$
159

Certificates of deposit held at other financial institutions
$

 
$

 
$
39

 
$
39

FHLB common stock and other equity securities
5

 

 
(1
)
 
4

Taxable investment securities
113

 
51

 
6

 
170

Nontaxable investment securities

 

 
5

 
5

Restricted securities

 

 
3

 
3

Loans receivable
3,788

 
(524
)
 
(225
)
 
3,039

Total interest-earning assets
$
3,973

 
$
(432
)
 
$
(122
)
 
$
3,419

Interest Expense:
 
 
 
 
 
 
 
Checking accounts
$
26

 
$
11

 
$
3

 
$
40

Savings accounts
1

 
1

 

 
2

Money market deposit accounts
73

 
18

 
15

 
106

Certificate of deposit accounts
324

 
1

 

 
325

Total interest-bearing deposits
424

 
31

 
18

 
473

Borrowed funds

 
(182
)
 

 
(182
)
Floating rate junior subordinated debt

 

 
124

 
124

Total interest-bearing liabilities
$
424

 
$
(151
)
 
$
142

 
$
415

Net change in net interest income
$
3,549

 
$
(281
)
 
$
(264
)
 
$
3,004

Provision for Loan Losses. A negative provision for loan losses of $150,000 was recorded in the quarter ended March 31, 2017 due to the continued positive credit quality trends of the loan portfolio, as well as continuing net recoveries of formerly charged-off loans. During the prior-year period, no provision for loan losses was recorded. Net recoveries for the three months ended March 31, 2017 were $156,000, compared to net recoveries of $155,000 for the three months ended March 31, 2016. With the net recoveries for the current quarter nearly offset by the negative provision, there was almost no change in the allowance for loan loss during the three months ended March 31, 2017. The allowance for loan losses was $10.5 million, or 1.04% of total loans receivable, at March 31, 2017. Our nonperforming loans decreased to $1.6 million, or 0.18%, of total loans at March 31, 2017 from $2.2 million at March 31, 2016. As a result, our allowance as a percent of nonperforming loans increased to 652.47% at March 31, 2017. See our discussion on the allowance for further information.
Noninterest Income. Noninterest income increased $33,000, or 0.7%, to $4.5 million for the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016. The increase was attributable to increases of $258,000 in bankcard fee and other deposit fee income, driven by the Company's bankcard fee program, $183,000 in gain on sale of loans, largely due to increased mortgage activity in both our legacy and newly acquired markets, and $78,000 in brokerage commissions, as well as $248,000 in gain on sale of investment securities. These increases were almost wholly offset by $750,000 in recoveries on loans formerly covered by loss sharing agreements in the prior-year quarter. No such recoveries were recorded during the quarter ended March 31, 2017.

36


The following table shows noninterest income by category for the periods indicated.
 
For the Three Months Ended
 
Mar 31, 2017
 
Dec 31, 2016
 
Sep 30, 2016
 
Jun 30, 2016
 
Mar 31, 2016
 
(dollars in thousands)
Service charges on deposit accounts
$
1,701

 
$
1,888

 
$
1,861

 
$
1,810

 
$
1,620

Bankcard fees
1,367

 
1,282

 
1,319

 
1,300

 
1,189

Gain on sale of loans
543

 
731

 
808

 
602

 
360

Brokerage commissions
225

 
166

 
199

 
164

 
146

Bank owned life insurance
247

 
332

 
333

 
327

 
245

Gain on investment securities available for sale
248

 

 

 
13

 

Recoveries on acquired loans previously covered under FDIC loss share agreements

 
250

 

 

 
750

Other
215

 
334

 
398

 
487

 
203

Total noninterest income
$
4,546

 
$
4,983

 
$
4,918

 
$
4,703

 
$
4,513


Noninterest Expense. Total noninterest expense increased $847,000, or 8.6%, to $10.7 million for the quarter ended March 31, 2017, compared to $9.9 million for the quarter ended March 31, 2016. The overall increase was primarily attributable to increases of $791,000, $113,000 and $123,000 in salaries, core deposit intangible amortization expense and other operating expenses, all of which were attributable to increased ongoing operational costs from the acquisition of CBS. These increases were partially offset by a $291,000 decrease in legal and professional fees, most of which was due to deal costs in preparation for the third quarter 2016 acquisition of CBS in the prior year, and a $58,000 decrease in the net cost of operations of real estate owned as a result of the Company's overall reduction of OREO balances.
The following table shows noninterest expense by category for the periods indicated:
 
For the Three Months Ended
 
Mar 31, 2017
 
Dec 31, 2016
 
Sep 30, 2016
 
Jun 30, 2016
 
Mar 31, 2016
 
(dollars in thousands)
Salaries and employee benefits
$
6,079

 
$
6,134

 
$
6,635

 
$
8,470

 
$
5,287

Occupancy
1,220

 
1,323

 
1,398

 
1,534

 
1,150

Data processing
1,004

 
909

 
904

 
1,654

 
1,045

Legal and professional
388

 
284

 
463

 
793

 
679

Marketing
412

 
357

 
421

 
500

 
379

Furniture and equipment
228

 
174

 
240

 
301

 
161

Postage, office supplies, and printing
223

 
270

 
277

 
237

 
171

Core deposit intangible amortization expense
149

 
154

 
158

 
173

 
36

Federal insurance premiums and other regulatory fees
197

 
165

 
240

 
185

 
210

Net cost (benefit) of operations of other real estate owned
14

 
(359
)
 
(309
)
 
(76
)
 
71

Other
836

 
879

 
927

 
1,293

 
714

Total noninterest expense
$
10,750

 
$
10,290

 
$
11,354

 
$
15,064

 
$
9,903

Income Taxes. Income taxes increased to $2.3 million for the quarter ended March 31, 2017 from $1.1 million for the quarter ended March 31, 2016. Our effective tax rate was 40.78% in the quarter ended March 31, 2017 and 34.28% in the quarter ended March 31, 2016. The increase in income taxes was due primarily to the 71.8% increase in net income before income taxes for the quarter ended March 31, 2017, which, combined with flat tax-advantaged investments and state tax credits, led to an increase in the effective rate.


