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EX-32.1 - EXHIBIT 32.1 - CHARTER FINANCIAL CORPchfn-09302017ex321.htm
EX-31.2 - EXHIBIT 31.2 - CHARTER FINANCIAL CORPchfn-09302017ex312.htm
EX-31.1 - EXHIBIT 31.1 - CHARTER FINANCIAL CORPchfn-09302017ex311.htm
EX-23.0 - EXHIBIT 23.0 - CHARTER FINANCIAL CORPchfn-09302017ex230.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-K
__________________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017
Commission File Number: 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, including area code)

Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
__________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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 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
 
¨
 
Accelerated filer
 
x
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨

 
 
 
 
Emerging growth company
 
¨
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).    Yes  ¨    No  x
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of March 31, 2017 was approximately $266,736,963.
The number of shares outstanding of the registrant’s common stock as of December 7, 2017 was 15,118,383.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.



CHARTER FINANCIAL CORPORATION
INDEX TO FORM 10-K 

 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Cautionary Note About Forward-Looking Statements
We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to time our management may make statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, as well as statements about the objectives and effectiveness of our risk management and liquidity policies, statements about trends in or growth opportunities for our businesses, statements about our future status, and activities or reporting under U.S. banking and financial regulation. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” “potential, ” “seek,” and similar expressions. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

PART I 
ITEM 1.
BUSINESS
General Overview
Charter Financial Corporation (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 (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. As of September 30, 2017, our total assets were approximately $1.6 billion, total loans receivable were approximately $1.1 billion and our deposits were approximately $1.3 billion. We have total stockholders’ equity of $214.2 million.
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 the Company, which became 100% owned by public shareholders. This conversion process included raising capital that increased capital to 25.13% of assets, or tangible capital to 24.78% of tangible assets, a non-GAAP measure (see Non-GAAP Financial Measures for further information). As is typical with overcapitalized converted thrifts, the company's stock traded based on book value. With additional capital leverage and resulting improved earnings in fiscal 2017 the Company is now trading primarily on earnings.
The Company's stockholder value strategy focuses on creating earnings and stockholder value through increasing capital leverage, operating leverage, and expanding into more dynamic markets. In recent years, through acquisitions and strategic de novo branching, the Company has expanded further into the Atlanta Metropolitan Statistical Area ("MSA"). This growth was the result of the following:
Acquired all assets and assumed all liabilities of Resurgens Bancorp ("Resurgens"), the parent company of Resurgens Bank, a full-service commercial bank headquartered in Tucker, Georgia, as part of a purchase agreement in September 2017;
Acquired all assets and assumed all liabilities of CBS Financial Corporation ("CBS"), the parent company of Community Bank of the South, a full-service commercial bank headquartered in Smyrna, Georgia, as part of a purchase agreement in April 2016;
Completed a lift out of a seasoned relationship team in the attractive Buckhead community of Atlanta in October 2015 to operate a new branch that opened in February 2017;
Acquired certain assets and assumed all deposits of The First National Bank of Florida (“FNB”), a full-service commercial bank headquartered in Milton, Florida, as a part of a loss-sharing agreement with the FDIC in September 2011;
Acquired certain assets and assumed all deposits of McIntosh Commercial Bank (“MCB”), a full-service commercial bank headquartered in Carrollton, Georgia, as a part of a loss-sharing agreement with the FDIC in March 2010;
Acquired certain assets and assumed all deposits of Neighborhood Community Bank (“NCB”), a full-service commercial bank headquartered in Newnan, Georgia, as a part of a loss-sharing agreement with the FDIC in June 2009;

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Opened branch in Norcross, Georgia and staffed with lift out of the area's foremost construction and commercial real estate lenders;
Opened de novo branches in LaGrange, Georgia in March 2007 and May 2005;
Acquired EBA Bancshares and its subsidiary, Eagle Bank of Alabama, in February 2003.

chfnbusinessprogression.jpg
We have made significant progress by bringing our total capital to total assets ratio to 13.06%, while our tangible capital to tangible assets ratio, a non-GAAP measure, decreased to 10.72%. We also improved our return on average equity to 6.89% and our return on average tangible equity, a non-GAAP measure (see Non-GAAP Financial Measures for further information) to 8.18% since the stock conversion.
chart-ed7c5dff32313caebc5.jpg
________________________________
(1)
Non-GAAP measures (See Non-GAAP Financial Measures for Further Information).
The Bank’s principal business consists of attracting retail deposits, focusing on transaction accounts, from the general public. We then invest those deposits, together with funds generated from operations, in commercial real estate loans, one- to four-family residential mortgage loans, construction loans and investment securities and, to a lesser extent, commercial business loans, home equity loans and lines of credit and other consumer loans. We offer a variety of community banking services to our customers, including online banking and bill payment services, mobile banking, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs. We operate 22 branch offices in Metro Atlanta, the I-85 corridor

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south to Auburn, Alabama, and the Florida Gulf Coast. The Bank's executive offices are located at 1233 O.G. Skinner Dr., West Point, Georgia 31833. Its telephone number at that address is (706) 645-1391.
Market Area
We conduct operations primarily in three metropolitan areas, along with our legacy market in Troup County, Georgia and Chambers County, Alabama. We currently have 11 branches in the Atlanta MSA, three branches in the Auburn-Opelika, Alabama MSA, and three branches in the Pensacola, Florida MSA, along with five branches in our legacy market. FDIC-assisted acquisitions have complemented the corporate expansion we have achieved in recent years both through de novo branching and acquisitions. Our expansion into the Atlanta market has been a key component of implementing our strategic plan, as all 11 branches in the Atlanta MSA have been added in the last 10 years either through acquisitions or lift outs of lending and customer relationship personnel. We also added the Pensacola MSA through acquisitions. As indicated in the population growth map below, all but one of our branches are in counties projected to experience strong population growth over the next five years.
populationgrowth2018.jpg
In the Atlanta MSA, we have locations in Carroll, Cobb, Coweta, DeKalb, Fulton and Gwinnett Counties. As of September 30, 2017, the unemployment rate in the MSA was at 4.0%, below the national and statewide levels. According to the 2010 U.S. Census, population in the MSA grew 28.1% between 2000 and 2010. As of 2015, median household income in the MSA was approximately $57,000, above both the national and state levels.
In the Auburn-Opelika MSA, we conduct business in Lee County in Alabama. As of September 30, 2017, the unemployment rate in the MSA was at 2.9%, below both the statewide and national levels. According to the 2010 Census, population in the MSA grew 21.9% between 2000 and 2010. Median household income in the MSA was approximately $45,000 as of 2015, above the statewide but below national levels.
In the Pensacola MSA, we conduct business in Escambia and Santa Rosa Counties in Florida. As of September 30, 2017, the unemployment rate in the MSA was at 3.3%, below the statewide and national levels. According to the 2010 Census, population in the MSA grew 8.9% between 2000 and 2010. As of 2015, median household income in the MSA was approximately $50,000, below the national level but above the state level.
In our legacy market, we conduct business in Troup County, Georgia and Chambers County, Alabama. As of September 30, 2017, the unemployment rate in the area was at 3.8%, below nationwide and state levels. According to the 2010 Census, population in the area grew 6.2% between 2000 and 2010. As of 2015, median household income in the area was approximately $39,000, below nationwide and state levels.

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Our acquisitions of CBS and Resurgens have added to our Atlanta market presence, which in management’s view is a key area for potential growth of the Company. The Atlanta market area comprises the eighth-largest economy in the country and 17th-largest in the world. Key components of the market area’s economy include corporate operations, as the area has the third-largest concentration of Fortune 500 companies in the United States. Other key factors in the area’s economy include media and film entertainment, logistics and transportation, and information technology. The market area was disproportionately impacted by the 2008 financial crisis in unemployment rate, declining real income levels and a depressed housing market. The outlook for the Atlanta market is for above-average growth.
In the Auburn-Opelika MSA, the economy is heavily dependent on higher education, retail, industry and textiles. Auburn was ranked the sixth-best performing city for economic growth in the United States by the Milken Institute in 2016. This market area is forecasted for modest growth over the next five years.
The economy of the Florida Panhandle is primarily dependent upon tourism and hospitality, farming, forestry, paper mills, import/export shipping, shipbuilding, and commercial fishing. Over the next five years, our Florida markets are projected to experience moderate growth in terms of total population and number of households, and Pensacola has been ranked in the top quintile of United States metro areas in population growth. The outlook for our Florida Panhandle market is affected by the heavy influences of military bases and tourism.
Our legacy market's economy was previously heavily dependent on the textile industry, but has shifted to an automotive employment base because of the Kia plant, which opened 10 years ago and which estimates show created more than 12,000 jobs. The area is also influenced by higher education with LaGrange College and Point University, which moved to West Point in 2012. Our legacy market is projected to see modest growth over the next five years.
Competition
We face intense competition both in making loans and attracting deposits. Metro Atlanta, the I-85 corridor south to Auburn, Alabama, and the Florida Panhandle have a high concentration of financial institutions, many of which are branches of large money center, super-regional, and regional banks that have resulted from the consolidation of the banking industry in Georgia, Alabama, and Florida. Many of these competitors have greater resources than we do and may offer services that we do not provide.
Our competition for loans comes from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, credit card banks, insurance companies, and brokerage and investment banking firms. Our most direct competition for deposits historically has come from commercial banks, savings banks, savings and loan associations, credit unions, and mutual funds. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds as well as from brokerage firms, insurance companies and non-traditional financial institutions, including non-depository financial services providers.
Metro Atlanta Expansion
On September 1, 2017, the Company completed its acquisition of Resurgens Bancorp and its subsidiary, Resurgens Bank, for cash consideration of $25.8 million. The purchase of Resurgens continued the Company's strategy of leveraging its capital to expand in the Atlanta metropolitan area. Resurgens operated two branches in DeKalb County. We acquired $177.5 million of assets, including $128.8 million of net loans receivable, and assumed $151.7 million of liabilities, including $138.0 million of deposits. See Note 2: Business Combinations for more information regarding the acquisition.
On April 15, 2016, the Company completed its acquisition of CBS Financial Corporation and its subsidiary, Community Bank of the South, for cash consideration of $55.9 million. The purchase of CBS expanded the Company's presence in Metro Atlanta with four branches in the attractive Cobb County market. As part of the purchase, we acquired $401.9 million of assets, including $300.8 million of net loans receivable, and assumed $345.9 million of liabilities, including $333.7 million of deposits. See Note 2: Business Combinations for more information regarding the acquisition.

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chart-8f884ec16764bdc91ca.jpg chart-590b2784b8beb8fa6ed.jpg
As shown in graphs above the Company had no Atlanta MSA deposits in 2007 and now has 53% of its deposits in the MSA. The Company has the 8th largest deposit market share of community banks in the Atlanta MSA.
FDIC-Assisted Acquisitions
On June 26, 2009, the Bank entered into a purchase and assumption agreement with the FDIC to acquire $202.8 million of assets and assume $195.3 million of liabilities of NCB, a full-service commercial bank headquartered in Newnan, Georgia. Subsequently, on March 26, 2010, the Bank entered into an acquisition agreement with the FDIC to acquire $322.6 million of assets and assume $306.2 million of liabilities of MCB, a full-service commercial bank headquartered in Carrollton, Georgia. The retention of NCB's four full-service branches (one of which was closed in 2014) and one of MCB's full-service branches expanded our market presence in west-central Georgia within the I-85 corridor region. Both the NCB and MCB acquisition agreements with the FDIC included loss-sharing agreements pursuant to which the FDIC assumed between 80% and 95% of losses and shared between 80% and 95% of loss recoveries on acquired loans and other real estate owned (“OREO”).
On September 9, 2011, the Bank entered into an acquisition agreement with the FDIC to acquire $251.8 million of assets and assume $247.5 million of liabilities of FNB, a full-service commercial bank headquartered in Milton, Florida. The retention of three of FNB’s full-service branches expanded our market presence to the Florida Panhandle. The purchase and assumption agreement with the FDIC included loss-sharing agreements pursuant to which the FDIC assumed 80% of losses and shared 80% of loss recoveries on acquired loans and other real estate owned.
The three FDIC-assisted acquisitions between 2009 and 2011 extended our retail branch footprint as part of our efforts to increase our retail deposits and reduce our reliance on brokered deposits and borrowings as a significant source of funds. We refer to each of the three financial institutions we acquired in conjunction with FDIC loss share agreements collectively as the “Acquired Banks - FDIC” and we refer to the indemnification assets and other receivables associated with the FDIC loss share agreements related to the Acquired Banks - FDIC as the “FDIC receivable.” Additionally, we refer to loans subject to loss share agreements with the FDIC in periods prior to the termination of all agreements with the FDIC in the fourth quarter of fiscal 2015, as “covered loans” and loans that were not subject to loss share agreements with the FDIC as “non-covered loans.” For more information regarding the Bank's FDIC-assisted acquisitions and subsequent loss share resolution, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — FDIC Loss-Share Resolution”.
Lending Activities
We offer a broad range of loan products with a variety of rates and terms. Our lending operations consist of the following major segments: commercial real estate lending; single-family residential mortgage lending for retention in our portfolio;

