Charter Financial Corporation reported net income of $4.4 million for the quarter ended December 31, 2017, or $0.31 and $0.29 per basic and diluted share, respectively, compared with net income of $5.0 million, or $0.36 and $0.33 per basic and diluted share, respectively, for the quarter ended December 31, 2016.

Net income for the current-year quarter decreased $649,000 from the prior-year quarter. The difference was attributable to a $1.4 million charge to income tax expense as a result of the revaluation of our deferred tax asset, offset in part by $2.2 million of growth in loans receivable interest income, due largely to the Company's first full quarter with the newly acquired Resurgens Bancorp ("Resurgens"). The Company's return on equity for the current year quarter was 8.10%, as compared to 6.89% for the last full fiscal year, while the Company's return on tangible equity (a non-GAAP measure which excludes the average balance of intangible assets from average equity) was 10.10%, as compared to 8.18% for the fiscal year ended September 30, 2017. Revenue increased 7.2% to $19.7 million for the quarter ended December 31, 2017 compared to $18.4 million for the quarter ended September 30, 2017, while noninterest expense declined 17.5% to $11.9 million at December 31, 2017 from $14.4 million at September 30, 2017.

"We had an excellent first quarter with strong revenue growth, aided by our first full quarter with Resurgens," said Chairman and CEO Robert L. Johnson. "We also saw improvement in our noninterest expense when compared to the September 2017 quarter, as we had $1.9 million of merger-related costs last quarter and only $309,000 of deal costs during the current quarter. We had our best-ever quarter of deposit and bankcard fees, continued growth in our net interest margin, and had first-quarter loan growth for the first time in three years, though we still have work to do on growing our portfolio. We had the benefit of several one-time positive items, which were more than offset by the revaluation of our deferred tax asset. We're also beginning to see the benefit of the Resurgens acquisition, as our efficiency ratio improved to 60.26%."

Core system conversion of the Resurgens acquisition is expected to be completed in February 2018, and no further deal costs are expected after that time.

Tax Cuts and Jobs Act

On December 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act, the tax reform bill (the "Tax Act"). Under the Tax Act, federal corporate tax rates were cut to 21% from 35%. The Company's net deferred tax assets, which totaled $6.0 million at September 30, 2017, were calculated using the previous statutory rate of 35%. Because of the change, the Company revalued the net deferred tax asset and recorded an estimated expense of $1.4 million, or approximately $0.10 and $0.09 per basic and diluted share, respectively, as an addition to income tax expense at December 31, 2017. The Company is utilizing the measurement period approach to revalue its deferred tax asset, so the amount may change prior to fiscal year end at September 30, 2018.

In spite of the one-time charge, the Company expects to realize significant savings as a result of the tax rate changes from the Tax Act. Management's calculations estimate that the new rate would have reduced the Company's income tax expense $3.0 million during the previous fiscal year under full implementation of the 21% rate. Due to the Company's fiscal year, our income taxes will be calculated at a blended 24.5% federal statutory rate for the current fiscal year and 21% for future fiscal years. The new, blended tax rate is expected to reduce income tax expense by approximately $2.5 million as compared to the prior rate during the current year, with greater reductions in future years when the new rate is fully implemented. The rate change reduced expense $742,000, or $0.05 per basic and diluted share, in regular tax accruals during the current quarter.

"We are very excited about the opportunities the new tax law will give us," Mr. Johnson said. "We feel the savings provided by the new, lower corporate tax rate will give us far greater ability to provide value for all our stakeholders, principally, our customers, in the long term."

Quarterly Operating Results

Quarterly earnings for the first quarter of fiscal 2018 compared with the first quarter of fiscal 2017 were positively impacted by:

• An increase in loans receivable income of $2.2 million, or 17.5%, to $14.8 million for the 2018 first quarter, compared with $12.6 million for the same quarter in 2017, as a result of our first full quarter with Resurgens.

• An increase in deposit and bankcard fee income of $403,000, or 12.7%.

• Interest on interest-bearing deposits in other financial institutions increased $250,000 due to our increased cash balances and the Federal Reserve's rate increases.

• One-time items including a $266,000 gain on the sale of assets available for sale and $215,000 in incentive payments from our bankcard vendor, both included in other income.