37


Comparison of Operating Results for the Six Months Ended March 31, 2017 and March 31, 2016
General. Net income increased $1.6 million, or 23.8%, to $8.4 million for the six months ended March 31, 2017 from $6.8 million for the six months ended March 31, 2016. The improvement was largely due to an increase of $6.0 million in net interest income, along with increases of $566,000 and $530,000 in gain on sale of loans and deposit and bankcard fees, respectively. The Company also recorded $900,000 in negative provisions for loan losses for the six months ended March 31, 2017, compared to no provision in the six months ended March 31, 2016. These increases were partially offset by a reduction of $3.4 million in recoveries on loans formerly covered by loss sharing agreements and a $2.1 million increase in total noninterest expenses. Basic and diluted net income per share for the six months ended March 31, 2017 increased 28.26% and 25.00%, respectively, compared to the prior year period, partially due to the decreased weighted average number of common shares outstanding.
Interest Income. Total interest income increased to $27.2 million for the six months ended March 31, 2017, from $20.3 million for the six months ended March 31, 2016. This increase was primarily attributable to the acquisition of CBS and the resulting increased loan balances and interest income. Loan interest income, excluding accretion income, increased $7.1 million to $23.4 million during the six months ended March 31, 2017, largely due to an increase in the average balance of loans receivable of $298.2 million, or 42.2%, to $1.0 billion for the six months ended March 31, 2017, compared to $706.2 million for the six months ended March 31, 2016. Net accretion of acquired loan discounts declined $920,000 due to the runoff of our accretion on loan discounts acquired in FDIC-assisted acquisitions, as well as reduced accretion on loan discounts from the CBS acquisition. As a result of the reduced accretion, along with higher cash balances, the average yield on interest-earning assets declined 29 basis points during the six months ended March 31, 2017 as compared to the same prior-year period.
The average yield on loans decreased to 4.87% for the six months ended March 31, 2017, compared to 5.18% for the six months ended March 31, 2016. The lower average yield on loans for the six months ended March 31, 2017 was attributable to reductions in accretion income due to the runoff of purchase discounts related to the 2011 FNB acquisition as well as accelerated accretion in the first three quarters of the 2016 CBS acquisition, resulting in a slowdown in the most recent quarter, along with continued payoffs of higher-yielding loans. There is $139,000 of accretable discount remaining from the FNB acquisition, which will accrete into income over the next two quarters. There is $1.9 million of discount on the CBS loans to accrete into interest income over the remaining life of all acquired loans, with the accretion heavily weighted towards early quarters based on current cash flow projections.
Interest on taxable investment securities increased $319,000 to $2.2 million for the six months ended March 31, 2017 from $1.9 million for the corresponding prior year period, due primarily to increased yields from the Company's portfolio of CLOs. Interest on nontaxable investment securities, which consisted of nontaxable state and municipal obligations, was $9,000 for the six months ended March 31, 2017 from $0 for the six months ended March 31, 2016, as these securities were acquired in the CBS acquisition.
Interest on interest earning deposits in other financial institutions increased $258,000 to $324,000 for the six months ended March 31, 2017 from $66,000 for the six months ended March 31, 2016 due to an increase of $67.3 million, or 191.12%, in the average balance of such deposits, as well as the Federal Reserve's increases in interest rates approved in December 2015 and 2016.
Dividends on Federal Home Loan Bank stock increased $5,000 to $80,000 for the six months ended March 31, 2017, compared to $75,000 for the six months ended March 31, 2016, due largely to a 10.98% increase in the average balance of such stock.
Interest on certificates of deposit held at other financial institutions and dividends on restricted securities, which were inherited from the acquisition of CBS, were $81,000 and $5,000 for the six months ended March 31, 2017.
Interest Expense. Total interest expense increased $862,000, or 35.1%, to $3.3 million for the six months ended March 31, 2017, compared to $2.5 million for the six months ended March 31, 2016. Interest expense increased due to a $361.2 million, or 51.6%, increase in the average balance of interest-bearing liabilities to $1.1 billion during the six months ended March 31, 2017, partially offset by a seven basis point, or 10.0%, decline in the average cost of such liabilities to 0.63% at March 31, 2017 from 0.70% at March 31, 2016, reflecting continued low market interest rates. The Company saw significant growth in demand deposits and certificates of deposit, both from legacy growth and the acquisition of CBS.
Interest expense on deposits increased $966,000, or 71.2%, to $2.3 million for the six months ended March 31, 2017, compared with the six months ended March 31, 2016. The increase was due to a $355.4 million, or 54.8%, increase in the average balance of interest-bearing deposits to $1.0 billion, partially offset by a four basis point increase in average cost of deposits to 0.46% for the current six month period compared to 0.42% for the six months ended March 31, 2016. The increase in average cost of deposits was largely driven by a six basis point increase in the cost of money market deposit accounts, mostly as a result of higher-costing accounts assumed in the acquisition of CBS.

38


The average cost of our interest bearing checking accounts increased two basis points to 0.14% for the six months ended March 31, 2017 compared to the same period in fiscal 2016, while the cost of our savings accounts and certificates of deposit each increased one basis point to 0.04% and 0.89%.
Interest expense on FHLB advances decreased $348,000 to $750,000 for the six months ended March 31, 2017 compared to $1.1 million for the six months ended March 31, 2016, due to a decrease of $814,000, or 1.6%, in the average balance of advances, as well as the restructuring of a $25.0 million advance costing 4.30% to 3.43% in March 2017 and the maturation in May 2016 of a $25 million advance costing 4.33% which was extended for an additional five years at a rate of 1.76%. The average cost of advances decreased 132 basis points to 3.00% for the six months ended March 31, 2017, from 4.32% during the six months ended March 31, 2016. Interest expense on floating rate junior subordinated debt, which was assumed in the acquisition of CBS, was $244,000 in the six months ended March 31, 2017.
Net Interest Income. Net interest income increased $6.0 million, or 33.5%, to $23.9 million for the six months ended March 31, 2017, from $17.9 million for the six months ended March 31, 2016, due to increased interest income from the acquisition of CBS, a $258,000 increase in income on interest bearing deposits in other financial institutions, and a seven basis point decline in the cost of interest-bearing liabilities. Total interest income increased $6.8 million, or 33.7%, while total interest expense increased $862,000, or 35.1%, for the six months ended March 31, 2017, compared to the same prior-year period.
As the table indicates below, our net interest margin decreased 27 basis points during the six months ended March 31, 2017 as compared to the six months ended March 31, 2016, while our net interest rate spread decreased 22 basis points to 3.49% for the first six months of fiscal 2017 from 3.71% for the comparable six months of 2016. Additionally, net interest margin excluding the effects of purchase accounting was 3.44% for the six months ended March 31, 2017 compared to 3.43% for the six months ended March 31, 2016.