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construction lending; commercial business loans; and residential mortgage lending for resale in the secondary mortgage market. To a lesser extent, we also originate consumer loans. Our lending activities are consistent with our community bank orientation.
We have pursued loan diversification with the objective of lowering credit concentration risk, enhancing yields and earnings, and improving the interest rate sensitivity of our assets. Historically, we have focused our lending activities on residential and commercial mortgage loans as well as consumer loans, primarily to local customers.
Commercial Real Estate Loans. Commercial real estate lending is an integral part of our operating strategy and we intend to continue to take advantage of opportunities to originate commercial real estate loans. Commercial real estate loans typically have higher yields, shorter durations and larger loan balances compared to residential mortgage loans. Commercial real estate lending also has provided us with another means of broadening our range of customer relationships. As of September 30, 2017, commercial real estate loan balances totaled $697.1 million, or 60.0% of our total loan portfolio.
Commercial real estate loans are generally made to borrowers in the southeastern United States and are secured by properties in these states. Commercial real estate loans are generally made for up to 80% of the value of the underlying real estate. Our commercial real estate loans are typically secured by offices, hotels, strip shopping centers, warehouses/distribution facilities, land, multi-family properties, or convenience stores located principally in Georgia, Alabama and Florida.
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 related borrowers compared to residential real estate loans. Our commercial real estate loans generally have higher interest rates and shorter maturities than our residential mortgage loans. We offer commercial real estate loans, generally at adjustable rates. Our most common commercial real estate loan is fixed for five years and then adjustable tied to the prime rate as reported in the Wall Street Journal.
Our underwriting criteria for commercial real estate loans include maximum loan-to-value ratios, debt coverage ratios, secondary sources of repayment, guarantor requirements and quality of cash flow. As part of our loan approval and underwriting of commercial real estate loans, we undertake a cash flow analysis, and we generally require a debt-service coverage ratio of at least 1.15 times. Our capacity to expand this portfolio may be tempered by lack of demand from qualified borrowers and intense competition for good loans.
Risks associated with commercial real estate loans are similar to that of other loans, while repayment is often dependent on the successful operation and cash flows of the owner's business. Commercial real estate loans are also subject to changes in the value of the underlying collateral or decreases in the occupancy rate of non-owner occupied real estate.
Residential Mortgage Loans. We originate first and second mortgage loans secured by one- to four-family residential properties within Georgia, Florida and Alabama. We currently originate mortgages in all of our markets, but utilize centralized underwriting at our corporate office. As of September 30, 2017, residential mortgage loans totaled $232.0 million, or 20.0% of total loans.
We originate both fixed-rate and adjustable-rate one- to four-family residential mortgage loans. Fixed-rate, 15 and 30 year, conforming loans are generally originated for resale into the secondary market on a servicing-released basis. It is our intent to originate these 15 year fixed-rate loans for resale into the secondary market. We generally retain in our portfolio loans that are non-conforming due to property exceptions and loans that have adjustable rates. We sell loans to Fannie Mae and retain the servicing associated with these loans. As of September 30, 2017, approximately 36.4% of our one- to four-family loan portfolio consisted of fixed-rate mortgage loans and 63.6% consisted of either adjustable-rate mortgage loans (“ARMs”) or hybrid loans with fixed interest rates for the first one, three, five or seven years of the loan, and adjustable rates thereafter. After the initial term, the interest rate on ARMs generally adjusts on an annual basis at a fixed spread over the monthly average yield on United States Treasury securities, the prime interest rate as listed in The Wall Street Journal, or LIBOR. The interest rate adjustments are generally subject to a maximum increase of 2% per adjustment period and 6% over the life of the loan.
While we offer fixed-rate and adjustable-rate mortgage loans with terms of up to 30 years, to limit interest rate risk, as well as to provide liquidity, the Bank sells a majority of its 15, 20 and 30 year fixed-rate mortgage originations into the secondary market. Moreover, to reduce the potential volatility of our net interest income, we funded our fixed-rate mortgage loan portfolio with a combination of long-term fixed rate liabilities and non-maturity core deposits with similar assumptive duration profiles.
The Bank originates one- to four-family residential loans with loan-to-values of up to 80%. We will also originate loans with loan-to-values in excess of 80% with private mortgage insurance. A substantial portion of our one- to four-family residential mortgage loans are secured by properties in Georgia, Alabama and Florida.
We offer home equity lines of credit as a complement to our one- to four-family residential mortgage lending. We believe that offering home equity credit lines helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. Home equity credit lines have adjustable rates and are

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secured by a first or second mortgage on owner-occupied one- to four-family residences located primarily in Georgia, Alabama and Florida. Home equity credit lines enable customers to borrow at rates tied to the prime rate as reported in The Wall Street Journal. The underwriting standards applicable to home equity credit lines are 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 90% of the value of the underlying property unless the loan is covered by private mortgage insurance. At September 30, 2017, we had $46.7 million of home equity lines of credit and second mortgage loans. We had $35.7 million of unfunded home equity line of credit commitments at September 30, 2017.
We consider “subprime” loans to be loans originated to borrowers having credit scores below 660 at the time of origination. As of September 30, 2017, the Company had total one- to four-family residential subprime loans of $13.8 million. We do not, and have not, originated “low documentation” or “no documentation” loans, “option ARM” loans, or other loans with special or unusual payment arrangements.
We modify residential mortgage loans when it is mutually beneficial to us and the borrower, and on terms that are appropriate to the circumstances. We have no legacy loans in government modification programs.
Residential mortgage loans are particularly sensitive to fluctuations in the value of real estate. Increases in interest rates, fluctuations in the value of real estate or other factors arising after origination could negatively affect a borrower's cash flow, creditworthiness and ability to repay the loan.
Construction Loans. Consistent with our community bank strategy, construction lending has been an integral part of our overall lending strategy. Construction loans represent an important segment of the loan portfolio, totaling $88.8 million, or 7.6% of loans at September 30, 2017.
We make 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. We offer construction loans to pre-approved local builders including loans on both speculative (unsold) and pre-sold properties. The number of speculative loans that we will extend to a builder at one time depends upon the financial strength and credit history of the builder. Our construction loan program is expected to remain a modest portion of our loan portfolio. We generally limit the number of outstanding loans on unsold homes under construction to within a specific area and/or to a specific borrower.
Construction lending generally carries a higher degree of risk than long-term financing of existing properties because repayment depends on the completion of the project and generally on the subsequent leasing and/or sale of the property. Specific risks include cost overruns, mismanaged construction, inferior or improper construction techniques, economic changes or downturns during construction, a downturn in the real estate market, rising interest rates which may prevent sale of the property and the failure to lease or sell completed projects in a timely manner.
Commercial Loans and Consumer Loans. To a much lesser extent, we also originate non-mortgage loans, including commercial business and consumer loans. At September 30, 2017, commercial loans totaled $103.7 million, or 8.9% of total loans, and consumer and other loans totaled $39.9 million, or 3.4% of loans.
Our commercial business loans are generally limited to terms of ten years or less. We typically attempt to collateralize these loans with a lien on commercial real estate or with a lien on business assets and equipment. We also generally require the personal guarantee of the business owner. 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 or guarantors. Such risks can be significantly affected by economic conditions. In addition, commercial business lending generally requires substantially greater supervision efforts by our management compared to residential mortgage or commercial real estate lending.
We have a portfolio of SBA loans, a majority of which were purchased in the acquisition of Resurgens. These loans are primarily commercial related, with a portion of each loan guaranteed by the SBA or with other credit enhancements provided by the government.
Our consumer loans are loans on deposits, automobile loans, and various other installment loans, as well as manufactured housing loans purchased from a national lender, most of which are outside our traditional markets. 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. Our consumer lending generally follows accepted industry standards for non-subprime lending, including certain minimum credit scores and debt to income ratios.

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Loan Origination and Approval Procedures and Authority. The following describes our current lending procedures for residential mortgage loans and home equity loans and lines of credit. Upon receipt of a completed loan application from a prospective borrower, we order a credit report and verify other information. If necessary, we obtain additional financial or credit related information. We require an appraisal for all residential mortgage loans, except for home equity loans or lines where a valuation may be used to determine the loan-to-value ratio. Appraisals are performed by licensed or certified third-party appraisal firms and are reviewed by our lending department. We require title insurance or a title opinion on all mortgage loans.
We require borrowers to obtain hazard insurance and we also require borrowers to obtain flood insurance prior to closing if the underlying property is in a flood zone. For properties with a private sewage disposal system, we also require evidence of compliance with applicable laws on residential mortgage loans. Further, we generally require borrowers on one- to four-family residential mortgage loans to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which we make disbursements for items such as real estate taxes, hazard insurance, flood insurance, and private mortgage insurance premiums, if required.
Commercial loans are approved through the Bank's Management Loan Committee process. The Management Loan Committee consists of the Chief Executive Officer, the President, the Chief Financial Officer and certain other senior lending and credit officers. Commercial loan relationships of $2.0 million or less may be approved outside the Committee process by senior officers who have commercial loan authority. Commercial loan relationships greater than $2.0 million are approved by the Management Loan Committee.
Loan Originations, Participations, Purchases and Sales. Most of our loan originations are generated by our loan personnel operating at our banking office locations and corporate headquarters. All loans we originate are underwritten pursuant to our policies and procedures. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of real estate loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our real estate loan originations can vary from period to period.
Consistent with our interest rate risk strategy, in the low interest rate environment that has existed in recent years, we have sold almost all fixed-rate, 15- and 30-year conforming one- to four-family residential mortgage loans in the primary and secondary market while retaining commercial real estate loans and non-conforming one- to four-family residential mortgage loans for retention in our portfolio. We sold $100.3 million of loans in fiscal 2017.
Occasionally, we have purchased loan participations in commercial loans in which we are not the lead lender that are secured by real estate or other assets. With regard to all loan participations, we follow our customary loan underwriting and approval policies, and although we may be only approving a portion of the loan, we underwrite the loan request as if we had originated the loan to ensure cash flow and collateral are sufficient. We had $31.5 million of purchased loan participations and $508,000 of sold participations at September 30, 2017. All of our loan participations were performing in accordance with their terms at September 30, 2017. During fiscal 2017, we purchased no new loan participations.
Investments
The Board of Directors reviews and approves our investment policy. The Chief Executive Officer and Chief Financial Officer, as authorized by the Board, implement this policy based on the established guidelines within the written investment policy, and other established guidelines, including those set periodically by the Asset-Liability Management Committee.
The primary goal of our investment policy is to invest funds in assets with varying maturities that will result in the best possible yield while maintaining the safety of the principal invested and assisting in managing our interest rate risk. We also seek to use our strong capital position to maximize our net income by investing in higher yielding mortgage-related securities funded by borrowings. We also consider our investment portfolio as a source of liquidity.
The broad objectives of our investment portfolio management are to:
minimize the risk of loss of principal or interest;
generate favorable returns without incurring undue interest rate and credit risk;
manage the interest rate sensitivity of our assets and liabilities;
meet daily, cyclical and long term liquidity requirements while complying with our established policies and regulatory liquidity requirements;
provide a stream of cash flow;
diversify assets and address maturity or interest repricing imbalances; and
provide collateral for pledging requirements.

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In determining our investment strategies, we consider our interest rate sensitivity, yield, credit risk factors, maturity and amortization schedules, asset prepayment risks, collateral value and other characteristics of the securities to be held.
Sources of Funds
Deposits are the major source of balance sheet funding for lending and other investment purposes. Additional significant sources of funds include liquidity, repayment of loans, loan sales, maturing investments, and borrowings. We believe that our standing as a sound and secure financial institution and our emphasis on the convenience of our customers will continue to contribute to our ability to attract and retain deposits. We offer extended hours at the majority of our branches and alternative banking delivery systems that allow customers to pay bills, transfer funds and monitor account balances at any time. We also offer competitive rates as well as a competitive selection of deposit products, including checking, money market, regular savings and term certificate accounts. In addition, we offer a bank rewarded product that offers a higher rate on deposit balances up to $15,000 if certain conditions are met. These conditions include receiving electronic statements, having at least one monthly ACH transaction per month and having 20 or more debit card transactions per month. For accounts that do not meet these conditions in any given month, the rate paid on the balances is reduced.
We also rely on advertising and long-standing relationships to maintain and develop depositor relationships, while competitive rates are also paid to attract and retain deposits. Furthermore, the NCB, MCB, FNB, CBS and Resurgens acquisitions continue to enhance customer convenience by broadening the markets currently served by the Bank.
We continually evaluate opportunities to enhance deposit growth. Potential avenues of growth include de novo branching and branch or whole bank acquisitions. Additionally, to the extent additional funds are needed, we may employ available collateral to increase borrowings, which are expected to consist primarily of Federal Home Loan Bank advances. Based on asset limitations we have $380.4 million available at the Federal Home Loan Bank of Atlanta at September 30, 2017. Based on available collateral pledged we are limited to $54.0 million at September 30, 2017 with additional lendable collateral in the amount of $86.9 million that was available to be pledged. We have a source of emergency liquidity with the Federal Reserve, and at September 30, 2017 we had collateral pledged that provided access to approximately $74.3 million of discount window borrowings.
Employees
As of September 30, 2017, we had 351 full-time employees and 9 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.
Subsidiary Activities
The Company has no direct or indirect operating subsidiaries other than the Bank.
Availability of Information
The Company’s investor website can be accessed at www.charterbk.com under “Investor Relations.” Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished to the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, are available on our investor website under the caption “SEC Filings” promptly after we electronically file such materials with, or furnish such materials to, the SEC. No information contained on our website is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K. Documents filed with the SEC are also available on the SEC's website at www.sec.gov.
SUPERVISION AND REGULATION
General
The Company and the Bank are subject to comprehensive supervision and regulation that affect virtually all aspects of our operations. This supervision and regulation is designed primarily to protect depositors and the Deposit Insurance Fund (“DIF”), administered by the Federal Deposit Insurance Corporation (FDIC), and the banking system as a whole, and generally is not intended for the protection of stockholders. The following summarizes certain of the more important statutory and regulatory provisions applicable to us.

