Charter Financial Corporation (NASDAQ:CHFN) today reported net income of $3.8 million for the quarter ended September 30, 2016, or $0.27 and $0.26 per basic and diluted share, respectively, compared with net income of $553,000, or $0.04 per basic and diluted share, for the quarter ended September 30, 2015. Net income for the year ended September 30, 2016, was $11.9 million, or $0.83 and $0.79 per basic and diluted share, respectively, compared with net income of $5.6 million, or $0.35 and $0.34 per basic and diluted share, respectively, for the year ended September 30, 2015.
Net income for the current year quarter increased $3.3 million over the prior-year quarter due in part to a $2.5 million impairment charge to the FDIC receivable in the prior-year quarter, as well as increased loan interest income and deposit fee income generated by the acquisition of CBS Financial Corporation (“CBS”) in the third quarter of fiscal 2016.
The year over year increase in net income of $6.3 million was partially attributable to $3.6 million of nonrecurring recoveries on loans that were previously covered by loss share agreements with the FDIC, as well as the prior-year FDIC impairment charge, partially offset by $4.2 million of acquisition expenses from the purchase of CBS. Core system conversion was completed in July and integration expenses are substantially completed.
Quarterly Operating Results
Quarterly earnings for the fourth quarter of fiscal 2016 compared with the fourth quarter of fiscal 2015 were positively impacted by the following items:
| • | Loan interest income increased $3.1 million, or 32.9%, while loan interest income excluding accretion and amortization of loss share receivable increased $3.6 million, or 44.7%. |
| • | Deposit and bankcard fee income increased by a combined $413,000, or 14.9%. |
| • | Gain on sale of loans and servicing released loan fees increased $350,000, or 76.2%, due to increased activity in both legacy markets and the newly acquired market. |
| • | Interest expense on FHLB borrowings decreased $173,000, or 30.9%, due to a maturing advance being extended at a substantially lower rate during the third quarter of fiscal 2016. |
| • | As a result of the early termination of the Company’s loss-sharing agreements with the FDIC in the fourth quarter of fiscal 2015, a $2.5 million impairment charge to earnings was recorded. No such charge was recorded in the fourth quarter of fiscal 2016. |
The above increases to net income were partially offset by the following items:
| • | Interest expense on deposits increased $454,000, or 68.4%, due to higher balances from both the CBS acquisition and legacy markets. |
| • | Salaries and employee benefits increased $1.0 million, or 18.8%, due to increased payroll as well as final severance costs related to the CBS acquisition. |
| • | Income tax expense increased $1.8 million due to an increase of $5.1 million in income before income taxes. |
Chairman and CEO Robert L. Johnson said, “Our fourth quarter results clearly show the transformative impact of the acquisition of CBS Financial Corporation on our earnings. With the acquisition now behind us, the Company can focus on its expanded market presence in Atlanta.
“We have taken a major step toward our goal of increasing our earnings to the level that supports our stock price,” Mr. Johnson continued. “Looking ahead to 2017, we believe our strategy of building bankcard and deposit fee income, in addition to net interest income, provides revenue diversification, which lowers risk to our earnings.”
Financial Condition
The Company’s total assets increased $415.9 million to $1.4 billion at September 30, 2016, from $1.0 billion at September 30, 2015. Net loans increased $279.3 million, or 39.1%, to $994.1 million at September 30, 2016, from $714.8 million at September 30, 2015. These increases were largely attributable to the completion of the acquisition of CBS, which brought in $376.4 million of total assets and $300.8 million of loans, respectively. Legacy loans increased $6.4 million and $3.8 million during the quarter and year ended September 30, 2016, to $729.5 million, while new originations from former CBS branches totaled $22.8 million since the acquisition date of April 15, 2016.
Total deposits were $1.2 billion at September 30, 2016, compared with $738.9 million at September 30, 2015. The increase was due in part to the acquisition of CBS, which added $333.7 million of deposits to the Company’s portfolio, as well as a continued increase in the Company’s legacy deposits, which grew $75.2 million during the year ended September 30, 2016. Overall, transaction and money market accounts increased $150.7 million and $115.6 million, respectively, at September 30, 2016.
Total stockholders’ equity decreased to $203.1 million at September 30, 2016, compared to $204.9 million at September 30, 2015, due primarily to $13.2 million of share repurchases during fiscal 2016, offset by $11.9 million of net income during the same period. Book value per share increased to $13.52 at September 30, 2016, from $12.79 per share at September 30, 2015, due to the effects of the company’s stock repurchases, offset by our retention of earnings. Tangible book value per share decreased to $11.36 at September 30, 2016, compared to $12.48 at September 30, 2015, due to $25.5 million of goodwill generated by the purchase of CBS, partially offset by stock repurchases during fiscal 2016 and the associated reduced share count at September 30, 2016. However, tangible book value per share increased $0.25 from $11.11 at June 30, 2016, as a result of our earnings in the current quarter.
Net Interest Income and Net Interest Margin
Net interest income increased to $12.2 million for the quarter ended September 30, 2016, compared with $9.3 million for the quarter ended September 30, 2015. Interest income increased $3.3 million due to a $3.6 million increase in loan interest income, excluding accretion and amortization of loss share receivable, offset by a $444,000 decrease in net purchase discount accretion and amortization of loss share receivable. Quarter over quarter, total interest expense increased $399,000 to $1.6 million for the quarter ended September 30, 2016, largely due to increased balances of higher-costing deposits from CBS. Net interest margin was 3.82% for the three months ended September 30, 2016, compared to 4.05% for the same period in 2015. The decrease was largely due to increased deposit balances, both from legacy growth and the acquisition of CBS, as well as a continued drop in accretion income. The Company’s net interest margin, excluding the effects of purchase accounting, increased to 3.47% for the quarter ended September 30, 2016, compared with 3.37% for the quarter ended September 30, 2015.