39


 
For the Six Months Ended March 31,
 
2017
 
2016
 
Average Balance
 
Interest
 
Average Yield/Cost (10)
 
Average Balance
 
Interest
 
Average Yield/Cost (10)
 
(dollars in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits in other financial institutions
$
102,451

 
$
324

 
0.63
%
 
$
35,192

 
$
66

 
0.38
%
Certificates of deposit held at other financial institutions
12,630

 
81

 
1.29

 

 

 

FHLB common stock and other equity securities
3,377

 
80

 
4.71

 
3,043

 
75

 
4.93

Taxable investment securities
195,409

 
2,200

 
2.25

 
177,621

 
1,882

 
2.12

Nontaxable investment securities (1)
1,593

 
9

 
1.15

 

 

 

Restricted securities
279

 
5

 
3.76

 

 

 

Loans receivable (1)(2)(3)(4)
1,004,386

 
23,391

 
4.66

 
706,199

 
16,303

 
4.62

Accretion, net, of acquired loan discounts (5)
 
 
1,082

 
0.21

 
 
 
2,002

 
0.57

Total interest-earning assets
1,320,125

 
27,172

 
4.12

 
922,055

 
20,328

 
4.41

Total noninterest-earning assets
135,883

 
 
 
 
 
96,564

 
 
 
 
Total assets
$
1,456,008

 
 
 
 
 
$
1,018,619

 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing checking
$
251,110

 
$
180

 
0.14
%
 
$
179,548

 
$
110

 
0.12
%
Bank rewarded checking
52,692

 
52

 
0.20

 
47,776

 
48

 
0.20

Savings accounts
62,434

 
12

 
0.04

 
51,642

 
8

 
0.03

Money market deposit accounts
257,379

 
389

 
0.30

 
136,800

 
165

 
0.24

Certificate of deposit accounts
380,584

 
1,691

 
0.89

 
232,990

 
1,027

 
0.88

Total interest-bearing deposits
1,004,199

 
2,324

 
0.46

 
648,756

 
1,358

 
0.42

Borrowed funds
50,006

 
750

 
3.00

 
50,820

 
1,098

 
4.32

Floating rate junior subordinated debt
6,616

 
244

 
7.39

 

 

 

Total interest-bearing liabilities
1,060,821

 
3,318

 
0.63

 
699,576

 
2,456

 
0.70

Noninterest-bearing deposits
173,561

 
 
 
 
 
104,861

 
 
 
 
Other noninterest-bearing liabilities
15,459

 
 
 
 
 
12,069

 
 
 
 
Total noninterest-bearing liabilities
189,020

 
 
 
 
 
116,930

 
 
 
 
Total liabilities
1,249,841

 
 
 
 
 
816,506

 
 
 
 
Total stockholders' equity
206,167

 
 
 
 
 
202,113

 
 
 
 
Total liabilities and stockholders' equity
$
1,456,008

 
 
 
 
 
$
1,018,619

 
 
 
 
Net interest income
 
 
$
23,854

 
 
 
 
 
$
17,872

 
 
Net interest earning assets (6)
 
 
$
259,304

 
 
 
 
 
$
222,479

 
 
Net interest rate spread (7)
 
 
 
 
3.49
%
 
 
 
 
 
3.71
%
Net interest margin (8)
 
 
 
 
3.61
%
 
 
 
 
 
3.88
%
Net interest margin, excluding the effects of purchase accounting (9)
 
 
 
 
3.44
%
 
 
 
 
 
3.43
%
Ratio of average interest-earning assets to average interest-bearing liabilities
 
 
 
 
124.44
%
 
 
 
 
 
131.80
%
__________________________________
(1)
Tax exempt or tax-advantaged securities and loans are shown at their contractual yields and are not shown at a tax equivalent yield.
(2)
Includes net loan fees deferred and accreted pursuant to applicable accounting requirements.
(3)
Interest income on loans is interest income as recorded in the income statement and, therefore, does not include interest income on nonaccrual loans.
(4)
Interest income on loans excludes discount accretion and amortization of the indemnification asset.
(5)
Accretion of accretable purchase discount on loans acquired.
(6)
Net interest-earning assets represent total average interest-earning assets less total average interest-bearing liabilities.
(7)
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.
(8)
Net interest margin represents net interest income as a percentage of average interest-earning assets.
(9)
Net interest margin, excluding the effects of purchase accounting, a non-GAAP measure (See Non-GAAP Financial Measures for further information), represents net interest income excluding accretion and amortization of acquired loans receivable as a percentage of average

40


net interest earning assets excluding loan accretable discounts in the amount of $2.6 million and $2.5 million for the six months ended March 31, 2017 and March 31, 2016, respectively.
(10)
Annualized.
Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rates (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The combined column represents the net change in volume between the two periods multiplied by the net change in rate between the two periods. The net column represents the sum of the prior columns.
 