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The Company is a savings and loan holding company that is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the Board of Governors of the Federal Reserve System (“Federal Reserve Board” or “FRB”). The Company is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
The Bank is a federal savings bank or federal savings association, examined and supervised by the Office of the Comptroller of the Currency (“OCC”) and subject to examination by the FDIC. Under this system of federal regulation, the Bank is periodically examined to ensure that it satisfies applicable standards with respect to capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the OCC critiques the Bank’s operations and assigns its rating (known as an institution’s CAMELS rating). The OCC prepares reports for the consideration of the Bank's board of directors on operating deficiencies should any arise. Under federal law, an institution may not disclose its CAMELS rating to the public. The Bank must also comply with consumer protection regulations issued by the Consumer Financial Protection Bureau. The Bank also is regulated to a lesser extent by the FRB, governing reserves to be maintained against deposits and other matters. The Bank’s relationship with its depositors and borrowers is also regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s loan documents and certain consumer protection matters.
Certain of the regulatory requirements that are applicable to the Bank and the Company are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on the Bank and the Company and is qualified in its entirety by reference to the actual statutes and regulations. Any change in these laws or regulations, whether by the OCC, FRB, the FDIC, the CFPB, or Congress, could have a material adverse impact on the Company, the Bank and their operations.
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), significantly changed the bank regulatory structure and affected the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act eliminated our former primary federal regulator, the Office of Thrift Supervision, and required the Bank to be regulated by the OCC (the primary federal regulator for national banks). The Dodd-Frank Act also authorized the FRB to supervise and regulate all savings and loan holding companies, such as the Company.
The Dodd-Frank Act required the FRB to set minimum capital levels for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with substantial power to enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Bank will continue to be examined by their applicable federal bank regulators. The legislation also weakened the federal preemption available for national banks and federal savings banks, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.
The legislation broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a depository institution instead of aggregate deposits. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directed the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives, regardless of whether the company is publicly traded. The Dodd-Frank Act provided for originators of certain securitized loans to retain a percentage of the risk for transferred loans, directed the FRB to regulate pricing of certain debit card interchange fees and contained a number of reforms related to mortgage origination. The Dodd-Frank Act authorized, for the first time, the payment of interest on commercial checking accounts.
Many of the provisions of the Dodd-Frank Act have delayed effective dates and the legislation required various federal agencies to promulgate numerous and extensive implementing regulations. Although the complete impact of these regulations cannot be

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completely determined at this time, the legislation and implementing regulations have and may continue to increase our operating and compliance costs.
Basel III Capital Rules
In July 2013, our primary federal regulator, the Federal Reserve, and the Bank’s primary federal regulator, the OCC, published final rules (“Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules implement the Basel Committee's December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to savings and loan holding companies and depository institutions, including the Company and the Bank. The Basel III Capital Rules define the components of regulatory capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The Basel III Capital Rules also revised risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios with a more risk-sensitive approach. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods as discussed below).
The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (CET1), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments from capital as compared to existing regulations. Under the Basel III Capital Rules, for most banking organizations the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common form of Tier 2 capital is subordinated notes and a portion of the allocation for loan losses, in each case, subject to the Basel III Capital Rules’ specific requirements.
Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2015 are as follows:
4.5% CET1 to risk-weighted assets.
6.0% Tier 1 capital to risk-weighted assets.
8.0% Total capital to risk-weighted assets.
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
The Basel III Capital Rules also introduce a new “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus the 2.5% capital conservation buffer, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, effectively resulting in a minimum Tier 1 capital ratio of 8.5%, (iii) a minimum ratio of Total capital (Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer, effectively resulting in a minimum total capital ratio of 10.5% and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority's risk-adjusted measure for market risk).
Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items (except gains and losses on cash flow hedges where the hedged item is not recognized on a banking organization’s balance sheet at fair value) are not excluded; however, certain banking organizations, including the Company and the Bank, may make a one-time permanent election to continue to exclude these items. The Company and the Bank have made this election.
The Basel III Capital Rules also preclude counting certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank or savings and loan holding companies. However for bank or savings and loan holding companies that had assets of less than $15 billion as of December 31, 2009 which includes the Company, trust preferred securities issued prior to May 19, 2010 can be treated as Additional Tier 1 capital to the extent that they do not exceed 25% of Tier 1 capital after applying all capital deductions and adjustments.

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Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a three-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter until fully phased-in at January 1, 2018). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a three-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
The Basel III Capital Rules prescribe a standardized approach for risk weightings. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 day past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-weights (from 0% to up to 600%) for equity exposures.
At September 30, 2017, the Company's and the Bank’s capital exceeded all applicable requirements.
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and federal regulations. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Bank may also establish subsidiaries that may engage in certain activities not otherwise permissible for the Bank, including real estate investment and securities and insurance brokerage.
Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2017, the Bank was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings bank, the Bank must satisfy the qualified thrift lender, or “QTL”, test. Under the QTL test, the Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.
The Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code. A savings association that fails the qualified thrift lender test must operate under specified restrictions, including with regard to the payment of dividends. Under the Dodd-Frank Act, non-compliance with the QTL test may subject the Bank to agency enforcement action for a violation of law. At September 30, 2017, the Bank satisfied the QTL test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings association. A federal savings bank must file an application with the OCC for approval of a capital distribution if:
the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;
the savings association would not be at least adequately capitalized following the distribution;
the distribution would violate any applicable statute, regulation, agreement or condition imposed by a regulator; or
the savings association is not eligible for expedited treatment of its filings.
Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company must still file a notice with the FRB at least 30 days before the board of directors declares a dividend or approves a capital distribution.
The OCC and the FRB have established similar criteria for approving an application or a notice and may disapprove a notice or application if:
the savings association would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution, if the institution would be undercapitalized after the distribution. A federal savings bank also may not make a capital

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distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form. In addition, beginning in 2016, the Bank’s ability to pay dividends is limited if the Bank does not have the capital conservation buffer required by the new capital rules, which may limit the ability of the Company to pay dividends to its stockholders. See “-Basel III Capital Rules.”
Liquidity. A federal savings bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.
Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the Community Reinvestment Act and related federal regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings bank, the OCC is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. The Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by FRB regulations and by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as the Bank. The Company is an affiliate of the Bank. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Savings associations are required to maintain detailed records of all transactions with affiliates.
The Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the FRB. Among other things, these provisions require that extensions of credit to insiders:
subject to certain exceptions for loan programs made available to all employees, be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.
Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including shareholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal

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banking agency may require the institution to submit a compliance plan. Failure to implement such a plan can result in further enforcement action including the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is required and authorized to take supervisory actions against undercapitalized savings associations. For this purpose, a savings association is placed in one of the following five categories based on the savings association’s capital:
Well Capitalized - having (1) a total risk-based capital ratio of 10 percent or greater, (2) a Tier 1 risk-based capital ratio of 8 percent or greater, (3) a CET1 risk-based capital ratio of 6.5 percent or greater, (4) a leverage capital ratio of 5 percent or greater and (5) not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
Adequately Capitalized - having (1) a total risk-based capital ratio of 8 percent or more, (2) a Tier 1 capital ratio of 6 percent or more, (3) a CET1 capital ratio of 4.5 percent or more, and (4) a leverage ratio of 4 percent or more.
Undercapitalized - having (1) a total capital ratio of less than 8 percent, (2) a Tier 1 capital ratio of less than 6 percent, (3) a CET1 capital ratio of less than 4.5 percent, or (4) a leverage ratio of less than 4 percent.
Significantly Undercapitalized - having (1) a total risk-based capital ratio of less than 6 percent (2) a Tier 1 capital ratio of less than 4 percent, (3) a CET1 ratio of less than 3 percent or (4) a leverage capital ratio of less than 3 percent.
Critically Undercapitalized - having a ratio of tangible equity to total assets that is equal to or less than 2 percent.
Generally, the OCC is required to appoint a receiver or conservator for a savings association that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a savings association receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities the savings association will engage in while the capital restoration plan is in effect, and assurances that the capital restoration plan will not appreciably increase the current risk profile of the savings association. Any holding company for a savings association required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the savings association’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the OCC has the authority to require payment and collect payment under the guarantee. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings association, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At September 30, 2017, the Bank met the criteria for being considered “well-capitalized.”
Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as the Bank. Deposit accounts in the Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. Due to the changes put into effect on July 1, 2016, these rates for institutions with assets less than $10.0 billion, such as the Bank, have rates established based upon CAMELS ratings and certain financial ratios, subject to certain adjustments. As of July 1, 2016, minimum and maximum assessment rates (inclusive of possible adjustments) for institutions the size of the Bank currently range from 1.5 to 30 basis points of each institution’s total assets less tangible capital. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s aggregate deposits.
The Dodd-Frank Act increased the minimum target ratio for the Deposit Insurance Fund from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits, and the FDIC must achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are required to fund the increase. The Dodd-Frank Act also eliminated the 1.5% maximum fund ratio, and instead gives the FDIC the discretion to determine the maximum fund ratio. The FDIC has exercised that discretion by establishing a long-term fund ratio of 2%.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order

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or condition imposed by the FDIC. The Bank does not believe that it is taking or is subject to any action, condition or violation that could lead to termination of its deposit insurance.
All FDIC-insured institutions are required to pay a pro rata portion of the interest due on obligations issued by the Financing Corporation (“FICO”) for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended September 30, 2017, the annualized Financing Corporation assessment was equal to 0.36 basis points of total assets less tangible capital. Assessments related to the FICO bond obligations were not subject to the December 30, 2009 prepayment.
For the fiscal year ended September 30, 2017, the Bank paid $72,098 related to the FICO bonds and was assessed $399,994 pertaining to deposit insurance assessments.
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the FHLB of Atlanta, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank.
As of September 30, 2017, outstanding borrowings from the FHLB of Atlanta were $60.0 million and the Bank was in compliance with the stock investment requirement.
Other Regulations
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. In addition, the Bank’s operations are subject to federal laws and regulations applicable to credit transactions, financial privacy, money laundering and electronic fund transfers.
Holding Company Regulation
General. The Company is a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, the Company is registered with the FRB and subject to FRB regulations, examinations, supervision and reporting requirements. In addition, the FRB has enforcement authority over the Company and, in some instances, the Bank. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the Bank.
Permissible Activities. Under present law, the business activities of the Company are not limited so long as the Bank continues to meet the QTL test. However, the Company's activities are otherwise generally limited to those activities permissible for financial holding companies, bank holding companies under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. The Dodd-Frank Act specifies that a savings and loan holding company may only engage in financial holding company activities if it meets the qualitative criteria necessary for a bank holding company to engage in such activities, makes an election to be treated as a financial holding company and conducts the activities in accordance with the requirements that would apply to a financial holding company’s conduct of such activity. As of September 30, 2017, the Company has not elected to be a financial holding company.
Federal law prohibits a savings and loan holding company, including the Company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the FRB. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the FRB must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The FRB is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:
(i)
the approval of interstate supervisory acquisitions by savings and loan holding companies; and

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(ii)
the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital. Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to establish for all depository institution holding companies minimum consolidated capital requirements that are as stringent as those required for the insured depository subsidiaries. See “-Basel III Capital Rules.”
Dividends and Repurchases. The FRB has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the guidance provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The guidance provides for prior regulatory review of capital distributions in certain circumstances, such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The guidance also provides for regulatory consultation prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of the Company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have existing policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.
Change in Control Regulations. Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as the Company unless the FRB has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquiror has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances, including where the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the FRB. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the FRB.
Federal Securities Laws
The Company's common stock is registered with the Securities and Exchange Commission. As a result, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
TAXATION
Federal Taxation
General. First Charter, MHC and Charter Federal were, and the Bank and the Company are, subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal

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taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Charter Federal, the Company or the Bank.
Method of Accounting. For federal income tax purposes, Charter Federal reported its income and expenses on the accrual method of accounting and used a tax year ending September 30 for filing its federal and state income tax returns. Similarly, for federal income tax purposes, the Company reports its income and expenses on the accrual method of accounting and uses a tax year ending September 30 for filing its federal and state income tax returns.
Bad Debt Reserves. Historically, the Bank has been subject to special provisions in the tax law regarding allowable tax bad debt deductions and related reserves. Tax law changes were enacted in 1996, pursuant to the Small Business Protection Act of 1996 (the “1996 Act”), that eliminated the use of the percentage of taxable income method for tax years after 1995 and required recapture into taxable income over a six year period all bad debt reserves accumulated after 1987. The Bank has recaptured its reserves accumulated after 1987.
Currently, the Charter Financial consolidated group uses the specific charge off method to account for bad debt deductions for income tax purposes.
Taxable Distributions and Recapture. Prior to 1996, bad debt reserves created prior to 1988 were subject to recapture into taxable income if the Bank failed to meet certain thrift asset and definitional tests or made certain distributions. Tax law changes in 1996 eliminated thrift-related recapture rules. However, under current law, pre-1988 tax bad debt reserves remain subject to recapture if the Bank makes certain non-dividend distributions, repurchases any of its common stock, pays dividends in excess of earnings and profits, or fails to qualify as a “bank” for tax purposes.
At September 30, 2017, the total federal pre-base year bad debt reserve of the Bank was approximately $2.1 million.
Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the regular income tax. Net operating losses can offset no more than 90% of alternative taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Charter Federal's consolidated group has not been subject to the alternative minimum tax and has no such amounts available as credits for carryover.
Net Operating Loss Carryovers. Generally, a financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years.
Corporate Dividends-Received Deduction. Charter Federal excluded from its federal taxable income 100% of dividends received from the Bank as a wholly-owned subsidiary by filing consolidated tax returns. The corporate dividends-received deduction is 80% when the corporation receiving the dividend owns at least 20% of the stock of the distributing corporation. The dividends-received deduction is 70% when the corporation receiving the dividend owns less than 20% of the distributing corporation.
Audit of Tax Returns. An audit by the Internal Revenue Service of First Charter, MHC, Charter Federal and the Bank's federal income taxes for 2009 to 2011 was completed in fiscal 2013. Tax years 2014, 2015 and 2016 are subject to examination by the Internal Revenue Service. Tax years 2014 through 2016 are subject to examination by state taxing authorities in Georgia, Alabama and Florida.
State Taxation
The Bank currently files Georgia, Florida and Alabama income tax returns. Generally, the income of financial institutions in Georgia, Alabama and Florida, which is calculated based on federal taxable income, subject to certain adjustments, is subject to Georgia, Alabama and Florida tax, respectively.
The Company is required to file a Georgia income tax return and will generally be subject to a state income tax rate that is the same tax rate as the tax rate imposed on financial institutions in Georgia.
As a Maryland business corporation, the Company is required to file an annual report with and pay franchise taxes to the state of Maryland.