Quarterly earnings for the first quarter of fiscal 2018 compared with the first quarter of fiscal 2017 were negatively impacted by:

• A $1.4 million additional charge to income tax as the result of the revaluation of our deferred tax asset due to the new Tax Act.

• Nonrecurring deal costs from the Resurgens acquisition of $309,000, largely concentrated in severance costs. No deal costs were recorded in the same period in 2017.

• An increase in interest expense on deposits of $305,000, or 26.3%, due to higher balances as well as an increase of seven basis points in the Company's cost of deposits due to higher-costing deposits from Resurgens assumed in September 2017, adding to our already increased legacy deposit rates. The Company's cost of deposits increased three basis points from the quarter ended September 30, 2017.

• Salaries and employee benefits increased $875,000, or 14.3%, and data processing increased $244,000, due to Resurgens transaction costs as well as increased ongoing operating costs as a result of the acquisition.

Financial Condition

Total assets increased $3.5 million from September 30, 2017 to $1.6 billion at December 31, 2017, largely attributable to loan and deposit growth. Net loans grew $2.0 million, or 0.2%, to $1.2 billion at December 31, 2017, driven by $3.4 million of growth in our Atlanta markets.

"We are very pleased with our asset growth during the first quarter of fiscal 2018," Mr. Johnson said. "Over the past several fiscal years, the first quarter has been a challenge for us in growing our loan portfolio, so we are excited to see an increase there, even if a small one. As we continue to integrate our new Resurgens team we expect to use our capital and market base to further expand the loan portfolio."

Total deposits increased $4.9 million to $1.3 billion during the three months ended December 31, 2017, largely due to growth in our money market accounts of $13.1 million. Transaction accounts increased $7.5 million from September 30, 2017, while retail certificates of deposit decreased $14.8 million.

From September 30, 2017 to December 31, 2017, total stockholders' equity increased $4.0 million to $218.2 million due primarily to $4.4 million of net income. Book value per share increased to $14.42 at December 31, 2017 from $14.17 at September 30, 2017 due to the Company's retention of earnings, while tangible book value per share, a non-GAAP financial measure (see Reconciliation of Non-GAAP Measures for further information) increased to $11.59 from $11.33.

Net Interest Income and Net Interest Margin

Net interest income increased $2.1 million to $14.3 million for the first quarter of fiscal 2018, compared with $12.2 million for the prior-year period. Total interest income increased $2.4 million. These increases were attributable to increased loan balances and loans receivable interest income as a result of the Resurgens acquisition, as well as increased loan interest income from the higher market interest rates. Loans receivable interest income increased $2.2 million to $14.8 million during the current quarter from $12.6 million during the prior-year quarter. The Company also experienced an increase of $250,000 in interest income on interest-bearing deposits in other financial institutions during the current-year quarter due to higher cash balances and the Federal Reserve's interest rate increases. Total interest expense increased $306,000 to $2.0 million for the current quarter, with approximately $100,000 due to increased deposit balances and the remainder to higher rates. A portion of the rate increase was attributable to increased interest rates on our money market accounts and certificates of deposit, while the remainder was tied to higher-costing deposits from the Resurgens acquisition.

"We've benefited from the rate increases from the Federal Reserve, both in our prime-based loans receivable income and our interest-bearing overnight deposits," Mr. Johnson said. "Thus far we've been able to keep our deposit rates low, despite a slight uptick in the last two quarters. Our mix of deposits from our non-metro legacy markets with relatively stable deposit costs and our more recently acquired Metro Atlanta deposits provide a nice blend of growth potential and rate stability.  "

Net interest margin was 3.87% for the first quarter of fiscal 2018, compared to 3.71% for the first quarter of fiscal 2017. The impact of purchase accounting on the Company's net interest margin was 0.10% for the quarter ended December 31, 2017, compared to 0.23% for the quarter ended December 31, 2016 as our accretion income has dropped while legacy loans receivable income has increased. The increase in net interest margin was attributable to increased loan income, both from acquisitions and legacy loan growth, as well as increased yields on the Company's Federal Reserve deposits. While the Company will use some of the benefits of the Tax Act to increase rates on deposits, we are relatively well-positioned to protect net interest margin due to our high liquidity and moderate level of loans to deposits.