For the Six Months Ended March 31, 2017
Compared to the Six Months Ended March 31, 2016
 
Increase/(Decrease) Due to
 
Volume
 
Rate
 
Combined
 
Net
 
(dollars in thousands)
Interest Income:
 
 
 
 
 
 
 
Interest-earning deposits in other financial institutions
$
126

 
$
45

 
$
87

 
$
258

Certificates of deposit held at other financial institutions
$

 
$

 
$
81

 
$
81

FHLB common stock and other equity securities
8

 
(3
)
 

 
5

Taxable investment securities
188

 
117

 
13

 
318

Nontaxable investment securities

 

 
9

 
9

Restricted securities

 

 
5

 
5

Loans receivable
7,729

 
(1,097
)
 
(464
)
 
6,168

Total interest-earning assets
$
8,051

 
$
(938
)
 
$
(269
)
 
$
6,844

Interest Expense:
 
 
 
 
 
 
 
Checking accounts
$
53

 
$
16

 
$
5

 
$
74

Savings accounts
2

 
2

 

 
4

Money market deposit accounts
145

 
42

 
37

 
224

Certificate of deposit accounts
651

 
8

 
5

 
664

Total interest-bearing deposits
851

 
68

 
47

 
966

Borrowed funds
(18
)
 
(336
)
 
6

 
(348
)
Floating rate junior subordinated debt

 

 
244

 
244

Total interest-bearing liabilities
$
833

 
$
(268
)
 
$
297

 
$
862

Net change in net interest income
$
7,218

 
$
(670
)
 
$
(566
)
 
$
5,982

Provision for Loan Losses. There was a $900,000 negative provision recorded for loan losses in the six months ended March 31, 2017 and no provision for loan losses recorded in the six months ended March 31, 2016. The Company recorded a negative provision in the current period due to the trend of net recoveries on loans previously charged off, along with an overall improvement in the loan portfolio in recent quarters. Net recoveries were $1.0 million for the six months ended March 31, 2017, compared with net recoveries of $362,000 for the six months ended March 31, 2016. The allowance for loan losses was $10.5 million, or 1.04% of total loans receivable at March 31, 2017. Our allowance for loan losses as a percent of legacy loans was 1.24% at March 31, 2017. Our nonperforming loans decreased to $1.6 million at March 31, 2017 from $2.2 million at March 31, 2016. Our allowance as a percent of nonperforming loans was 652.47% at March 31, 2017.
Noninterest Income. Noninterest income decreased $1.8 million or 16.0%, to $9.5 million for the six months ended March 31, 2017, from $11.3 million for the six months ended March 31, 2016, due to a reduction of $3.4 million in recoveries on loans acquired in FDIC-assisted transactions accounted for under purchase accounting to $250,000 from $3.6 million. Service charges and bankcard fees increased a total of $530,000, or 9.3%, for the six months ended March 31, 2017, compared to the same period in fiscal 2016. Gains on the sale of loans increased $566,000, or 80.1%, during the six months ended March 31, 2017, and gains on the sale of investment securities available for sale increased $212,000 to $248,000 from $36,000 in the prior-year period.
Noninterest Expense. Total noninterest expense increased $2.1 million, or 10.8%, to $21.0 million for the six months ended March 31, 2017 compared to $19.0 million in the same period in the prior fiscal year. Increases of $1.7 million, $336,000 and $218,000 in salaries and employee benefits, occupancy, and core deposit intangible amortization expense, respectively, were tied heavily to ongoing operational cost increases as a result of the CBS acquisition. These increases were offset in part by a decrease

41


of $396,000 in the net cost of operations of real estate owned due to several large gains on the sale of real estate, most of which occurred in the first quarter of fiscal 2017, as well as a decrease of $387,000 in legal and professional fees, largely due to deal costs associated with preparation for the CBS acquisition during the prior-year period.
Income Taxes. Income taxes increased to $4.9 million for the six months ended March 31, 2017 from $3.5 million for the six months ended March 31, 2016. The increase was due to an increase in our income before income taxes, which, combined with stable tax-advantaged investments and state tax credits, led to our effective tax rate increasing to 36.86% in the six months ended March 31, 2017, compared to 33.97% in the six months ended March 31, 2016. These increases were offset in part by a reduction to income tax expense of $127,000 in the first quarter of fiscal 2017 related to our early adoption of ASU 2016-09.

Asset Quality
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 is comprised of three outside directors including the chairman, a permanent position, and two other positions, which alternate between four outside directors. Additionally, two inside directors serve as ex officio members of the committee.
We generally stop accruing interest income when we consider the timely collectability of interest or principal to be doubtful. We generally stop accruing for loans that are 90 days or more past due unless the loan is well secured and we determine that the ultimate collection of all principal and interest is not in doubt. When we designate loans as nonaccrual, we reverse all outstanding unpaid interest that we had previously credited. These loans remain on nonaccrual status until a regular pattern of timely payments is established.
Impaired loans are individually assessed to determine whether the carrying value exceeds the fair value of the collateral or the present value of the expected cash flows to be received. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, are collectively evaluated for impairment.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as OREO until it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at the lower of the related loan balance or its fair value as determined by an appraisal, less estimated costs of disposal. If the value of the property is less than the loan, less any related specific loan loss reserve allocations, the difference is charged against the allowance for loan losses. Any subsequent write-down of OREO or loss at the time of disposition is charged against earnings.

42


Nonperforming Assets. The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
 
March 31, 2017
 
September 30, 2016
 
(dollars in thousands)
Nonaccrual loans: (1) (2)
 
 
 
1-4 family residential real estate
$
1,028

 
$
930

Commercial real estate
478

 
2,705

Commercial
67

 
100

Real estate construction

 

Consumer and other loans
37

 

Total nonaccrual loans
1,610

 
3,735

Loans delinquent 90 days or greater and still accruing: (3)
 
 
 
1-4 family residential real estate

 

Commercial real estate

 

Commercial

 

Real estate construction

 

Consumer and other loans

 

Total loans delinquent 90 days or greater and still accruing

 

Total nonperforming loans
1,610

 
3,735

Other real estate owned:
 
 
 
1-4 family residential real estate
476

 
618

Commercial real estate
1,481

 
2,088

Commercial

 

Real estate construction

 

Consumer and other loans

 

Total real estate owned
1,957

 
2,706

Total nonperforming assets
$
3,567

 
$
6,441

Ratios:
 
 
 