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ITEM 1A.
RISK FACTORS
Operational Risks
We face significant cyber and data security risk that could result in the dissemination of confidential and sensitive information, adversely affecting our business or reputation and exposing us to material liabilities.
Our business model enables our customers to utilize the Internet and other remote channels to transact business. As a financial institution, we are under continuous threat of loss due to the swiftness and sophistication of hacking and cyber-attacks. This risk, although considerable at the present, will only increase in the future. Two of the most significant cyber-attack risks that we face are electronic fraud and loss of sensitive customer data. Loss from electronic fraud occurs when cybercriminals breach and extract funds directly from customer accounts or our own accounts. The attempts to breach sensitive customer data, such as account numbers, social security numbers, or other personal information are less frequent but would present significant legal and/or regulatory costs to us if successful, as well as potentially damage our reputation among the markets we serve. Our risk and exposure to these matters will remain relevant because of the evolving nature and complexity of the threats posed by cybercriminals and hackers along with our plans to continue to provide Internet banking and mobile banking avenues for transacting business. While we have not experienced material losses relating to cyber-attacks or other information security breaches to date, we have been the subject of attempted hacking and cyber-attacks, and while we have an active program to attempt to prevent these there can be no assurance that we will not suffer such losses in the future.
The occurrence of any cyber-attack or information security breach could result in material adverse consequences including damage to our reputation and the loss of current or potential customers. We also could face litigation or additional regulatory scrutiny due to such an occurrence. Litigation or regulatory actions in turn could lead to material liability, including, but not limited to, fines and penalties or reimbursement to customers adversely affected by a data breach. Even if we do not suffer any material adverse consequences as a result of events affecting us directly, successful attacks or systems failures at other financial institutions could lead to a general loss of customer confidence in our company.
We continually review our network and systems security and make the necessary investments to improve the resiliency of our systems and their security from attack. Nonetheless, there remains the risk that we may be materially harmed by a cyber-attack or information security breach. Methods used to attack information systems continue to evolve in sophistication, swiftness, and frequency and can occur from a variety of sources, such as foreign governments, hacktivists, or other well-financed entities, and may originate from remote and less regulated areas of the world. If such an attack or breach were to occur, we might not be able to address and find a solution in a timely and adequate manner. We will, however, promptly take reasonable and customary measures to address the situation.
If we are unable to replace the revenue we expect to derive from the interest income and continued realization of accretable discounts on our acquired loans with new loans and other interest earning assets, our financial condition and earnings may be adversely affected.
As a result of the three FDIC-assisted acquisitions between 2009 and 2011, as well as the acquisitions of CBS and Resurgens in 2016 and 2017, and the fair value purchase accounting adjustments associated with each acquisition, a significant portion of our income in recent years has been derived from the interest income and continued realization of accretable discounts on the loans that we purchased in our acquisitions. For the years ended September 30, 2017, 2016, and 2015, we recognized $15.0 million, $14.6 million, and $6.7 million, respectively, of net loans receivable and accretion income including amortization of loss share receivable on acquired loans, with $1.7 million, $4.4 million, and $3.6 million, respectively, due to loan accretion and amortization. There are no remaining accretable discounts on loans purchased in FDIC acquisitions, and $4.1 million of discount accretion related to the acquisitions of CBS and Resurgens over the remaining lives of the acquired loans. During such period, if we are unable to replace our acquired loans and the related accretion with new performing loans at a similar yield and other interest earning assets due to such reasons as a decline in loan demand or competition from other financial institutions in our markets, our financial condition and earnings, including our interest rate spread, may be adversely affected.
Our commercial real estate, real estate construction, and commercial business loans increase our exposure to credit risks.
Over the last several years, we have increased our non-residential lending in order to improve the yield and reduce the average duration of our assets. At September 30, 2017, our portfolio of commercial real estate, real estate construction, and commercial business loans totaled $889.5 million, or 76.6% of total loans, compared to $277.2 million, or 63.3% of total loans at September 30, 2008. At September 30, 2017, the amount of nonperforming commercial real estate, real estate construction, and commercial business loans was $1.4 million, or 80.1% of total nonperforming loans. At September 30, 2017, our largest non-residential real estate borrowing relationship had a loan balance and potential liability of $19.5 million, and consisted of a borrower whose collateral was three hotels in South Carolina. These loans may expose us to a greater risk of non-payment and loss than residential real estate loans because, in the case of commercial loans, repayment often depends on the successful operation and earnings of the borrower's

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businesses and, in the case of consumer loans, the applicable collateral is subject to rapid depreciation. Additionally, commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest due on the loan, which could cause us to increase our provision for loan losses and adversely affect our financial condition and operating results.
If our problem assets increase, our earnings will decrease.
At September 30, 2017, our nonperforming assets (which consist of nonaccrual loans, loans 90 days or more delinquent, and foreclosed real estate assets) consisted of $1.7 million of loans and $1.4 million of OREO. Excluded from the nonperforming loans at September 30, 2017 is an additional $888,000 of acquired loans that are regarded as accruing loans due to the ongoing recognition of accretion income established at the time of acquisition. In addition, our classified assets (consisting of substandard loans and securities, doubtful loans and loss assets) totaled $32.1 million at September 30, 2017. Our problem assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for loan losses at an appropriate level. From time to time, we also write down the value of properties in our OREO portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our OREO. Further, the resolution of problem assets requires the active involvement of management, which could detract from the overall supervision of our operations. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly.
Acquisitions could disrupt our business and adversely affect our operating results.
The Company has been highly acquisitive in recent years, completing the three FDIC-assisted transactions between 2009 and 2011, and the CBS and Resurgens acquisitions in the last two years. We expect to continue to grow by acquiring other financial institutions, related businesses or branches of other financial institutions that we believe provide a strategic fit with our business. To the extent that we grow through acquisitions, we may not be able to adequately or profitably manage this growth. In addition, such acquisitions may involve the issuance of securities, which may have a dilutive effect on earnings per share. Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:
Potential exposure to unknown or contingent liabilities we acquire;
Exposure to potential asset quality problems of the acquired financial institutions, businesses or branches;
Difficulty and expense of integrating the operations and personnel of financial institutions, businesses or branches we acquire;
Higher than expected deposit attrition;
Potential diversion of our management’s time and attention;
The possible loss of key employees and customers of financial institutions, businesses or branches we acquire;
Difficulty in safely investing any cash generated by the acquisition;
Inability to utilize potential tax benefits from such transactions;
Difficulty in estimating the fair value of the financial institutions, businesses or branches to be acquired which affects the profits we generate from the acquisitions; and
Potential changes in banking or tax laws or regulations that may affect the financial institutions or businesses to be acquired.
We will incur transaction and integration costs in connection with mergers and acquisitions.
Transaction and integration costs are a significant part of any merger. During our merger with CBS in fiscal 2016, we recognized $4.2 million of acquisition-related costs, and to date we have recognized $1.9 million of costs in conjunction with the Resurgens merger, with more costs expected prior to integration in February 2018. These costs include, but are not limited to, severance pay, contract buyouts, legal and professional fees, operational expenses, data processing costs and other, miscellaneous expenses. These costs can have a short-term negative impact to our results of operations, cash flows and earnings per share. The success of any merger, including anticipated benefits and cost savings, depends on, among many other things, our ability to combine the businesses in a timely manner that permits growth opportunities, including, among other things, enhanced revenues and revenue synergies, an expanded market reach and operating efficiencies, and that does not materially disrupt the existing customer relationships of either us or the acquired institution, nor result in decreased revenues due to loss of customers. If we are not able to achieve these objectives, the anticipated benefits of any merger may not be realized fully or at all, or may take longer to realize than expected. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management's time and energy and could have an adverse effect on the surviving corporation's business, financial condition, operating results and prospects. In addition, it is possible that the integration process of any merger could result in the disruption of our ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of a merger.

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Reductions in service charge income could negatively impact our earnings.
We derive significant revenue from service charges on deposit accounts, totaling $7.6 million during fiscal 2017, the bulk of which comes from overdraft-related fees. Changes in banking regulations, such as the FRB’s rules on certain overdraft payments on consumer accounts, as well as the FDIC’s Overdraft Payment Programs and Consumer Protection Final Overdraft Payment Supervisory Guidance, could have an adverse impact on our ability to derive income from service charges. Increased competition from other financial institutions or changes in consumer behavior could lead to declines in our deposit balances, which would result in a decline in service charge fees. Such a reduction could have a material impact on our earnings.
Reductions in interchange income could negatively impact our earnings. 
Interchange income is derived from fees paid by merchants to the interchange network in exchange for the use of the network's infrastructure and payment facilitation. These fees are paid to card issuers to compensate them for the costs associated with issuance and operation. We earn interchange fees on card transactions from its debit cards, including $5.5 million during the year ended September 30, 2017. Merchants have attempted to negotiate lower interchange rates, and the Durbin Amendment to the Dodd-Frank Act limits the amount of interchange fees that may be charged for certain debit card transactions. Merchants may also continue to pursue alternative payment platforms, such as Apple Pay, to lower their processing costs. Any such new payment system may reduce our interchange income. Our failure to comply with the operating regulations set forth by payment card networks, which may change, could subject us to penalties, fees or the termination of our license to use the networks. Any of these scenarios could have a material impact on our business, financial condition and results of operations.
If the allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
We derive the most significant portion of our revenues from our lending activities. When we lend money, commit to lend money or enter into a letter of credit or other contract with a counterparty, we incur credit risk, which is the risk of losses if our customers do not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans is insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on our capital, financial condition and operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If our assumptions are incorrect, the allowance for loan losses – which is a reserve established through a provision for loan losses charged to expenses and represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans – may not be sufficient to cover losses inherent in our loan portfolio. Consequently, this would require additions to the allowance for loan losses. Additions to the allowance would decrease our net income and capital. At September 30, 2017, our allowance for loan losses was $11.1 million, or 0.96% of total loans and 649.13% of nonperforming loans, compared to $10.4 million, or 1.03% of loans and 277.66% of nonperforming loans at September 30, 2016. At September 30, 2017, we had $1.7 million of total nonperforming loans.
Our level of commercial real estate, real estate construction and commercial business loans is one of the more significant factors in evaluating the allowance for loan losses. These loans may require increased provisions for loan losses in the future, which would decrease our earnings.
Because the risk rating of the loans is dependent on some subjective information and subject to changes in the borrower’s credit risk profile, evolving local market conditions and other factors, it can be difficult for us to predict the effects of such factors on the classifications assigned to the loan portfolio, and thus difficult to anticipate the velocity or volume of the migration of loans through the classification process and effect on the level of the allowance for loan losses. Future additions to the allowance may be necessary based on changes in the economic environment as well as changes in assumptions regarding a borrower’s ability to pay and/or collateral values. In addition, various regulatory agencies, as an integral part of their examination procedures, periodically review our allowance for loan losses. Based on their judgments about information available to them at the time of their examination, such agencies may require an increase to the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs would decrease our earnings and adversely affect our capital, financial condition and operating results.
As a community bank, our recruitment and retention efforts may not be sufficient enough to implement our business strategy and execute successful operations.
Our financial success depends upon our ability to attract and retain highly motivated, well-qualified personnel. We face significant competition in the recruitment of qualified employees from financial institutions and others. As we continue to grow, we may find our recruitment and retention efforts more challenging. If we do not succeed in attracting, hiring, and integrating experienced or qualified personnel, we may not be able to successfully implement our business strategy, and we may be required to substantially increase our overall compensation or benefits to attract and retain such employees. Furthermore, in June 2010, the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the FDIC jointly issued

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comprehensive final guidance designed to ensure that incentive compensation policies do not undermine the safety and soundness of banking organizations by encouraging employees to take imprudent risks. This regulation significantly restricts the amount, form, and context in which we pay incentive-based compensation and may put us at a competitive disadvantage compared to non-financial institutions in terms of attracting and retaining senior level employees.
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
Our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.
We hold certain intangible assets that in the future could be classified as either partially or fully impaired, which would reduce our earnings and the book values of these assets.
Pursuant to applicable accounting requirements, we are required to periodically test our goodwill and core deposit intangible assets for impairment. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similarly situated insured depository institutions. Future impairment testing may result in a partial or full impairment of the value of our goodwill or core deposit intangible assets, or both. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment.
We rely on third-party vendors for key components of our business.
Many key components of our operations, including data processing, recording and monitoring transactions, online interfaces and services, internet connections and network access are provided by other companies. Our vendor management process selects third-party vendors carefully, but we do not control their actions. Problems, including disruptions in communication, security breaches, or failure of a vendor to provide services, could hurt our operations or our relationships with customers. If our vendors suffer financial or operational issues, our operations and reputation could suffer if it harms the vendors’ ability to serve us and our customers. Third-party vendors are also a source of operational and information security risk to us. Replacing or renegotiating contracts with vendors could entail significant operational expense and delays. The use of third-party vendors represents an unavoidable inherent risk to our company.
Hurricanes or other adverse weather events would negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.
Our market area is located in the southeastern region of the United States and is susceptible to natural disasters, such as hurricanes, tornadoes, tropical storms, other severe weather events and related flooding and wind damage, and man-made disasters. These natural disasters could negatively impact regional economic conditions, cause a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us, damage our banking facilities and offices and negatively impact our growth strategy. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where they operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes or tornadoes will affect our operations or the economies in our current or future market areas, but such weather events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of natural or man-made disasters.
Industry Risks
Changes in interest rates could adversely affect our results of operations and financial condition.
Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, a sustained increase in interest rates generally would tend to reduce our interest income.
Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing

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costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable-rate loans. Also, increases in interest rates may extend the life of fixed-rate assets, which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive on a new investment.
Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At September 30, 2017, the fair value of our portfolio of investment securities, mortgage-backed securities and collateralized mortgage obligations totaled $183.8 million. Net unrealized losses on these securities totaled $1.7 million at September 30, 2017.
Additionally, 63.6% of our one- to four-family loan portfolio is comprised of adjustable-rate loans. Any rise in market interest rates may result in increased payments for borrowers who have adjustable-rate mortgage loans, which would increase the possibility of default.
Strong competition and changing banking environment may limit growth and profitability.
Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms operating locally and elsewhere, and non-traditional financial institutions, including non-depository financial services providers. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Additionally, non-traditional financial institutions may not have the same regulatory requirements or burdens as we do even while playing a rapidly increasing role in the financial services industry including providing services previously limited to commercial banks, which could ultimately limit our growth, profitability and shareholder value. Our profitability depends upon our ability to successfully compete in our market areas and adapt to the ever changing banking environment.
Our business may be adversely affected by downturns in our national and local economies.
Our operations are significantly affected by national and local economic conditions. Substantially all of our loans are to businesses and individuals in Georgia, east-central Alabama and the Florida Panhandle. All of our branches and most of our deposit customers are also located in these areas. A decline in the economies in which we operate could have a material adverse effect on our business, financial condition and results of operations.
A deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:
demand for our loans, deposits and services may decline;
loan delinquencies, problem assets and foreclosures may increase;
weak economic conditions may continue to limit the demand for loans by creditworthy borrowers, limiting our capacity to leverage our retail deposits and maintain our net interest income;
collateral for our loans may decline further in value; and
the amount of our low-cost or non-interest bearing deposits may decrease.
As an issuer of debit cards, we are exposed to losses in the event that holders of our cards experience fraud on their card accounts.
Our customers regularly use CharterBank-issued debit cards to pay for transactions with retailers and other businesses. There is the risk of data security breaches at these retailers and other businesses that could result in the misappropriation of our customers’ debit card information. When our customers use CharterBank-issued cards to make purchases from those businesses, card account information is provided to the business. If the business’s systems that process or store card account information are subject to a data security breach, holders of our cards who have made purchases from that business may experience fraud on their card accounts. The Bank may suffer losses associated with reimbursing our customers for such fraudulent transactions on customers’ card accounts, as well as for other costs related to data security compromise events, such as replacing cards associated with compromised card accounts.
Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.
We are exposed to many types of operation risks, including reputational risk, legal and regulatory and compliance risk, the risk of fraud or theft by employees or persons outside our company, including the execution of unauthorized transactions by

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employees or operational errors, clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and keep customers and can expose us to litigation and regulatory action. Actual or alleged conduct by the Bank can result in negative public opinion about our business. Negative public opinion could also affect our credit ratings, which are important to our access to unsecured wholesale borrowings.
Our business involves storing and processing sensitive consumer and business customer data. If personal, non-public, confidential or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who were not permitted to have that information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties. Furthermore, a cyber security breach could result in theft of such data.
Because we operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions, and our large transaction volume, may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers, computer break-ins, phishing and other disruptions or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may result in violations of consumer privacy laws including the Gramm-Leach-Bliley Act, cause significant liability to us and give reason for existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage and potential liability, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that our (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability of us to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business, financial condition or operations results, perhaps materially.
The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those changes, we will not be able to effectively compete.
The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. Our future success will depend, in part, on our ability to keep pace with the technological changes and to use technology to satisfy and grow customer demand for our products and services and to create additional efficiencies in our operations. We expect that we will need to make substantial investments in our technology and information systems to compete effectively and to stay current with technological changes. Some of our competitors have substantially greater resources to invest in technological improvements and will be able to invest more heavily in developing and adopting new technologies, which may put us at a competitive disadvantage. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result, our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations may be adversely affected.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. Any such losses could have a material adverse effect on our financial condition and results of operations.
A reduction in future corporate tax rates could have a material impact on the value of our deferred tax assets.
As a financial institution, we are generally subject to higher effective tax rates than other industries. The effects of future changes in tax laws or rates are not anticipated in the determination of the fair value of our net deferred tax assets. Changes in tax

23


rates, such as those proposed by President Donald Trump, that, among other things, would lower the corporate tax rate from its current 35%, would decrease the amount of our net deferred tax assets, though uncertainty regarding the timing and magnitude of any reduction make it difficult to predict the overall impact on the Company of such a decrease. If such a reduction were to occur, the Company would likely recognize income tax expense to reduce the deferred tax asset, which would negatively impact our earnings and could adversely impact the price of our stock. Such one-time charges would be offset in part by reductions in income tax going forward.
Regulatory Risks
Regulation of the financial services industry continues to undergo major changes, and future legislation could increase our cost of doing business or harm our competitive position.
The Dodd-Frank Act brought about a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, mortgage lending practices, registration of investment advisors and changes among the bank regulatory agencies.
Among other things, as a result of the Dodd-Frank Act:
the Office of the Comptroller of the Currency became the primary federal regulator for federal savings banks such as the Bank (replacing the Office of Thrift Supervision), and the FRB now supervises and regulates all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision, including the Company;
the Consumer Financial Protection Bureau was established, and has broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like the Bank, will be examined by their applicable bank regulators;
federal preemption rules that have been applicable for national banks and federal savings banks have been weakened, and state attorneys general have the ability to enforce federal consumer protection laws;
the federal prohibition on paying interest on demand deposits has been eliminated, thus allowing businesses to have interest bearing checking accounts. This change may increase our interest expense;
the FRB was required to set minimum capital levels for depository institution holding companies that are as stringent as those required for their insured depository subsidiaries, and the components of Tier 1 capital are required to be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions;
there are prohibitions and restrictions on the ability of a banking entity and nonbank financial company to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund (the “Volcker Rule”);
the assessment base for deposit insurance premiums was expanded; and
there are new restrictions on compensation, including a prohibition on incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material losses.
Some of these and other major changes could materially impact the profitability of our business, the value of assets we hold or the collateral available for our loans, require changes to business practices or force us to discontinue businesses and expose us to additional costs, taxes, liabilities, enforcement actions and reputational risk. Many of these provisions became effective upon enactment of the Dodd-Frank Act, while others were subject to further study, rulemaking, and the discretion of regulatory bodies and have only recently taken effect or will take effect in coming years. In light of these significant changes and the discretion afforded to federal regulators, we cannot fully predict the effect that compliance with the Dodd-Frank Act or any implementing regulations will have on the Company’s or the Bank’s businesses or our ability to pursue future business opportunities, our financial condition or results of operations.
Certain other reform proposals have resulted in the Company and the Bank becoming subject to stricter capital requirements and leverage limits, and affect the scope, coverage, or calculation of capital, all of which could require us to reduce business levels or to raise capital, including in ways that may adversely impact our shareholders or creditors. See “Part I - Item 1. Business - Supervision, Regulation and Other Factors” of this Report for further information. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.

24


We are subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.
In July 2013, the OCC and the Federal Reserve Board approved a new rule that substantially amended the regulatory risk-based capital rules applicable to the Bank and the Company. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The final rule included new minimum risk-based capital and leverage ratios, which became effective for the Bank and the Company on January 1, 2015, and refined the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also established a “capital conservation buffer” of 2.5%, and resulted in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations established a maximum percentage of eligible retained income that can be utilized for such actions.
The application of more stringent capital requirements for the Bank and the Company could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions such as the inability to pay dividends or repurchase shares if we were to be unable to comply with such requirements.
New regulations could restrict our ability to originate and sell mortgage loans.
The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid monetary damages under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:
excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);
interest-only payments;
negative-amortization; and
terms longer than 30 years.
Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive/and or time consuming to make these loans, which could limit our growth or profitability.
Government responses to economic conditions may adversely affect our operations, financial condition and earnings.
The Dodd-Frank Act has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of the Dodd-Frank Act and regulatory actions, may adversely affect our operations by increasing ongoing compliance costs and restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.
If the FRB increases the federal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

25


Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.
Bank regulatory agencies, such as the Office of the Comptroller of the Currency and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors. In addition, new laws and regulations are likely to increase our costs of regulatory compliance and costs of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge, and our ongoing operations, costs and profitability. For example, regulatory changes to our overdraft protection programs could decrease the amount of fees we receive for these services. For the years ended September 30, 2017 and 2016, overdraft protection fees totaled $5.9 million and $5.5 million, respectively. We cannot fully predict the effect that changes in law or regulation will have on the Company’s or the Bank’s businesses or our ability to pursue future business opportunities, our financial condition or results of operations.
Investment/Securities Risks
Our management team’s strategies for the enhancement of shareholder value may not succeed.
Our management team is taking actions to enhance shareholder value, including reviewing personnel, developing new products, engaging in stock repurchases, issuing dividends and exploring acquisition opportunities. In addition, we intend to focus on opportunities for cross selling products to existing customers in an effort to deepen our “share of wallet.” These actions may not enhance shareholder value. For example, holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have, since 2013, paid a quarterly cash dividend to the holders of our common stock, we are not legally required to do so. Further, the Federal Reserve could decide at any time that paying any dividends on our common stock could be an unsafe or unsound banking practice. The reduction or elimination of dividends paid on our common stock could adversely affect the market price of our common stock.
Our stock price may be volatile due to limited trading volume.
Our common stock is traded on the NASDAQ Global Select Market. However, the average daily trading volume in the Company’s common stock has been relatively small, averaging less than 43,000 shares per day during 2017. As a result, trades involving a relatively small number of shares may have a significant effect on the market price of the common stock, and it may be difficult for investors to acquire or dispose of large blocks of stock without significantly affecting the market price.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We currently conduct business through our administrative office in West Point, Georgia, our branch offices in Metro Atlanta, the I-85 corridor south to Auburn, Alabama, and the Florida Panhandle. Our Georgia branch offices are located in Buckhead, Carrollton, Decatur, LaGrange (three offices), Marietta (three offices), Newnan (two offices), Norcross, Smyrna, Tucker and West Point, and our Alabama branches are located in Auburn (two offices), Opelika and Valley. Our Florida Branch offices are in Milton, Pace and Pensacola. The net book value of the land, buildings, furniture, fixtures and equipment owned by us was $29.6 million at September 30, 2017.
ITEM 3.
LEGAL PROCEEDINGS
As of the date of filing of this Annual Report on Form 10-K, we were not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, involve amounts that we believe are immaterial to our consolidated financial condition, results of operations and cash flows.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.


26


PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market and Dividend Information
Our common stock currently trades on the Nasdaq Capital Market (“NASDAQ”) under the trading symbol “CHFN.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock. The table below also presents the cash dividends paid per share for the periods indicated.
 
 
Price Per Share
 
Cash Dividend Declared
 
 
High
 
Low
 
Fiscal 2017
 
 
 
 
 
 
Fourth quarter
 
$
19.47

 
$
15.81

 
$
0.070

Third quarter
 
21.11

 
17.16

 
0.065

Second quarter
 
20.10

 
16.27

 
0.060

First quarter
 
16.75

 
12.51

 
0.055

Fiscal 2016
 
 
 
 
 
 
Fourth quarter
 
$
13.98

 
$
12.54

 
$
0.050

Third quarter
 
13.80

 
12.36

 
0.050

Second quarter
 
14.02

 
12.34

 
0.050

First quarter
 
14.76

 
12.28

 
0.050

Holders
As of December 7, 2017, there were approximately 633 holders of record of our common stock.
Dividends
The Company started paying a quarterly cash dividend in September 2002. Following the dividend paid in May 2012, the quarterly cash dividend was briefly discontinued until it was reinstated in May 2013. The dividend rate and the continued payment of dividends will primarily depend on our earnings, alternative uses for capital, such as capital requirements, acquisition opportunities, our financial condition and results of operations, statutory and regulatory limitations affecting dividends and the policies of the Board of Governors of the Federal Reserve System (“FRB”) and, to a lesser extent, tax considerations and general economic conditions. In the first quarter of fiscal 2017, the Company increased the dividend payment from $0.05 per share to $0.055 per share, and has increased the dividend by half a cent per share each quarter since.
Under the rules of the Office of Comptroller of the Currency and the FRB, the Bank is not permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. For information concerning additional federal laws and regulations regarding the ability of the Bank to make capital distributions, including the payment of dividends to the Company, see Part I, Item 1 Business “Taxation—Federal Taxation” and “Supervision and Regulation—Federal Banking Regulation.”
Unlike the Bank, the Company is not restricted by Office of the Comptroller of the Currency regulations on the payment of dividends to its shareholders. However, the FRB has issued a policy statement regarding the payment of dividends by bank holding companies that it has also made applicable to savings and loan holding companies. In general, the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. FRB guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions. In addition, the source of dividends that may be paid by the Company depends on dividends from the Bank.
We may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

27


Stock Performance Graph
The information relating to the performance graph required by Item 201(e) of Regulation S-K is incorporated herein by reference to the section captioned “Performance Graph” in the Company’s Proxy Statement for the Annual Meeting of Stockholders (the “Proxy Statement”).
Securities Authorized for Issuance under Equity Compensation Plans
See Part III, Item 12(d) Equity Compensation Plan Information, in this Annual Report on Form 10-K, for the table providing information as of September 30, 2017 about Company common stock that may be issued upon the exercise of options under the Charter Financial Corporation 2001 Stock Option Plan and the Charter Financial Corporation 2013 Equity Incentive Plan.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the quarter ended September 30, 2017, the Company repurchased no 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. During fiscal 2014, 2015, 2016 and 2017, 8.1 million shares were repurchased at a total cost of approximately $91.9 million.

ITEM 6.
SELECTED FINANCIAL DATA
The summary financial information presented below is derived in part from our consolidated financial statements. The following is only a summary and should be read in conjunction with the consolidated financial statements and notes contained in Item 8 of this Annual Report on Form 10-K. The information at September 30, 2017 and 2016 and for the years ended September 30, 2017, 2016 and 2015 is derived in part from the audited consolidated financial statements that appear in this annual report. The information at September 30, 2015, 2014 and 2013, and for years ended September 30, 2014 and 2013, is derived in part from the audited consolidated financial statements that do not appear in this annual report. The information presented below does not include the financial condition, results of operations or other data of First Charter, MHC prior to its elimination following the April 8, 2013 conversion. The information presented prior to April 8, 2013, is that of Charter Federal, the Company's predecessor company.
 