At December 31, 2017, the Company had $3.7 million of remaining loan discount accretion related to the Community Bank of the South ("CBS") and Resurgens acquisitions, which will be accreted over the lives of the loans acquired.

Provision for Loan Losses

The Company recorded no provision for loan losses in the quarter ended December 31, 2017, due to the continued positive credit quality trends of its loan portfolio and net recoveries of previously charged-off loans. A negative provision of $750,000 was recorded in the quarter ended December 31, 2016.

Noninterest Income and Expense

Noninterest income increased $409,000 to $5.4 million in the fiscal 2018 first quarter compared to $5.0 million in the same period of 2017. The increase was primarily due to a $403,000, or 12.7%, increase in deposit and bankcard fees, reflecting the continued success of the Company's signature debit card transaction marketing and deposit growth, a $215,000 gain on incentive rebates from our debit card vendor, and a nonrecurring $266,000 gain on the sale of assets available for sale. These increases were offset in part by a $112,000 decrease in gain on sale of loans due to reduced mortgage sale activity. The Company also recorded $250,000 of recoveries on loans formerly covered under loss share agreements during the prior year quarter, while no such gain was recorded for the three months ended December 31, 2017.

Noninterest expense for the quarter ended December 31, 2017, increased $1.6 million to $11.9 million, compared with $10.3 million for the prior-year quarter, primarily due to increased ongoing operational costs as a result of the acquisition of Resurgens. Salaries and employee benefits increased $875,000, or 14.3%, to $7.0 million during the current quarter, while occupancy and data processing increased $154,000 and $244,000, or 11.7% and 26.8%, over the prior-year quarter. The Company also recorded $309,000 of merger costs from the Resurgens acquisition, which were largely concentrated in severance costs. Net benefit of operations of real estate owned decreased $310,000 due to reduced sales activity in the current quarter as the balance of real estate owned has fallen to minimal levels.

Asset Quality

Nonperforming assets at December 31, 2017 were at 0.19% of total assets, unchanged from September 30, 2017. The allowance for loan losses was at 0.96% of total loans and 575.09% of nonperforming loans at December 31, 2017, compared to 0.96% and 649.13%, respectively, at September 30, 2017. Not included in the allowance at December 31, 2017 was $3.7 million in yield and credit discounts on the CBS- and Resurgens-acquired loans. At December 31, 2017, the allowance for loan losses was 1.19% of legacy loans, compared to 1.22% at September 30, 2017. The Company recorded net loan recoveries of $36,000 in its allowance for loan losses for the quarter ended December 31, 2017, compared with net loan recoveries of $878,000 for the same period in the prior year.

Capital Management

From the first quarter of fiscal 2014 through the first quarter of fiscal 2017, the Company has repurchased 8.1 million shares, or 35.6%, of its common stock, for $91.9 million. The company repurchased 14,364 shares for cash proceeds of $263,000 during the quarter ended December 31, 2017 to satisfy tax withholding obligations for restricted stock awards of certain  officers, not as part of its publicly announced repurchase program.

During the quarter ended December 31, 2017, the Company paid a $0.075 per-share dividend. The Company announced on January 23, 2018 it would pay a dividend of $0.08 per share on February 27, 2018 to shareholders of record as of February 13, 2018. This will be the sixth consecutive quarterly dividend increase. The Company's equity as a percent of total assets stood at 13.27% at December 31, 2017, as compared to 13.06% at September 30, 2017, while the Company's tangible common equity ratio, a non-GAAP measure, was 10.96% at December 31, 2017, up from 10.72% at September 30, 2017.

Mr. Johnson concluded, “Charter Financial continues to be in great position to capitalize on our long term goals, and the new tax bill should only help us achieve these goals. Asset quality remains strong, and our new teams in Cobb and DeKalb Counties are positioned to perform well as we expand into the Metro Atlanta market. We still have plenty of capacity to use our capital to expand the balance sheet, either through acquisitions or legacy loan growth. Our capital position remains strong and the increase in the dividend is evidence of the board's confidence in our promising outlook for 2018 and beyond."