Nonperforming loans as a percentage of total loans, gross
0.16
%
 
0.37
%
Nonperforming assets as a percentage of total assets
0.24
%
 
0.45
%
__________________________________
(1)
Included in nonaccrual loans is $137,000 and $1.8 million of non-accruing troubled debt restructured loans at March 31, 2017 and September 30, 2016, respectively.
(2)
Acquired FAS ASC 310-30 loans that were previously covered under loss share agreements with the FDIC, as well as our acquisition of CBS, and have associated accretable discount remaining, in the amount of $2.7 million and $2.5 million are excluded from this table as of March 31, 2017 and September 30, 2016, respectively. Due to the recognition of accretion income that was established at the time of acquisition, FAS ASC 310-30 loans that were greater than 90 days delinquent or otherwise considered nonperforming loans are regarded as performing loans for reporting purposes.
(3)
Not included in this section are acquired loans in the amount of $600,000 and $1.5 million at March 31, 2017 and September 30, 2016, respectively. These loans, which are accounted for under ASC 310-30, are reported as performing loans because of the ongoing recognition of accretion income established at the time of acquisition.

Nonperforming assets decreased $2.9 million during the six months ended March 31, 2017 due primarily to a $2.1 million decrease in nonaccrual loans, largely due to the payoff of two long-standing, high-balance, nonperforming loans in the first quarter of fiscal 2017, combined with a $749,000 decrease in real estate owned. We have 34 loans that remain nonperforming at March 31, 2017, and the largest nonperforming loan had a balance of $218,000 and was secured by 1-4 family residential real estate.
For the six and twelve months ended March 31, 2017 and September 30, 2016, interest income recognized on impaired loans, which includes nonperforming loans and accruing troubled debt restructured loans, was approximately $143,000 and $336,000, respectively. Additional gross interest income that would have been recorded had our impaired loans been current in accordance with their original terms was approximately $62,000 and $258,000, respectively, for the six and twelve months ended March 31, 2017 and September 30, 2016.

43


Allowance for Loan Losses on Loans. The allowance for loan losses represents a reserve for probable loan losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans with particular emphasis on impaired, nonaccrual, past due and other loans that management believes require special attention. The determination of the allowance for loan losses is considered a critical accounting policy.
Additions to the allowance for loan losses are made periodically to maintain the allowance at an appropriate level based on management’s analysis of loss inherent in the loan portfolio. The amount of the provision for loan losses is determined by an evaluation of the level of loans outstanding, loss risk as determined based on a loan grading system, the level of nonperforming loans, historical loss experience, delinquency trends, the amount of losses charged to the allowance in a given period, and an assessment of economic conditions. Management believes the current allowance for loan losses is adequate based on its analysis of the losses in the portfolio.
The Company recorded $1.0 million of net recoveries and a negative provision in the amount of $900,000 in the six months ended March 31, 2017, for a net reserve build of $133,000. During the six months ended March 31, 2017, the Company recorded one large recovery of $608,000, but the bulk of the remaining recoveries came from small recoveries. The following table sets forth activity in our allowance for loan losses for the period indicated.
 
Six Months Ended March 31, 2017
 
1-4 family real estate
 
Commercial real estate
 
Commercial
 
Real estate construction
 
Consumer and other
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
779,288

 
$
7,346,130

 
$
600,258

 
$
516,556

 
$
79,140

 
$
1,050,044

 
$
10,371,416

Charge-offs
(92,136
)
 
(49,097
)
 

 

 
(11,804
)
 

 
(153,037
)
Recoveries
137,420

 
754,425

 
271,169

 

 
23,145

 

 
1,186,159

Provision
(34,799
)
 
(757,203
)
 
(155,767
)
 
(113,376
)
 
103,780

 
57,365

 
(900,000
)
Ending balance
$
789,773

 
$
7,294,255

 
$
715,660

 
$
403,180

 
$
194,261

 
$
1,107,409

 
$
10,504,538

Amounts allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$
104,955

 
$

 
$

 
$
27,000

 
$

 
$
131,955

Other loans not individually evaluated
789,773

 
7,189,300

 
715,660

 
403,180

 
167,261

 
1,107,409

 
10,372,583

Ending balance
$
789,773

 
$
7,294,255

 
$
715,660

 
$
403,180

 
$
194,261

 
$
1,107,409

 
$
10,504,538

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts collectively evaluated for impairment
$
219,333,237

 
$
589,866,645

 
$
69,326,842

 
$
77,331,705

 
$
37,263,178

 
 
 
$
993,121,607

Amounts individually evaluated for impairment
1,407,850

 
6,113,555

 
67,419

 

 
36,830

 
 
 
7,625,654

Amounts related to loans acquired with deteriorated credit quality
2,474,695

 
12,225,823

 
3,724,790

 

 

 
 
 
18,425,308

Ending balance
$
223,215,782

 
$
608,206,023

 
$
73,119,051

 
$
77,331,705

 
$
37,300,008

 
 
 
$
1,019,172,569

Our allowance for loan loss methodology is a loan classification-based system. Our allowance for loan losses is segmented into the following four major categories: (1) specific reserves; (2) general allowances for Classified/Watch loans; (3) general allowances for loans with satisfactory ratings; and (4) an unallocated amount. We base the required reserve on a percentage of the loan balance for each type of loan and classification level. 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 loan loss history for the last two years. Reserve percentages are also adjusted based upon our estimate of the effect that the current economic environment will have on each type of loan.
Potential problem loans are loans as to which management has serious doubts about the ability of the borrowers to comply with present repayment terms. Management classifies potential problem loans as either special mention or substandard. Potential problem loans aggregated $44.4 million and $50.5 million at March 31, 2017 and September 30, 2016, respectively, with $13.5 million and $13.1 million classified special mention and $30.9 million and $37.3 million classified substandard at March 31, 2017 and September 30, 2016, respectively.

