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Entegra Financial Corp. Announces Second Quarter 2015 Results; Reversal of Deferred Tax Asset Valuation Allowance

Highlights:

  • Second quarter net income of $17.1 million ($2.61 per share) compared to $0.7 million for the same period in 2014. Net income of $19.7 million ($3.01 per share) for the six months ended June 30, 2015 compared to $2.8 million for the same period in 2014. Results for both the three and six months ended June 30, 2015 reflect a non-cash income tax benefit of $17.6 million resulting from the reversal of substantially all of the valuation allowance on the Company's net deferred tax asset.
  • Book value increased $3.03, or 18.5%, to $19.42 per share at June 30, 2015 compared to $16.39 at December 31, 2014.
  • Restructured a $15 million Federal Home Loan Bank (FHLB) advance and incurred a prepayment penalty of $1.8 million. As a result of the restructuring, the interest rate on the advance was reduced by 2.60%, resulting in expected incremental pre-tax annual earnings of approximately $0.4 million.
  • Loans receivable increased to $582.5 million at June 30, 2015 compared to $549.9 million at March 31, 2015, an annualized growth rate of 23.8% during the second quarter.
  • Non-performing assets decreased $4.1 million, or 19.6%, to $17.1 million at June 30, 2015 compared to $21.2 million at December 31, 2014 and totaled 1.76% of total assets at June 30, 2015 compared to 2.35% at December 31, 2014.
  • Received approval from the FDIC, subject to obtaining all necessary and final approvals, for a full-service branch at 501 Roper Mountain Rd., Greenville, South Carolina with a planned opening in the fall of 2015.
  • The Company and the Bank are no longer subject to any regulatory orders.
  • Continued the process to rebrand the Bank to Entegra Bank, with an expected completion date of September 30, 2015.

FRANKLIN, N.C., July 30, 2015 (GLOBE NEWSWIRE) -- Entegra Financial Corp. (NASDAQ:ENFC) (the "Company"), the holding company for Macon Bank (the "Bank"), today announced earnings for the three and six month periods ended June 30, 2015.

Roger D. Plemens, President and CEO of the Company, reported, "We are pleased to announce the reversal of substantially all of the valuation allowance on our net deferred tax asset as we have continued to achieve core profitability for the last six quarters. Our strong core profitability, loan growth, capital base, and significantly improved asset quality illustrate our team effort in returning our focus to core banking operations and providing long-term shareholder value."

Net Interest Income

Core net interest income, which excludes one-time deferred interest and discounts recognized, increased $0.6 million, or 9.4%, to $6.6 million for the three months ended June 30, 2015 compared to $6.1 million for the same period in 2014. Core net interest income increased $0.7 million, or 5.9% to $13.0 million for the six months ended June 30, 2015 as compared to $12.3 million during the comparable period in 2014. The increases for both periods in 2015 are primarily the result of higher earning asset levels.

Provision for Loan Losses

We recorded no provision for loan losses for the three month period ended June 30, 2015 compared to $6,000 for the same period in 2014. The provision for loan losses was negative $1.5 million for the six months ended June 30, 2015 compared to a positive $11,000 for the same period in 2014. The negative provision for the six month period was attributable to the Company's improved asset quality and significantly reduced charge-offs, as well as a decline in the overall historical loss rates used in our allowance for loan losses model.

Noninterest Income and Expense

Noninterest income decreased $0.5 million, or 30.0%, to $1.1 million for the three months ended June 30, 2015 compared to $1.6 million for the same period in 2014. For the six months ended June 30, 2015, noninterest income decreased $0.3 million, or 10.3%, to $2.6 million compared to $2.9 million for the same period in 2014. The decrease for both periods was primarily attributable to non-cash fair value adjustments on the Company's mortgage banking derivatives and loan servicing rights and a decrease in the gains on sales of investment securities.

Core noninterest expense, which excludes FHLB prepayment penalties, increased $0.8 million, or 13.2%, to $6.4 million for the three months ended June 30, 2015 compared to $5.7 million for the same period in 2014. For the six months ended June 30, 2015, core noninterest expense increased $1.2 million, or 10.3%, to $13.0 million compared to $11.8 million for the same period in 2014. The increase for both periods was primarily attributable to increases in compensation and other expenses, which were partially offset by decreases in the net cost of operation of real estate owned. The Company continues to make investments in people and infrastructure as it seeks to grow its existing revenue base and enter new markets.

Income Taxes

The Company reversed $17.6 million, which was substantially all of its valuation allowance on its net deferred tax asset as of June 30, 2015. Income tax benefit for the three and six months periods ended June 30, 2015 was $17.6 million and $17.4 million, respectively. The Company maintained $1.3 million in valuation allowance on its net deferred tax asset as of June 30, 2015 which is expected to be reversed during the third and fourth quarters of 2015 in accordance with the accounting literature for intra-period tax allocations.

Balance Sheet

Total assets increased $65.9 million, or 7.3%, to $969.5 million at June 30, 2015 compared to $903.6 million at December 31, 2014.