At September 30,
2017
 
2016
 
2015
 
2014
 
2013
 
(in thousands)
Selected financial condition data:
 
 
 
 
 
 
 
 
 
Total assets
$
1,640,159

 
$
1,438,389

 
$
1,027,079

 
$
1,010,361

 
$
1,089,406

Cash and cash equivalents
152,338

 
91,849

 
30,343

 
99,463

 
161,452

Loans receivable, net (1)
1,149,276

 
994,052

 
714,761

 
606,367

 
579,854

Other real estate owned
1,437

 
2,706

 
3,411

 
7,316

 
15,684

Securities available for sale (2)
183,790

 
206,336

 
184,404

 
188,743

 
215,118

Transaction accounts
567,213

 
478,028

 
327,373

 
314,201

 
296,453

Total deposits
1,339,143

 
1,161,844

 
738,855

 
717,192

 
751,297

Borrowings
66,748

 
56,588

 
62,000

 
55,000

 
60,000

Total stockholders’ equity
214,199

 
203,150

 
204,931

 
224,955

 
273,778

Tangible total equity
171,236

 
170,716

 
200,058

 
220,206

 
268,649

________________________________
(1)
Included in the loan balances at September 30, 2014 and 2013, are loans that were covered under loss share agreements with the FDIC prior to the termination of these agreements in the amount of $69.6 million and $109.0 million, respectively. Loans are presented net of deferred loan fees, allowance for loan losses, nonaccretable differences and accretable discounts and exclude loans held for sale.
(2)
Includes all CharterBank investment and mortgage securities available for sale.

28


 
At September 30,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in thousands, except per share amounts)
Selected operating data:
 
 
 
 
 
 
 
 
 
Interest income
$
55,861

 
$
47,784

 
$
37,893

 
$
35,648

 
$
42,636

Interest expense
6,719

 
5,630

 
5,013

 
5,730

 
7,361

Net interest income
49,142

 
42,154

 
32,880

 
29,918

 
35,275

Provision for loan losses
(900
)
 
(250
)
 

 
(713
)
 
1,489

Net interest income after provision for loan losses
50,042

 
42,404

 
32,880

 
30,631

 
33,786

Noninterest income
19,239

 
20,964

 
12,329

 
14,277

 
11,653

Noninterest expense
46,523

 
45,398

 
36,832

 
36,211

 
36,314

Income before provision for income taxes
22,758

 
17,970

 
8,377

 
8,697

 
9,125

Income tax expense
8,322

 
6,107

 
2,805

 
2,742

 
2,869

Net income
$
14,436

 
$
11,863

 
$
5,572

 
$
5,955

 
$
6,256

Per share data: (1)
 
 
 
 
 
 
 
 
 
Earnings per share – basic
$
1.01

 
$
0.83

 
$
0.35

 
$
0.29

 
$
0.30

Earnings per share – fully diluted
$
0.95

 
$
0.79

 
$
0.34

 
$
0.28

 
$
0.30

Cash dividends per share
$
0.25

 
$
0.20

 
$
0.20

 
$
0.20

 
$
0.35

________________________________
(1)
Share and share amounts held by the public prior to April 8, 2013 have been restated to reflect the completion of the second-step conversion on April 8, 2013 using a conversion ratio of 1.2471.

29


 
At or For the Years Ended September 30,
 
2017
 
2016
 
2015
 
2014
 
2013
Selected financial ratios and other data:
 
 
 
 
 
 
 
 
 
Performance ratios:
 
 
 
 
 
 
 
 
 
Return on average assets (ratio of net income to average total assets)
0.98
 %
 
0.98
 %
 
0.56
%
 
0.56
%
 
0.58
%
Return on average equity (ratio of net income to average equity)
6.89
 %
 
5.90
 %
 
2.62
%
 
2.28
%
 
2.98
%
Return on average tangible equity (ratio of net income to average tangible equity) (1)
8.18
 %
 
6.46
 %
 
2.68
%
 
2.32
%
 
3.06
%
Net interest rate spread (2)
3.54
 %
 
3.74
 %
 
3.49
%
 
3.02
%
 
3.66
%
Net interest margin (3)
3.67
 %
 
3.89
 %
 
3.67
%
 
3.22
%
 
3.82
%
Net interest margin, excluding the effects of purchase accounting (4)
3.53
 %
 
3.47
 %
 
3.26
%
 
2.87
%
 
2.82
%
Efficiency ratio (5)
68.04
 %
 
71.93
 %
 
81.47
%
 
81.93
%
 
77.38
%
Non-interest expense to average total assets
3.15
 %
 
3.76
 %
 
3.68
%
 
3.41
%
 
3.38
%
Average interest-earning assets as a ratio of average interest-bearing liabilities
1.25
x
 
1.28
x
 
1.32
x
 
1.31
x
 
1.19x

Average equity to average total assets
14.17
 %
 
16.67
 %
 
21.24
%
 
24.62
%
 
19.51
%
Dividend payout ratio (6)
24.79
 %
 
24.24
 %
 
56.25
%
 
70.06
%
 
122.82
%
Asset quality ratios: (7)
 
 
 
 
 
 
 
 
 
Nonperforming assets to total assets
0.19
 %
 
0.45
 %
 
0.73
%
 
1.14
%
 
1.71
%
Nonperforming loans to total loans
0.15
 %
 
0.37
 %
 
0.57
%
 
0.69
%
 
0.49
%
Allowance for loan losses as a ratio of nonperforming loans
6.49
x
 
2.78
x
 
2.30
x
 
2.23
x
 
4.15
x
Allowance for loan losses to total loans
0.96
 %
 
1.03
 %
 
1.30
%
 
1.53
%
 
2.04
%
Net (recoveries) charge-offs as a percentage of average loans outstanding
(0.16
)%
 
(0.13
)%
 
%
 
0.06
%
 
1.48
%
Bank regulatory capital ratios:
 
 
 
 
 
 
 
 
 
Total risk-based capital (to risk-weighted assets)
14.45
 %
 
15.26
 %
 
21.71
%
 
27.90
%
 
33.83
%
Tier 1 risk-based capital (to risk-weighted assets)
13.53
 %
 
14.34
 %
 
20.55
%
 
26.65
%
 
32.57
%
Common equity tier 1 risk-based capital (to risk-weighted assets) (8)
13.53
 %
 
14.34
 %
 
20.55
%
 
N/A

 
N/A

Tier 1 leverage (to average assets)
10.96
 %
 
11.51
 %
 
16.04
%
 
17.67
%
 
18.56
%
Holding company regulatory capital ratios: (9)
 
 
 
 
 
 
 
 
 
Total risk-based capital (to risk-weighted assets)
15.79
 %
 
16.74
 %
 
25.48
%
 
N/A

 
N/A

Tier 1 risk-based capital (to risk-weighted assets)
14.87
 %
 
15.82
 %
 
24.32
%
 
N/A

 
N/A

Common equity tier 1 risk-based capital (to risk-weighted assets) (8)
14.32
 %
 
15.23
 %
 
24.32
%
 
N/A

 
N/A

Tier 1 leverage (to average assets)
12.05
 %
 
12.68
 %
 
19.11
%
 
N/A

 
N/A

Consolidated capital ratios:
 
 
 
 
 
 
 
 
 
Total equity to total assets
13.06
 %
 
14.12
 %
 
19.95
%
 
22.26
%
 
25.13
%
Tangible common equity ratio (10)
10.72
 %
 
12.14
 %
 
19.56
%
 
21.90
%
 
24.78
%
Other data:
 
 
 
 
 
 
 
 
 
Number of full service offices
22

 
20

 
15

 
15

 
16

Full time equivalent employees
356

 
323

 
273

 
282

 
287

________________________________
(1)
Non-GAAP financial measure, derived as net income divided by average total equity less average intangible assets. See Non-GAAP Financial Measures for further information.
(2)
The interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities for the year.
(3)
The net interest margin represents net interest income as a percent of average interest-earning assets for the year.
(4)
Net interest income excluding accretion and amortization of loss share loans receivable divided by average net interest earning assets, excluding average loan accretable discounts in the amount of $2.4 million, $3.4 million, $4.6 million, $4.9 million and $9.2 million for the years ended September 30, 2017, 2016, 2015, 2014 and 2013, respectively, a non-GAAP measure. See Non-GAAP Financial Measures.

30


(5)
The efficiency ratio represents non-interest expense divided by the sum of net interest income before provision for loan losses and non-interest income.
(6)
The dividend payout ratio represents total dividends declared and not waived by First Charter, MHC as applicable prior to the completion of the conversion, divided by total net income.
(7)
Due to the early termination of the FDIC loss share agreements in the fourth quarter of fiscal 2015, ratios for the year ended September 30, 2015, include all previously covered assets with the exception of FAS ASC 310-30 loans that are excluded from nonperforming loans due to the ongoing recognition of accretion income established at the time of acquisition.
(8)
Common equity tier 1 risk-based capital ratio requirements were established under Basel III guidelines. Therefore, this ratio is not applicable to periods prior to January 1, 2015.
(9)
Pursuant to Section 171 (the Collins Amendment) and Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (final rule), the Federal Reserve System was required to impose minimum regulatory capital requirements on both bank holding companies and savings and loan holding companies that are no less stringent than those applicable to insured depository institution subsidiaries. The phase-in of the above capital requirements varied based on the size and complexity of the institution. For the Company, January 1, 2015 was the effective date for compliance with the revised minimum regulatory capital ratios. As such, capital ratios are presented for the Company for periods ending after the effective date.
(10)
Non-GAAP financial measure, derived as total capital less intangible assets divided by total assets less intangible assets. See Non-GAAP Financial Measures.

31


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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, taxable and nontaxable investment securities, 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 Federal Home Loan Bank advances.
Our business is 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 housing. In addition, we are subject to extensive regulations applicable to financial institutions, lending and other operations, privacy, and consumer disclosure.
On April 8, 2013, we completed our conversion from the mutual holding company to the stock holding company form of organization. As a result of the stock offering, we received gross proceeds of $142.9 million. Since the conversion, our stock price has experienced an 81% increase as we have utilized our excess capital to enhance shareholder value by a variety of means including the continued repurchase of shares at a price approximating tangible book value, acquisitions, the ongoing payment of a quarterly cash dividend and growing our loan portfolio. During fiscal 2017 we had a total stockholder return of 45.81%. We continue to explore other strategic initiatives, including acquisitions, that are accretive to earnings.
As a result of our loan underwriting policies, management believes that we did not suffer the same level of loan losses during the previous economic downturn as many financial institutions in our market area. Consequently, we were able to take advantage of attractive low-risk opportunities to enhance our banking franchise through the purchase of three distressed banking franchises from the FDIC between 2009 and 2011, as well as healthy-bank acquisitions in 2016 and 2017. As a result of the acquisitions, we extended our retail branch footprint as part of our efforts to increase retail deposits and reduce reliance on brokered deposits and borrowings as a significant source of funds. In total, $553.4 million of loans were acquired and $721.3 million of deposits were assumed via the FDIC-assisted acquisitions. As part of the acquisition of CBS in 2016, we acquired $300.8 million of loans and assumed $333.7 million of deposits. As part of the acquisition of Resurgens in 2017, we acquired $128.8 million of loans and assumed $138.0 million of deposits. Purchase discount accretion associated with the purchased loans and amortization of the indemnification asset, resulted in net increases to total interest income in the amounts of $1.7 million, $4.4 million and $3.6 million, for the years ended September 30, 2017, 2016 and 2015, respectively. Under purchase accounting rules, the Company currently expects to realize remaining loan discount accretion of $4.1 million.
During the fourth quarter of fiscal 2015, an agreement was reached with the FDIC to terminate all loss share agreements, bringing to an end a mutually beneficial venture between the Bank and the FDIC. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — FDIC Loss-Share Resolution," for more information regarding the Bank’s FDIC-assisted acquisitions and subsequent loss share resolution.
chart-1ad0c08be48a05a1a0c.jpg

32



For the year ended September 30, 2017, our earnings per basic and diluted share increased $0.18 and $0.16, or 21.69% and 20.25% respectively, compared to the prior fiscal year, due to an increase in net income of $2.6 million to $14.4 million, compared with $11.9 million for the year ended September 30, 2016, and to a lesser degree the effects of the Company's share repurchase programs and the associated reduced weighted average share count. The increase in net income was attributable to increased loan interest income as a result of the acquisition of CBS in April 2016 and legacy loan growth, partly aided by the acquisition of Resurgens in September 2017, as well as continued increases in deposit and bankcard fee income of $1.2 million. Net interest income increased $7.0 million due to increased loan balances from the acquisitions of CBS and Resurgens and increased interest on the Company's interest-bearing deposits in other financial institutions. These increases were partially offset by a $1.3 million increase in deposits expense due to higher deposit balances from the CBS and Resurgens acquisitions as well as legacy deposit growth. A negative provision for loan losses of $900,000 was recorded during the year ended September 30, 2017, due to the continued improvement in the credit quality of the loan portfolio and net recoveries in 11 of the past 12 quarters. We experienced net loan recoveries of $1.6 million for the year ended September 30, 2017, compared to net loan recoveries of $1.1 million in fiscal 2016. Noninterest income decreased $1.7 million to $19.2 million for the year ended September 30, 2017 due primarily to a reduction of $3.2 million in recoveries on loans formerly covered under loss sharing agreements with the FDIC, offset in part by increases in deposit and bankcard fee income and gain on the sale of loans. Noninterest expense increased to $46.5 million for the year ended September 30, 2017 due to increased ongoing operational costs as a result of the acquisition of CBS as well as $1.9 million of acquisition expenses related to the purchase of Resurgens, which were largely concentrated in data processing, legal and professional fees and severance costs.
For the year ended September 30, 2016, our earnings per basic and diluted share increased $0.48 and $0.45 respectively, compared to the prior fiscal year, due to an increase in net income of $6.3 million to $11.9 million, compared with $5.6 million for the year ended September 30, 2015, as well as the effects of the Company's stock repurchase program and associated reduced share count. The increase in net income was attributable to the acquisition of CBS and resultant higher interest income, partially offset by a net $600,000 pre-tax charge to income from nonrecurring CBS acquisition costs and recoveries on loans formerly covered by FDIC loss sharing agreements. Net income was also positively impacted by a prior-year net $2.4 million impairment charge to the FDIC receivable related to our termination of loss sharing agreements in the fourth quarter of fiscal 2015 and an increase of $1.5 million in deposit and bankcard fee income compared to 2015. Net interest income increased $9.3 million due to increased loan balances from the acquisition of CBS, as well as $2.4 million of amortization of the FDIC loss share receivable in the prior year. No such amortization was recorded in 2016. These increases were partially offset by a $725,000 increase in deposits expense due to higher deposit balances from the CBS acquisition as well as legacy deposit growth. A negative provision for loan losses of $250,000 was recorded during the year ended September 30, 2016, due to the continued improvement in the credit quality of the loan portfolio. We experienced net loan recoveries of $1.1 million for the year ended September 30, 2016, compared to net loan recoveries of $18,000 in fiscal 2015. Noninterest income increased $8.6 million to $21.0 million for the year ended September 30, 2016 due primarily to the recoveries on loans formerly covered by the FDIC, as well as the write-off of the remaining FDIC asset and settlement charges paid to the FDIC in the fourth quarter of fiscal 2015. Noninterest expense increased to $45.4 million for the year ended September 30, 2016 due to CBS merger expenses, which were largely concentrated in severance costs, data processing expenses and legal and professional fees. There were smaller increases in legacy operations in compensation and professional fees.
Business Strategy
Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing exceptional personal service to our individual and business customers. We believe that we have a competitive advantage in the markets we serve because of our knowledge of the local marketplace and our long-standing history of providing superior, relationship-based customer service. With over 60 years of history in the local community, combined with management’s extensive experience and adherence to conservative underwriting standards through numerous business cycles, we have been able to maintain a strong capital position with favorable credit quality metrics despite the most recent economic downturn.
On April 8, 2013, we completed our conversion from the mutual holding company form of organization to the fully public stock holding company form of organization and raised $142.9 million in gross offering proceeds from the related stock offering. We intend to continue to leverage our excess capital in order to provide value to our shareholders. The Company has increased its quarterly cash dividend payment for five consecutive quarters and also paid a special dividend of $0.25 per share to shareholders in fiscal 2013. Additionally, since December 2013, we have completed four stock buyback programs and initiated a fifth whereby a total of 8.1 million shares, or approximately 36%, of our common stock has been repurchased at an average price of $11.34 per share, which approximates tangible book value. Through acquisitions, organic growth, buybacks and dividends we have added leverage to bring our tangible capital to tangible assets down from over 24.78% to about 10.72%. This capital leverage enabled us to bring our return on tangible equity up from about 3.06% to over 8.18%.