44


Our largest substandard loan relationship at March 31, 2017 had a balance of $2.9 million. As of March 31, 2017, all loans in the relationship are current and real estate taxes have been paid. The loan relationship is collateralized by income producing properties in Georgia. We believe we are adequately collateralized.
The allowance for loan losses represented 652.47% and 277.66% of nonperforming loans at March 31, 2017 and September 30, 2016, respectively. This increase was due to a $2.1 million decline in nonperforming loans in the six months ended March 31, 2017, along with an increase in our allowance for loan losses due to continuing net recoveries on loans previously charged off. The allowance for loan losses as a percentage of total loans was 1.04% and 1.03% at March 31, 2017 and September 30, 2016, respectively. The allowance for loan losses as a percentage of legacy loans approximated 1.24% at March 31, 2017, compared to 1.35% at September 30, 2016. The increase in allowance as a percent of total loans was largely due to $1.0 million of net recoveries in the six months ended March 31, 2017. Due to the continuing trend of net recoveries, management recorded a negative provision of $900,000 during the current period. Management retained an unallocated allowance to maintain the overall allowance at a level reflective of continued economic uncertainties.
Management reviews the adequacy of the allowance for loan losses on a continuous basis. Management considered the allowance for loan losses adequate at March 31, 2017 to absorb probable losses inherent in the loan portfolio. However, adverse economic circumstances or other events, including additional loan review, future regulatory examination findings or changes in borrowers' financial conditions, could result in increased losses in the loan portfolio or in the need for increases in the allowance for loan losses.
Liquidity Management. Liquidity is defined as the ability to meet current and future short-term financial obligations. Our primary sources of funds consist of deposit inflows, advances from the FHLB, loan payments and prepayments, mortgage-backed securities and collateralized mortgage obligations repayments and maturities and sales of loans and other securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. At March 31, 2017 and September 30, 2016, we had access to immediately available funds of approximately $293.5 million and $243.0 million, respectively, including overnight funds, FHLB borrowing capacity and a Federal Reserve line of credit. Additionally, securities with lendable collateral value of $96.3 million and $98.4 million were available to be pledged at March 31, 2017 and September 30, 2016, respectively. The Company also had $10.5 million of certificates of deposits held at other financial institutions, which were inherited from the acquisition of CBS, at March 31, 2017. These certificates, of which $2.7 million were maturing within the next 90 days at March 31, 2017, could be utilized over time to supplement the liquidity needs of the Company.
As part of the acquisition of CBS, we also assumed a $318,000 letter of credit, which supports a customer obligation, from the FHLB of Atlanta. Management does not currently expect to draw on the letter.
We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are subject to our operating, financing, lending and investing activities during any given period. At March 31, 2017, cash and cash equivalents totaled $140.3 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $191.5 million at March 31, 2017. At March 31, 2017, we had $50.0 million in advances outstanding from the FHLB. However, based on available pledged and unpledged collateral other than cash, $177.1 million in additional advances were available as of March 31, 2017.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.
At March 31, 2017, we had $36.2 million of new loan commitments outstanding, and $76.2 million of unfunded construction and development loans. In addition to commitments to originate loans, we had $70.3 million of unused lines of credit to borrowers. Certificates of deposit due within one year of March 31, 2017 totaled $234.4 million, or 19.5% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2018. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are the origination of loans and the purchase of securities. During the six months ended March 31, 2017, we originated $186.3 million of loans and purchased $12.7 million in securities.

45


Financing activities consist primarily of additions to deposit accounts and FHLB advances. We experienced an increase in total deposits of $39.9 million for the six months ended March 31, 2017, primarily due to an increase in core deposits of $35.8 million as our surge in deposits continued. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB which provides an additional source of funds. FHLB advances have been used primarily to fund loan demand and to purchase securities.
Capital Management and Resources. The Bank and the Company are subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. Our regulatory capital ratios currently reflect the incorporation of Basel III and these changes had a minor impact on our capital ratios. The net result of the acquisition of CBS was a downstream of $6.1 million from the holding company to the Bank during the third quarter of fiscal 2016, which is reflected in these ratios at March 31, 2017 and September 30, 2016, respectively. At March 31, 2017, the Bank and the Company exceeded all regulatory capital requirements. The Bank and the Company are considered “well capitalized” under regulatory guidelines.
 
 
Actual
 
For Capital Adequacy Purposes
 
To be Well Capitalized Under Prompt Corrective Action Provisions
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
(dollars in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Charter Financial Corporation
 
$
195,657

 
17.93
%
 
$
87,282

 
8.00
%
 
$
109,103

 
10.00
%
CharterBank
 
179,915

 
16.53

 
87,061

 
8.00

 
108,827

 
10.00

Tier 1 risk-based capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Charter Financial Corporation
 
185,152

 
16.97

 
65,462

 
6.00

 
87,282

 
8.00

CharterBank
 
169,410

 
15.57

 
65,296

 
6.00

 
87,061

 
8.00

Common equity tier 1 risk-based capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Charter Financial Corporation
 
178,496

 
16.36

 
49,096

 
4.50

 
70,917

 
6.50

CharterBank
 
169,410

 
15.57

 
48,972

 
4.50

 
70,737

 
6.50

Tier 1 leverage (to average assets):
 
 
 
 
 
 
 
 
 
 
 
 
Charter Financial Corporation
 
185,152

 
12.92

 
57,314

 
4.00

 
71,642

 
5.00

CharterBank
 
169,410

 
11.84

 
57,212

 
4.00

 
71,515

 
5.00

September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Charter Financial Corporation
 
$
187,625

 
16.74
%
 
$
89,648

 
8.00
%
 
$
112,060

 
10.00
%
CharterBank
 
170,808

 
15.26

 
89,520

 
8.00

 
111,900

 
10.00

Tier 1 risk-based capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Charter Financial Corporation
 
177,255

 
15.82

 
67,236

 
6.00

 
89,648

 
8.00

CharterBank
 
160,437

 
14.34

 
67,140

 
6.00

 
89,520

 
8.00

Common equity tier 1 risk-based capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Charter Financial Corporation
 
170,668

 
15.23

 
50,427

 
4.50

 
72,839

 
6.50

CharterBank
 
160,437

 
14.34

 
50,355

 
4.50

 
72,735

 
6.50

Tier 1 leverage (to average assets):
 