The Company continued to experience improvement in loan demand as net loans increased by $42.0 million, or 7.8%, to $582.5 million at June 30, 2015 from $540.5 million at December 31, 2014. A portion of the loan growth is attributable to purchases of $15.2 million in externally sourced loans during the period. The Company also increased its investment portfolio by $30.4 million from December 31, 2014 to June 30, 2015 as it seeks to better leverage its capital. In addition to increases in loans and investment securities, net deferred tax assets increased $17.3 million from December 31, 2014 to June 30, 2015 as a result of the $17.6 million valuation allowance reversal.

Deposits decreased $10.6 million, or 1.5%, to $692.5 million compared to $703.1 million at December 31, 2014. The decrease is primarily attributable to the maturity of the Company's final brokered deposit of $9.0 million which carried an interest rate of 3.60%. The Company continues its focus on growing core deposits throughout its market area.

The Company funded its asset growth primarily with FHLB advances which increased $60.5 million from December 31, 2014 to June 30, 2015. As of June 30, 2015, the total FHLB advances of $120.5 million had a weighted average interest of 0.64%. This funding source continues to be a low cost complement to core deposits.

Total equity increased $19.8 million, or 18.5%, to $127.1 million at June 30, 2015 compared to $107.3 million at December 31, 2014. This increase was attributable to $19.7 million of year-to-date net income and a $0.1 million improvement in unrealized losses on investment securities.

Asset Quality

Non-performing loans decreased $4.4 million, or 26.4%, to $12.4 million at June 30, 2015 compared to $16.8 million at December 31, 2014. Real estate owned balances remained steady at $4.7 million at June 30, 2015 compared to $4.4 million at December 31, 2014. The Company continued to experience fewer transfers to real estate owned with most of the transfers being 1-4 family residential properties which are normally sold at a faster pace than other property types.

Non-performing assets were 1.76% of total assets and 13.4% of total equity at June 30, 2015 compared to 2.35% and 19.8% at December 31, 2014, respectively.

For the six months ended June 30, 2015, the Company had net loan charge-offs of $0.1 million compared to net charge-offs of $2.7 million for the same period in 2014, a net improvement of $2.6 million.

Non-GAAP Financial Measures

Statements included in this press release include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. This news release and the accompanying tables discuss financial measures, such core net interest income, core noninterest expense, core net income, core return on average assets, core return on average equity, and core efficiency ratio, which are non-GAAP measures. We believe that such non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare the Company's operating results from period to period in a meaningful manner. Non-GAAP measures should not be considered as an alternative to any measure of performance as promulgated under GAAP. Investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the company. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP.

About Entegra Financial Corp.

Entegra became the holding company of Macon Bank on September 30, 2014 upon the completion of the mutual-to-stock conversion of Macon Bancorp and the Company's related stock offering. A total of 6,546,375 shares were sold in the offering at $10.00 per share for gross and net proceeds of $65.5 million and $63.7 million, respectively. The Company's shares began trading on the NASDAQ Global Market on October 1, 2014 under the symbol "ENFC". In December 2014, Entegra's stock was added to the Russell Microcap Index and the ABA NASDAQ Community Bank Index.

The Bank operates a total of 11 branches located throughout the western North Carolina counties of Cherokee, Henderson, Jackson, Macon, Polk and Transylvania and a loan production office in Greenville, South Carolina which is expected to become a full service branch in the fall of 2015.

Disclosures About Forward-Looking Statements

The discussions included in this document and its exhibits may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. For the purposes of these discussions, any statements that are not statements of historical fact may be deemed to be "forward-looking statements." Such statements are often characterized by the use of qualifying words such as "expects," "anticipates," "believes," "estimates," "plans," "projects," or other statements concerning opinions or judgments of the Company and its management about future events. The accuracy of such forward looking statements could be affected by factors including, but not limited to, the financial success or changing conditions or strategies of the Company's customers or vendors, fluctuations in interest rates, actions of government regulators, the availability of capital and personnel or general economic conditions. These forward looking statements express management's current expectations, plans or forecasts of future events, results and condition, including financial and other estimates. Additional factors that could cause actual results to differ materially from those anticipated by forward looking statements are discussed in the Company's filings with the Securities and Exchange Commission, including without limitation its Registration Statement on Form S-1, annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The Company undertakes no obligation to revise or update these statements following the date of this press release.