33


The Atlanta market, especially the North Atlanta platinum triangle, is one of the highest growth markets in Georgia and Alabama. As of September 30, 2017, approximately 56.0% of our loans are on properties in the Atlanta MSA and 52.8% of our deposits are in the Atlanta MSA. This market provides significant opportunities for growth through acquisition and/or hiring experienced bankers with the capacity to move banking relationships. We continue to evaluate acquisition opportunities that would be accretive to earnings.
Based on the persistent challenges presented by the economic and regulatory climate along with increased compliance costs and an accelerated need for economies of scale, we expect there to continue to be a significant amount of unassisted consolidation in our banking markets which we intend to explore as opportunities arise. We believe that our strong financial condition and capital position are desirable traits and position us to take advantage of future opportunities.
Key aspects of our business strategy include the following:
Leverage capital through disciplined acquisitions. The economy and banking industry in Georgia, Alabama and Florida continue to face significant challenges as many banks have experienced capital and liquidity losses as a result of significant charge-offs associated with troubled loan credits. Additionally, the increased regulatory burden has created board and management fatigue in many smaller banks. These challenges have created strategic growth opportunities for us. Our discipline and selectivity in identifying target franchises, along with our successful history of managing transactions, and the additional capital raised through our second-step conversion provide us an advantage in pursuing and consummating future acquisitions. We will continue to leverage our capital base and acquisition experience to selectively pursue conservatively structured unassisted transactions of select franchises that present attractive risk-adjusted returns.
Expand our retail banking franchise. Our focus is on growing our retail banking presence throughout the markets in Metro Atlanta, the I-85 corridor south to Auburn, Alabama, and the Florida Gulf Coast. Since September 30, 2010 we have reduced FHLB borrowings by $152.0 million and certificates of deposit by $83.7 million in our efforts to fund our balance sheet with core deposits (comprised of transaction, savings and money market accounts, as well as retail certificates of deposit under $250,000). Over this same time period we have increased core deposits from $649.7 million to $1.2 billion while lowering our cost of funds from 2.55% for the year ended September 30, 2010 to 0.63% for the year ended September 30, 2017. These deposits provide a low cost source of funds for our lending operations, as well as a source of fee income.
We intend to build a diversified balance sheet to position us as a full-service community bank that offers both retail and commercial loan and deposit products to markets primarily within the Atlanta, Columbus/Auburn/Opelika, and Pensacola/Ferry Pass/Brent combined statistical areas. Moreover, we expect that the high level of customer service and expanded product offerings we provide, as well as our capital strength and financial position in an otherwise distressed banking market, will also facilitate organic growth and an opportunity to increase market share.
Expand franchise in good markets. Since 2008 we have entered the Atlanta metro market with 11 branches. We also added three branches in the Pensacola MSA. Our legacy branches are on the I-85 corridor from Lagrange, Georgia to Auburn, Alabama. Atlanta is the fourth-fastest growing city in the United States.
Provide quality customer service and convenience. In order to proactively address the needs of our clients, we continue to make and build out investments in infrastructure and technology to improve transactional efficiencies and minimize the amount of time required for customers to complete regular banking activities, such as making a deposit at a branch drive-thru. In addition, the customer experience is enhanced for in-branch transactions as unique amenities such as child-friendly play areas, coffee cafes and change counters combine banking activities with everyday realities. To further emphasize convenience for our customers, we offer extended hours at the majority of our offices and alternative banking delivery systems, such as internet and mobile banking, that allow customers to pay bills, transfer funds and monitor account balances at any time. Additionally, we strive to create tailored products and services that are designed to meet the changing needs of our customers, such as our Rewards checking program discussed under the heading Item 1, Business “—Sources of Funds.”
Maintain strong asset quality. We emphasize a disciplined credit culture based on intimate market knowledge, close ties to our customers, sound underwriting standards and experienced loan officers. While the challenging operating environment which began several years ago contributed to an increase in problem assets, management’s primary objective has been to expeditiously reduce the level of nonperforming and classified assets through diligent monitoring and aggressive resolution efforts. The results of this effort are evidenced by our asset quality at September 30, 2017, with $3.1 million of nonperforming assets which represented 0.19% of total assets. This is compared to $6.4 million of nonperforming assets, or 0.45% of total assets, at September 30, 2016. Our ratio of allowance for loan losses to nonperforming loans was 649.13% at September 30, 2017.

34


Focus on relationship-driven banking. We are focused on meeting the financial needs of our customer base through offering a full complement of loan, deposit and online banking solutions (i.e. internet banking and mobile banking). Over the years we have introduced new products and services in order to more fully serve and deepen the relationship with customers which has enabled us to grow our core deposit base, which generally represents a customer’s primary banking relationship. Our quality customer relationships and core competencies provide opportunities for cross selling products to existing customers in an effort to deepen our “share of wallet” and we intend to actively develop such opportunities.
Scalable operating platform. Our previous acquisitions of CBS and Resurgens, as well as our FDIC-assisted acquisitions highlight our ability to capitalize on opportunities that offer attractive risk-adjusted returns and provide a template for future acquisitions. We will continue to improve our operating leverage and focus our attention on other initiatives to increase franchise value.

FDIC Loss-Share Resolution
During the fourth quarter of fiscal 2015, each of the remaining loss share agreements with the FDIC was terminated. Due to the early termination of these agreements, the Bank realized a one-time pre-tax charge of approximately $2.5 million, resulting primarily from the write-off of the remaining FDIC indemnification asset along with settlement charges paid to the FDIC. The after tax one-time charge, along with related amortization, had an $0.08 negative impact on earnings per share for the year ended September 30, 2015. For further information regarding the termination transaction, see Note 7: FDIC Receivable for Loss Share Agreements in the Notes to our Consolidated Financial Statements.
Subsequent to the termination of the agreements, all associated assets have been fully incorporated into the Bank's loan and OREO portfolios with the Bank now benefiting from 100% of all future recoveries and, conversely, bearing 100% of the risk associated with any future losses and expenses attributable to these assets. As a result of the expiration of the loss sharing portion of two non-single family loss sharing agreements in June 2014 and March 2015, along with the progress made on the resolution of loss share assets, only $48.7 million of the $553.4 million of acquired loans and $2.9 million of the $97.9 million of acquired OREO remained covered under loss share immediately prior to the termination.

Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. They require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The following are the accounting policies that we believe are critical. For a discussion of recent accounting pronouncements, see Note 1: Summary of Significant Accounting Policies in the Notes to our Financial Statements.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. 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. The allowance 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.
We segment our 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 our loan and collection policy. A department independent from our loan origination staff 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. We have developed specific quantitative allowance factors to apply to each loan grade which considers loan charge-off experience over the most recent seven years by loan type. In addition, we apply loss estimates 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 in collateral-dependent loans, and other economic uncertainties. An unallocated component of the allowance is also for losses that specifically exist in the remainder of the portfolio, but have yet to be identified.

35


While management uses available information to recognize losses on loans, future additions or reductions to the allowance may be necessary based on changes in economic conditions or changes in accounting guidance on reserves. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Through the FDIC-assisted acquisitions of the loans of NCB, MCB, and FNB, we established nonaccretable discounts for the acquired impaired loans and we also established nonaccretable discounts for all other loans of MCB. These nonaccretable discounts were based on estimates of future cash flows. Subsequent to the acquisition dates, we assess the experience of actual cash flows on a quarterly basis compared to our estimates. When we determine that nonaccretable discounts are insufficient to cover expected losses in the applicable acquired loan portfolios, an allowance for loan losses was recorded with a corresponding provision as a charge to earnings. Prior to the early termination of the loss share agreements, we would also record an increase in the applicable FDIC receivable based on additional future cash that were expected to be received from the FDIC due to loss sharing indemnification.
Following the acquisitions of CBS and Resurgens in April 2016 and September 2017, respectively, we established accretable discounts on performing loans acquired. Management periodically reviews the adequacy of existing discounts, which totaled $4.1 million at September 30, 2017, to ensure no additional reserves are needed for acquired loans. At September 30, 2017, it was determined that such existing discounts were adequate to cover any potential losses in the portfolio.
Business Combinations. Accounting principles generally accepted in the United States requires that the acquisition method of accounting be used for all business combinations and that an acquirer be identified for each business combination. Under U.S. GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. U.S. GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date.
Other-Than-Temporary Impairment of Investment Securities. A decline in the market value of any available for sale security below cost that is deemed other-than-temporary results in a charge to earnings and the establishment of a new cost basis for that security. In connection with the assessment for other-than-temporary impairment of taxable and nontaxable investment securities, management obtains fair value estimates by independent quotations, assesses current credit ratings and related trends, reviews relevant delinquency and default information, assesses expected cash flows and coverage ratios, reviews average credit score data of underlying mortgages, and assesses other current data. The severity and duration of an impairment and the likelihood of potential recovery of an impairment is considered along with the intent and ability to hold any impaired security to maturity or recovery of carrying value.
Other Real Estate Owned. Real estate acquired through foreclosure, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is recognized and charged to the allowance for loan losses. Subsequent write downs are charged to a separate allowance for losses pertaining to OREO, established through provisions for estimated losses on OREO which are charged to expense. Based upon management’s evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary in an amount sufficient to reflect any declines in estimated fair value. Gains and losses recognized on the disposition of the properties are recorded in noninterest expense in the consolidated statements of income.
Goodwill and Other Intangible Assets. Intangible assets include costs in excess of net assets acquired and deposit premiums recorded in connection with the acquisitions. In accordance with accounting requirements, we test our goodwill for impairment annually or more frequently as circumstances and events may warrant. No impairment charges have been recognized through September 30, 2017.
Deferred Income Taxes. Management estimates income tax expense using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the amount of assets and liabilities reported in the consolidated financial statements and their respective tax bases. In estimating the liabilities and corresponding expense related to income taxes, management assesses the relative merits and risks of various tax positions considering statutory, judicial and regulatory guidance. Because of the complexity of tax laws and regulations, interpretation is difficult and subject to differing judgments. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management’s determination of the realization of the net deferred tax asset is based upon management’s judgment

36


of various future events and uncertainties, including the timing and amount of future income, reversing temporary differences which may offset, and the implementation of various tax plans to maximize realization of the deferred tax asset. Management has determined that no valuation allowances were necessary relating to the realization of its deferred tax assets.
Changes in the estimate of income tax liabilities occur periodically due to changes in actual or estimated future tax rates and projections of taxable income, interpretations of tax laws, the complexities of multi-state income tax reporting, the status of examinations being conducted by various taxing authorities and the impact of newly enacted legislation or guidance as well as income tax accounting pronouncements.
Estimation of Fair Value. The estimation of fair value is significant to certain of our assets, including investment securities available for sale, OREO, assets and liabilities subject to acquisition accounting and the value of loan collateral for impaired loans. These are all recorded at either fair value or the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, generally accepted accounting principles require disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial statements. Fair values may be influenced by a number of factors, including market interest rates, prepayment speeds, liquidity considerations, discount rates and the shape of yield curves. For additional information relating to the fair value of our financial instruments, see Note 16: Fair Value of Financial Instruments and Fair Value Measurement in the consolidated financial statements.

Comparison of Financial Condition at September 30, 2017 and 2016
Assets. Total assets increased $201.8 million, or 14.0%, to $1.6 billion at September 30, 2017, compared to September 30, 2016, largely due to the Company's purchase of Resurgens, which brought in $177.5 million of total assets, $128.8 million of loans and $138.0 million of deposits. Net loans grew $155.2 million, or 15.6%, to $1.1 billion at September 30, 2017, from $994.1 million at September 30, 2016.
Cash and cash equivalents. Cash and cash equivalents increased to $152.3 million at September 30, 2017, up from $91.8 million at September 30, 2016. This increase was primarily the result of a surge in deposits during the first two quarters of the year, along with paydowns on the Company's securities portfolio. The Company also received net cash of $5.4 million from the acquisition of Resurgens in September 2017.
Loans. At September 30, 2017, total net loans were $1.1 billion, or 70.1% of total assets, compared with $994.1 million, or 69.1% of total assets, at September 30, 2016. The increase was largely attributable to the aforementioned $128.8 million of loans purchased from Resurgens. The Company also purchased $23.8 million of manufactured housing loans from a national lender during the year ended September 30, 2017.

chart-78771538bd7a5815996.jpg
________________________________
(1)
Loans are shown net of deferred loan fees, allowance for loan losses, nonaccretable differences and accretable discounts.