 
 
 
 
 
 
 
 
 
 
 
Charter Financial Corporation
 
177,255

 
12.68

 
55,928

 
4.00

 
69,910

 
5.00

CharterBank
 
160,437

 
11.51

 
55,772

 
4.00

 
69,715

 
5.00

Effective as of January 1, 2016, the Company and its subsidiary bank must maintain a capital conservation buffer to avoid restrictions on capital distributions or discretionary bonus payments. This buffer must consist solely of Common Equity Tier 1 Capital, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital) in addition to

46


the minimum risk-based capital requirements. The capital conservation buffer required for 2017 is common equity equal to 1.25% of risk-weighted assets and will increase by .625% per year until reaching 2.5% beginning January 1, 2019.
The Company continues to seek strategic means to deploy the additional capital from the stock offering completed in 2013. This may include loan portfolio growth, stock buybacks, dividends, and appropriately priced acquisitions of other financial institutions.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.
For the six months ended March 31, 2017, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Non-GAAP Financial Measures
The measures entitled loan interest income excluding accretion, net interest margin excluding the effects of purchase accounting, total core deposits and tangible book value per share are not measures recognized under GAAP and therefore are considered non-GAAP financial measures. The most comparable GAAP measures to these measures are loan interest income, net interest margin, total deposits and book value per share, respectively.
Management uses these non-GAAP financial measures to assess the performance of the Company's business and the strength of its capital position. The Company believes that these non-GAAP financial measures provide meaningful additional information to assist management, investors and bank regulators in evaluating the Company's operating results, financial strength and capitalization and to permit investors to assess the performance of the Company on the same basis as that used by management. The non-GAAP financial measures should be considered as additional views of the way our financial measures are affected by significant items and other factors. Statements including non-GAAP financial measures should be read along with the accompanying tables which provide a reconciliation of non-GAAP financial measures to GAAP financial measures.

47


 
For the Quarters Ended
 
3/31/2017
 
12/31/2016
 
9/30/2016
 
6/30/2016
 
3/31/2016
Loans Receivable Income Excluding Accretion
 
 
 
 
 
 
 
 
 
Loans receivable income
$
11,903,416

 
$
12,569,903

 
$
12,680,420

 
$
12,563,466

 
$
8,863,437

Net purchase discount accretion
358,031

 
724,109

 
1,090,886

 
1,278,040

 
833,179

Loans receivable income excluding accretion (Non-GAAP)
$
11,545,385

 
$
11,845,794

 
$
11,589,534

 
$
11,285,426

 
$
8,030,258

 
 
 
 
 
 
 
 
 
 
Net Interest Margin Excluding the Effects of Purchase Accounting
 
 
 
 
 
 
 
 
 
Net Interest Margin
3.52
 %
 
3.71
 %
 
3.82
 %
 
3.97
 %
 
3.72
 %
Effect to adjust for net purchase discount accretion
(0.11
)
 
(0.23
)
 
(0.35
)
 
(0.44
)
 
(0.36
)
Net interest margin excluding the effects of purchase accounting (Non-GAAP)
3.41
 %
 
3.48
 %
 
3.47
 %
 
3.53
 %
 
3.36
 %
 
 
 
 
 
 
 
 
 
 
Total Core Deposits
 
 
 
 
 
 
 
 
 
Total deposits
$
1,201,731,475

 
$
1,186,346,952

 
$
1,161,843,586

 
$
1,155,245,321

 
$
791,692,453

Total certificates of deposit
381,194,185

 
377,890,409

 
377,138,976

 
373,147,686

 
237,432,653

Total core deposits (Non-GAAP)
$
820,537,290

 
$
808,456,543

 
$
784,704,610

 
$
782,097,635

 
$
554,259,800

 
 
 
 
 
 
 
 
 
 
Tangible Book Value Per Share
 
 
 
 
 
 
 
 
 
Book value per share
$
13.84

 
$
13.67

 
$
13.52

 
$
13.29

 
$
13.18

Effect to adjust for goodwill and other intangible assets
(2.14
)
 
(2.15
)
 
(2.16
)
 
(2.18
)
 
(0.29
)
Tangible book value per share (Non-GAAP)
$
11.70

 
$
11.52

 
$
11.36

 
$
11.11

 
$
12.89


 
For The Six Months Ended
 
3/31/2017
 
3/31/2016
Loans Receivable Income Excluding Accretion
 
 
 
Loans receivable income
$
24,473,319

 
$
18,304,962

Net purchase discount accretion
1,082,140

 
2,002,161

Loans receivable income excluding accretion (Non-GAAP)
$
23,391,179

 
$
16,302,801

 
 
 
 
Net Interest Margin Excluding the Effects of Purchase Accounting
 
 
 
Net Interest Margin
3.61
 %
 
3.88
 %
Effect to adjust for net purchase discount accretion
(0.17
)
 
(0.45
)
Net interest margin excluding the effects of purchase accounting (Non-GAAP)
3.44
 %
 
3.43
 %
 
 
 
 
Total Core Deposits
 
 
 
Total deposits
$
1,201,731,475

 
$
791,692,453

Total certificates of deposit
381,194,185

 
237,432,653

Total core deposits (Non-GAAP)
$
820,537,290

 
$
554,259,800

 
 
 
 
Tangible Book Value Per Share
 
 
 
Book value per share
$
13.84

 
$
13.18

Effect to adjust for goodwill and other intangible assets
(2.14
)
 