Net interest income for the year ended September 30, 2016 increased $9.3 million, or 28.2%, to $42.2 million, compared to $32.9 million for the prior-year period. Interest income increased $9.9 million primarily due to an increase of $7.2 million, or 19.7%, in loan interest income to $43.5 million. Loan interest income, excluding accretion and amortization of loss share receivable increased $8.7 million, while net purchase discount accretion and amortization of loss share receivable increased $813,000 during the twelve months ended September 30, 2016, partly due to the discontinuation of the Company’s loss-sharing agreements and resultant discontinuation of amortization of the FDIC loss share receivable, which totaled $2.4 million during the year ended September 30, 2015. Income on interest-earning deposits in other financial institutions increased $123,000 due to higher cash balances as well as the Federal Reserve’s decision to increase interest rates in December of 2015.
Under purchase accounting rules, the Company currently expects to realize remaining loan discount accretion of $462,000 over the next four quarters related to its acquisition of the First National Bank of Florida and $2.6 million related to the CBS acquisition over the life of the loans acquired.
Provision for Loan Losses
The Company recorded a negative provision for loan losses of $150,000 and $250,000 in the quarter and year ended September 30, 2016, respectively, due to the continued positive credit quality trends of the loan portfolio and net recoveries of previously charged-off loans. No provision was recorded in the three and 12 months ended September 30, 2015.
Noninterest Income and Expense
Noninterest income for the quarter ended September 30, 2016 increased to $4.9 million, compared with $1.5 million for the prior-year period. The increase was due to a $2.5 million impairment charge to the Company’s FDIC receivable for loss sharing agreements taken in the fourth quarter of 2015 as part of the early termination of the agreements, along with a $413,000 increase in bankcard fee and other deposit fee income and a $350,000 increase in gain on sale of loans and servicing released loan fees in the current-year quarter.
Noninterest expense for the quarter ended September 30, 2016 increased $1.4 million to $11.4 million, compared with the same period in fiscal 2015, due in part to an increase of $1.0 million in salaries and employee benefits, $103,000 of which was attributable to merger expenses in the form of severance payments and contract buyouts. Additionally, occupancy and data processing expenses increased $289,000 and $104,000 to $1.4 million and $904,000, respectively, while the net benefit of operations of real estate owned increased $290,000 to $309,000 as a result of several gains on the sales of real estate. The Company’s efficiency ratio for the quarter and year ended September 30, 2016 was 66.33% and 71.93%, respectively, compared to 92.49% and 81.47% for the same periods in 2015.
“Our improved efficiency ratio shows the impact of the additional operating leverage from the CBS acquisition,” Mr. Johnson said.
Noninterest income for the year ended September 30, 2016 increased $8.6 million to $21.0 million, compared with $12.3 million for the prior-year period. The improvement was due to $3.6 million in nonrecurring recoveries on loans that were previously covered by loss share agreements with the FDIC and a prior-year $2.4 million impairment charge to the FDIC receivable for loss sharing agreements, along with increases of $1.5 million in bankcard fee and other deposit fee income and $506,000 in gain on sale of loans and servicing released loan fees.
Noninterest expense for the year ended September 30, 2016 increased $8.6 million to $45.4 million, compared with the same period in fiscal 2015. The increase was partly attributable to merger-related costs for the current year period, which totaled $4.2 million, largely concentrated in severance costs, data processing expenses and legal and professional fees. The acquisition also impacted ongoing operational costs due to increased payroll and operational expenses. There were smaller increases in legacy operations in compensation and professional fees. These increases were offset slightly by a $371,000 decrease in the net cost of operations of real estate owned.
Asset Quality
Asset quality remained strong with nonperforming assets at 0.45% of total assets and the allowance for loan losses at 1.03% of total loans and 277.66% of nonperforming loans at September 30, 2016. Not included in the allowance is $2.6 million in yield and credit discounts on the CBS acquired loans. The allowance for loan losses was 1.35% of legacy loans. The Company recorded net loan recoveries of $404,000 and $1.1 million in its allowance for loan losses for the quarter and year ended September 30, 2016, respectively, compared with net loan recoveries of $55,000 and $18,000 for the same periods in fiscal 2015.
Capital Management
The company did not repurchase shares during the quarter ended September 30, 2016. Beginning with the first quarter of fiscal 2014 through the third quarter of fiscal 2016, the Company repurchased 8.1 million shares, or 35.6%, of the Company’s common stock for $91.9 million. On October 25, 2016, the company announced an increased dividend of $0.055 per share, up from the $0.05 per share dividend announced in the previous 14 quarters.
Mr. Johnson concluded, “With slightly less than two full quarters since the CBS acquisition, we have seen significant improvements in our return on assets and return on equity for the year to 0.98% and 5.90%, respectively, and we have added significant leverage to both our capital and operational structure. We are well-positioned to continue leveraging our expense structure and capital through organic and potential acquisitive growth. Our acquisition strategy is to seek out targets with an enduring loan portfolio, quality retail deposits and strongly accretive earnings. We continue to look for potential acquisitions that are additive to our existing franchise and will focus on these factors to maximize returns to our shareholders.”
About Charter Financial Corporation
Charter Financial Corporation is a savings and loan holding company and the parent company of CharterBank, a full-service community bank and a federal savings institution. CharterBank is headquartered in West Point, Georgia, and operates branches in Metro Atlanta, the I-85 corridor south to Auburn, Alabama, and the Florida Gulf Coast. CharterBank’s deposits are insured by the Federal Deposit Insurance Corporation. Investors may obtain additional information about Charter Financial Corporation and CharterBank on the internet at www.charterbk.com under About Us.