37


Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio at the dates indicated.
 
At September 30,
 
2017
 
2016
 
2015
 
2014
 
2013
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(dollars in thousands)
1-4 family residential real estate (1)
$
232,040

 
20.0
%
 
$
236,940

 
23.6
%
 
$
188,044

 
25.9
%
 
$
163,656

 
26.5
%
 
$
134,035

 
22.6
%
Commercial real estate
697,071

 
60.0
%
 
595,157

 
59.2
%
 
416,576

 
57.4
%
 
356,642

 
57.8
%
 
364,281

 
61.4
%
Commercial
103,673

 
8.9
%
 
71,865

 
7.1
%
 
37,444

 
5.2
%
 
28,298

 
4.6
%
 
29,225

 
4.9
%
Real estate construction
88,792

 
7.6
%
 
80,500

 
8.0
%
 
77,217

 
10.6
%
 
63,485

 
10.3
%
 
44,653

 
7.5
%
Consumer and other loans
39,944

 
3.5
%
 
21,241

 
2.1
%
 
6,392

 
0.9
%
 
5,139

 
0.8
%
 
20,897

 
3.6
%
Total loans, gross (2)
1,161,520

 
100.0
%
 
1,005,703

 
100.0
%
 
725,673

 
100.0
%
 
617,220

 
100.0
%
 
593,091

 
100.0
%
Deferred loan fees, net
(1,166
)
 
 
 
(1,280
)
 
 
 
(1,423
)
 
 
 
(1,382
)
 
 
 
(1,124
)
 
 
Allowance for loan losses
(11,078
)
 
 
 
(10,371
)
 
 
 
(9,489
)
 
 
 
(9,471
)
 
 
 
(12,113
)
 
 
Loans receivable, net (3)
$
1,149,276

 
 
 
$
994,052

 
 
 
$
714,761

 
 
 
$
606,367

 
 
 
$
579,854

 
 
________________________________
(1)
Excludes loans held for sale of $2.0 million $2.9 million, $1.4 million, $2.1 million and $1.9 million at September 30, 2017, 2016, 2015, 2014 and 2013, respectively.
(2)
Net of undisbursed proceeds on loans-in-process and acquired loan fair value discounts.
(3)
Included in the loan balances at September 30, 2014, 2013, and 2012, are net loans that were covered under loss share agreements with the FDIC prior to the termination of these agreements in the amount of $69.6 million, $109.0 million, and $166.2 million, respectively.
Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2017. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
 
 
1-4 family residential real estate (1)
 
  Commercial real estate (1)
 
   Commercial (1)
Amount
 
Weighted
average rate
 
Amount
 
Weighted average rate
 
Amount
 
Weighted average rate
(dollars in thousands)
Due During the Years
Ending September 30,
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
$
32,061

 
4.60
%
 
$
96,832

 
4.90
%
 
$
27,516

 
4.91
%
2019
 
7,255

 
4.87

 
71,645

 
4.87

 
15,977

 
4.81

2020
 
7,176

 
4.74

 
99,409

 
4.70

 
11,528

 
5.23

2021 to 2022
 
4,359

 
5.15

 
84,359

 
4.77

 
19,417

 
4.73

2023 to 2027
 
57,369

 
4.30

 
119,115

 
4.65

 
13,476

 
5.11

2028 to 2032
 
29,416

 
3.98

 
97,738

 
4.68

 
10,365

 
3.43

2033 and beyond
 
94,404

 
4.35

 
127,974

 
4.73

 
5,394

 
6.11

Total
 
$
232,040

 
4.37

 
$
697,072

 
4.75

 
$
103,673

 
4.84


38


 
 
  Real estate construction (1) (3)
 
Consumer and other loans (1)
 
  Total (2)
Amount (3)
 
Weighted average rate
 
Amount
 
Weighted average rate
 
Amount
 
Weighted average rate
(dollars in thousands)
Due During the Years
Ending September 30,
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
$
68,447

 
5.47
%
 
$
1,656

 
5.57
%
 
$
226,512

 
5.04
%
2019
 
12,298

 
5.31

 
1,033

 
4.61

 
108,208

 
4.91

2020
 
840

 
4.25

 
1,665

 
4.96

 
120,618

 
4.75

2021 to 2022
 
1,800

 
4.94

 
1,599

 
4.62

 
111,534

 
4.78

2023 to 2027
 
83

 
6.25

 
422

 
6.76

 
190,465

 
4.58

2028 to 2032
 
922

 
4.85

 
5,061

 
8.80

 
143,502

 
4.59

2033 and beyond
 
4,402

 
3.82

 
28,507

 
8.86

 
260,681

 
5.06

Total
 
$
88,792

 
5.34

 
$
39,943

 
8.25

 
$
1,161,520

 
4.85

________________________________
(1)
Presented net of undisbursed proceeds on loans-in-progress.
(2)
Excludes allowance for loan losses and net deferred loan fees.
(3)
All real estate construction loans with scheduled repayments in 2020 and beyond are construction-to-permanent loans.
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2017 that are contractually due after September 30, 2018
 
 
Due After September 30, 2018
 
 
Fixed
 
Adjustable
 
Total
 
 
(in thousands)
1-4 family residential real estate
 
$
56,162

 
$
143,818

 
$
199,980

Commercial real estate
 
2,309

 
18,036

 
20,345

Commercial
 
294,665

 
305,574

 
600,239

Real estate construction
 
38,113

 
174

 
38,287

Consumer and other loans
 
50,323

 
25,834

 
76,157

Total loans
 
$
441,572

 
$
493,436

 
$
935,008

Investment and Mortgage Securities Portfolio. At September 30, 2017, our investment and mortgage securities portfolio totaled $183.8 million, compared to $206.3 million at September 30, 2016. The decrease was attributable to $24.1 million in securities that were called or matured, $6.3 million in net sales and $18.9 million in principal paydowns, offset in part by $30.2 million of purchases of new securities. Unrealized gains on securities decreased $3.4 million. There were no other-than-temporary impairment charges in 2017, 2016 or 2015.
We review our investment portfolio on a quarterly basis for indications of impairment. In addition to management’s intent and ability to hold the investments to maturity or recovery of carrying value, the review for impairment includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer. Our review of mortgage securities includes loan geography, loan to value ratios, credit scores, types of loans, loan vintage, credit ratings, loss coverage from tranches less senior than our investment tranche and cash flow analysis. Our investments are evaluated using our best estimate of future cash flows. If, based on our estimate of cash flows, we determine that an adverse change has occurred, other-than-temporary impairment would be recognized for the credit loss. During the year ended September 30, 2017, we sold our one private-label security which had a cumulative $380,000 other-than-temporary impairment charge recorded in prior years. No non-agency collateralized mortgage backed securities in our investment portfolio remain other- than- temporarily impaired at September 30, 2017.

39


The following table sets forth the composition of our investment and mortgage securities portfolio at the dates indicated. At September 30, 2017, all investment and mortgage securities were classified as available for sale.
 
At September 30,
 
2017
 
2016
 
2015
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(in thousands)
Other investment securities:
 
 
 
 
 
 
 
 
 
 
 
State and municipal securities
$
2,239

 
$
2,252

 
$
2,484

 
$
2,524

 
$

 
$

Collateralized loan obligations
40,629

 
40,677

 
39,749

 
39,707

 
39,637

 
39,496

Total investment securities
42,868

 
42,929

 
42,233

 
42,231

 
39,637

 
39,496

Mortgage-backed and mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC certificates
21,658

 
21,755

 
27,432

 
28,025

 
35,533

 
35,991

FNMA certificates
114,741

 
112,992

 
126,293

 
127,403

 
97,677

 
98,218

GNMA certificates
2,504

 
2,506

 
1,509

 
1,513

 
1,554

 
1,559

Total mortgage-backed and mortgage-related securities
138,903

 
137,253

 
155,234

 
156,941

 
134,764

 
135,768

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
FHLMC

 

 

 

 
37

 
39

FNMA

 

 

 

 
62

 
63

Other (1)
3,743

 
3,608

 
7,197

 
7,164

 
8,989

 
9,038

Total collateralized mortgage obligations
3,743

 
3,608

 
7,197

 
7,164

 
9,088

 
9,140

Total mortgage-backed securities and collateralized mortgage obligations
142,646

 
140,861

 
162,431

 
164,105

 
143,852

 
144,908

Total
$
185,514

 
$
183,790

 
$
204,664

 
$
206,336

 
$
183,489

 
$
184,404

________________________________
(1)
Includes private-label mortgage securities. See Note 4: Securities Available for Sale in the Notes to Consolidated Financial Statements.
We analyze our non-agency collateralized mortgage securities for other-than-temporary impairment at least quarterly. We use a multi-step approach using Bloomberg analytics considering market price, ratings, ratings changes, and underlying mortgage performance including delinquencies, foreclosures, deal structure, underlying collateral losses, prepayments, loan-to-value ratios, credit scores, and loan structure and underwriting, among other factors. We apply the Bloomberg default model, and if the bond shows no losses we consider it not other-than-temporarily impaired. If a bond shows losses or a break in yield with the Bloomberg default model, we create a probable vector of loss severities and defaults and if it shows a loss we consider it other-than-temporarily impaired. Our investments in CLOs are in structured securities where our investment is one of the top three tranches with significant credit support. The underlying collateral is in traded loans with obligors having credit ratings and is actively traded. The securities include covenants requiring weighted average credit ratings of the underlying loans to maintain acceptable levels. All of the securities currently in our CLO portfolio are rated at least AA.
Cash flow analysis indicates that the yields on all of the private-label securities noted above are maintained. The unrealized losses may relate to general market liquidity and, in the securities with the larger unrealized losses, weakness in the underlying collateral, market concerns over foreclosure levels, and geographic concentration. We consider these unrealized losses to be temporary impairment losses primarily because cash flow analysis indicates that there are continued sufficient levels of credit enhancements and credit coverage levels of less senior tranches. As of September 30, 2017, the private-label securities were classified as available for sale and no other-than-temporary impairment charge had been recorded in prior periods. Based on the analysis performed by management as of September 30, 2017, we deemed it probable that all contractual principal and interest payments will be collected and therefore there is no other-than-temporary impairment. See Note 4: Securities Available for Sale in our Financial Statements for further information.
Securities Portfolio Maturities and Yields. The composition and maturities of the securities portfolio at September 30, 2017 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect scheduled amortization or the impact of prepayments or redemptions that may occur.

40


 
One year or less
 
Years two through five
 
Years six through ten
 
More than ten years
 
Total securities
 
Amort-
ized Cost
 
Weight-
ed Avg Yield
 
Amort-
ized Cost
 
Weight-
ed Avg Yield
 
Amort-
ized Cost
 
Weight-
ed Avg Yield
 
Amort-
ized Cost
 
Weight-
ed Avg Yield
 
Amort-
ized Cost
 
Fair Value
 
Weight-
ed Avg Yield
 
(dollars in thousands)
Other investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal securities
$
808

 
1.86
%
 
$
1,431

 
2.65
%
 
$

 
%
 
$

 
%
 
$
2,239

 
$
2,252

 
2.37
%
Collateralized loan obligations

 

 

 

 
11,579

 
3.54

 
29,050

 
3.03

 
40,629

 
40,678

 
3.17

Total investment securities
808

 
1.86

 
1,431

 
2.65

 
11,579

 
3.54

 
29,050

 
3.03

 
42,868

 
42,929

 


Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLMC certificates

 

 
1,066

 
1.79

 
4,390

 
1.84

 
16,202

 
2.26

 
21,658

 
21,755

 
2.07

FNMA certificates
12,824

 
0.97

 
25,139

 
2.14

 
63,187

 
1.49

 
13,591

 
2.42

 
114,741

 
112,992

 
2.54

GNMA certificates

 

 

 

 

 

 
2,504

 
5.14

 
2,504

 
2,506

 
5.14

Total mortgage-backed securities
12,824

 

 
26,205

 
2.05

 
67,577

 
1.51

 
32,297

 
4.32

 
138,903

 
137,253

 
2.21

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other (1)
108

 
3.60

 

 

 

 

 
3,635

 
3.50

 
3,743

 
3,608

 
7.11

Total collateralized mortgage obligations
108

 
3.60

 

 

 

 

 
3,635

 
3.50

 
3,743

 
3,608

 
7.11

Total
$
13,740

 
1.04
%
 
$
27,636

 
1.48
%
 
$
79,156

 
1.97
%
 
$
64,982

 
2.90
%
 
$
185,514

 
$
183,790

 
2.16
%
________________________________
(1)
Includes private-label mortgage securities.
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 non-interest income that is non-taxable. The total cash surrender values of such policies at September 30, 2017 and 2016 were $53.5 million and $49.3 million, respectively. The increase in the current year was partly due to $3.1 million of such policies purchased in the acquisition of Resurgens.
Deposits. Total deposits increased $177.3 million, or 15.26%, to $1.3 billion at September 30, 2017 from $1.2 billion at September 30, 2016. The increase was primarily attributable to the aforementioned $138.0 million of deposits brought in by the acquisition of Resurgens, as well as a surge in legacy deposits, particularly during the first two quarters of the current fiscal year. Overall, transaction, money market and retail certificates of deposit accounts increased $89.2 million, $36.6 million and $46.7 million, respectively, during 2017. At September 30, 2017$1.1 billion of deposits were retail deposits and $39.2 million of deposits were classified as wholesale deposits. Funds on deposit from internet services and brokered deposits are considered wholesale deposits.


41


 
 
 
Deposit Balances
 
Deposit & Bankcard Fees
 
Checking
 
Savings
 
Money Market
 
Retail CDs Under $250k
 
Total Core Deposits (1)
 
Retail CDs $250k & Over
 
Wholesale CDs
 
Total Deposits
 
 
 
(in thousands)