(0.29
)
Tangible book value per share (Non-GAAP)
$
11.70

 
$
12.89



48


Item 3. Quantitative and Qualitative Disclosures About Market Risk
Qualitative Aspects of Market Risk. The Company’s most significant form of market risk is interest rate risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings. We employ several strategies to manage the interest rate risk inherent in our mix of assets and liabilities, including:
selling fixed rate mortgages that we originate to the secondary market;
maintaining the diversity of our existing loan portfolio by originating commercial real estate and consumer loans, which typically have adjustable rates and/or shorter terms than residential mortgages;
emphasizing loans with adjustable interest rates;
maintaining fixed rate borrowings from the FHLB of Atlanta; and
increasing retail transaction deposit accounts, which typically have long durations.
We have an Asset/Liability Management Committee to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
Quantitative Aspects of Market Risk. We compute the amounts by which the difference between the present value of an institution's assets and liabilities (the institution's net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. Our simulation model uses a discounted cash flow analysis to measure the interest rate sensitivity of NPV. Depending on current market interest rates we historically have estimated the economic value of these assets and liabilities under the assumption that interest rates experience an instantaneous and sustained increase of 100, 200, or 300 basis points, or a decrease of 100 and 200 basis points. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, a NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared.
The table below sets forth, as of March 31, 2017, our calculation of the estimated changes in the Bank’s net portfolio value that would result from the designated instantaneous parallel shift in the interest rate yield curve.
Change in Interest Rates (bp) (1)
 
Estimated NPV (2)
 
Estimated Increase (Decrease) in NPV
 
Percentage Change in NPV
 
NPV Ratio as a Percent of
Present Value of Assets (3)(4)
 
Increase (Decrease) in NPV Ratio as a
Percent or Present Value of Assets (3)(4)
(dollars in thousands)
300
 
$
295,683

 
$
6,580

 
2.3%
 
20.0%
 
0.4%
200
 
$
294,281

 
$
5,178

 
1.8%
 
19.9%
 
0.3%
100
 
$
292,159

 
$
3,056

 
1.1%
 
19.8%
 
0.2%
 
$
289,103

 
$

 
—%
 
19.6%
 
—%
(100)
 
$
278,127

 
$
(18,976
)
 
(6.6)%
 
18.3%
 
(1.3)%
__________________________________
(1)
Assumes an instantaneous uniform change in interest rates at all maturities.
(2)
NPV is the difference between the present value of an institution’s assets and liabilities.
(3)
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)
NPV Ratio represents NPV divided by the present value of assets.

The table above indicates that at March 31, 2017, in the event of a 200 basis point increase in interest rates, we would experience a 1.8% increase in net portfolio value. In the event of a 100 basis point decrease in interest rates, we would experience a 6.6% decrease in net portfolio value. Additionally, our internal policy states that our minimum NPV of estimated present value of assets and liabilities shall range from a low of 5.5% for a 300 basis point change in rates to 7.5% for no change in interest rates. As of March 31, 2017, we were in compliance with our Board approved policy limits with a 20.1% NPV in the event of an increase of 300 basis points and 19.8% at current rates.
The effects of interest rates on net portfolio value and net interest income are not predictable. 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

49


different times and in different degrees to changes in 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 that 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 the calculations set forth above. Additionally, increased credit risk may result if our borrowers are unable to meet their repayment obligations as interest rates increase.

Item 4. Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


50


PART II. OTHER INFORMATION

Item 1. Legal Proceedings
From time to time, we may be party to various legal proceedings incident to our business. At March 31, 2017, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors
Risk factors that may affect future results were discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016 and in Charter Financial’s other filings with the Securities and Exchange Commission. The risks described in our Annual Report on Form 10-K and other filings are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. We do not believe that there have been any material changes to the risk factors disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended September 30, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Not applicable
(b)
Not applicable
(c)
During the quarter ended March 31, 2017, the Company did not repurchase any shares as part of its publicly announced share repurchase program. In December 2015, the Company's Board of Directors approved a stock repurchase program, the fifth approved and announced program since December 2013, allowing the repurchase of up to 800,000 shares, or approximately 5% of the Company's outstanding shares. As of March 31, 2017, 192,427 shares remain available to be repurchased under the December 2015 repurchase program. Since fiscal 2014, 8,104,150 shares have been repurchased at a total cost of approximately $91.9 million.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.


51


Item 6. Exhibits
Exhibit No.
 
Description
 
 
 
2.1
 
Agreement and Plan of Merger, dated as of December 3, 2015, by and among Charter Financial Corporation, CHFN Merger Sub, LLC and CBS Financial Corporation (1)
 
 
 
3.1
 
Articles of Incorporation of Charter Financial Corporation (2)
 
 
 
3.2
 
Bylaws of Charter Financial Corporation (3)
 
 
 
4.1
 
Specimen Stock Certificate of Charter Financial Corporation (4)
 
 
 
31.1
 
Rule 13a-14(a)/15d-14(c) Certification of Chief Executive Officer
 
 
 
31.2
 
Rule 13a-14(a)/15d-14(c) Certification of Chief Financial Officer
 
 
 
32.1
 
Section 1350 Certifications
 
 
 
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Statements of Financial Condition as of March 31, 2017 and September 30, 2016, (ii) the Unaudited Condensed Consolidated Statements of Income for the three and six months ended March 31, 2017 and 2016, (iii) the Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six months ended March 31, 2017 (iv) the Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2017 and 2016, (v) the Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2017 and 2016, and (vi) the Notes to the Unaudited Condensed Consolidated Financial Statements.
__________________________________
(1)
Incorporated by reference to Exhibit 2.1 to the Form 10-Q of Charter Financial Corporation, a Maryland corporation, originally filed with the Securities and Exchange Commission on February 8, 2016.
(2)
Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-185482) of Charter Financial Corporation, a Maryland corporation, originally filed with the Securities and Exchange Commission on December 14, 2012.
(3)
Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 333-185482) of Charter Financial Corporation, a Maryland corporation, originally filed with the Securities and Exchange Commission on December 14, 2012.
(4)
Incorporated by reference to Exhibit 4.0 to the Registration Statement on Form S-1 (File No. 333-185482) of Charter Financial Corporation, a Maryland corporation, originally filed with the Securities and Exchange Commission on December 14, 2012.






52


Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
CHARTER FINANCIAL CORPORATION
 
 
 
 
 
 
Date:
May 9, 2017
By:
/s/ Robert L. Johnson
 
 
 
 
Robert L. Johnson
 
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
 
 
Date:
May 9, 2017
By:
/s/ Curtis R. Kollar
 
 
 
 
Curtis R. Kollar
 
 
 
 
Senior Vice President and Chief Financial Officer
 







53