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 2014
Interest income $ 8,112 $ 7,862 $ 15,996 $ 16,590
Interest expense 1,473 1,574 3,025 3,212
Net interest income 6,639 6,288 12,971 13,378
Provision for loan losses -- 6 (1,500) 11
Net interest income after provision for loan losses 6,639 6,282 14,471 13,367
Noninterest income 1,088 1,555 2,627 2,929
Noninterest expense 8,181 5,668 14,757 11,781
Income (loss) before taxes (454) 2,169 2,341 4,515
Income tax expense (benefit) (17,559) 1,501 (17,379) 1,756
Net income $ 17,105 $ 668 $ 19,720 $ 2,759
Average shares outstanding 6,546,375 N/A 6,546,375 N/A
Basic and diluted net income per share $ 2.61 N/A $ 3.01 N/A
ENTEGRA FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands)
June 30, 2015 December 31, 2014
Assets
Cash and cash equivalents $ 28,995 $ 58,982
Investments - available for sale 239,741 219,859
Investments - held to maturity 39,777 29,285
Loans held for sale 9,635 10,761
Loans receivable 582,466 540,479
Allowance for loan losses (9,451) (11,072)
Real estate owned 4,710 4,425
Fixed assets, net 14,981 13,004
Bank owned life insurance 20,638 20,417
Net deferred tax asset 19,351 2,089
Other assets 18,681 15,419
Total assets $ 969,524 $ 903,648
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 692,537 $ 703,117
Federal Home Loan Bank advances 120,500 60,000
Junior subordinated notes 14,433 14,433
Post employment benefits 9,975 9,759
Other liabilities 4,937 9,020
Total liabilities $ 842,382 $ 796,329
Shareholders' equity
Total shareholders' equity 127,142 107,319
Total liabilities and shareholders' equity $ 969,524 $ 903,648
ENTEGRA FINANCIAL CORP. AND SUBSIDIARY
SELECTED FINANCIAL RATIOS AND OTHER DATA
(Dollars in thousands, except per share data)
For The Three Months Ended June 30, For The Six Months Ended June 30,
2015 2014 2015 2014
Non-GAAP Performance Ratios:
Core return on average assets 0.37% 0.63% 0.37% 0.56%
Core return on average equity (1) 3.05% 12.88% 3.09% 11.64%
Core efficiency ratio (2) 83.07% 74.33% 83.31% 77.60%
(1) - Return on average equity and core return on average equity for the three and six months ended June 30, 2014 reflects our actual average equity, and would have been adversely impacted had the $63.7 million in net stock offering proceeds raised in September 2014 been outstanding during the periods.
(2) - The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.
As of June 30, 2015 As of December 31, 2014
(Dollars in thousands, except per share data)
Asset Quality:
Non-performing loans $ 12,349 $ 16,780
Real estate owned $ 4,710 $ 4,425
Non-performing assets $ 17,059 $ 21,205
Non-performing loans to total loans 2.12% 3.10%
Non-performing assets to total assets 1.76% 2.35%
Allowance for loan losses to non-performing loans 76.53% 65.98%
Allowance for loan losses to total loans 1.62% 2.05%
Capital Ratios (Bank level only) (1):
Tier I capital (to average assets) 12.49% 11.91%
Common Equity Tier I capital (to risk-weighted assets) 18.76% N/A
Tier I capital (to risk-weighted assets) 18.76% 19.89%
Total capital (to risk-weighted assets) 20.02% 21.15%
Capital Ratios (Company) (1):
Tier I capital (to average assets) 14.46% 13.94%
Common Equity Tier I capital (to risk-weighted assets) 20.45% N/A
Tier I capital (to risk-weighted assets) 21.70% 23.24%
Total capital (to risk-weighted assets) 22.97% 24.50%
Other Data:
Book value per share $ 19.42 $ 16.39
Closing market price per share $ 17.55 $ 14.39
Closing price-to-book value ratio 90.37% 87.77%
(1) - Beginning January 1, 2015, the ratios are calculated using the Basel III framework which will be fully phased-in by
2019. Capital ratios for prior periods were calculated using the Basel I framework. The Common Equity Tier 1 (CET 1)
ratio is a new ratio introduced under the new Basel III framework.
APPENDIX – RECONCILIATION OF NON-GAAP MEASURES
Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 2014
(Dollars in thousands)
Core Net Interest Income
Net Interest income (GAAP) $ 6,639 $ 6,288 $ 12,971 $ 13,378
One-time deferred interest and discounts -- (218) -- (1,125)
Core net interest income (Non-GAAP) $ 6,639 $ 6,070 $ 12,971 $ 12,253
Core Noninterest Expense
Noninterest expense (GAAP) $ 8,181 $ 5,668 $ 14,757 $ 11,781
FHLB prepayment penalty (1,762) -- (1,762) --
Core noninterest expense (Non-GAAP) $ 6,419 $ 5,668 $ 12,995 $ 11,781
Core Net Income
Net income (GAAP) $ 17,105 $ 668 $ 19,720 $ 2,759
One-time deferred interest and discounts -- (218) -- (1,125)
Negative provision for loan losses -- -- (1,500) --
FHLB prepayment penalty 1,762 -- 1,762 --
Adjust actual income tax expense (benefit) to 35% estimated effective tax rate (1) (18,017) 818 (18,290) 569
Core net income (Non-GAAP) $ 850 $ 1,268 $ 1,692 $ 2,203
Core Return on Average Assets
Return on Average Assets (GAAP) 7.39% 0.33% 4.35% 0.70%
Effect to adjust for one-time deferred interest and discounts -- (0.11) -- (0.29)
Effect to adjust for negative provision for loan losses -- -- (0.33) --
Effect to adjust for FHLB prepayment penalty 0.76 -- 0.39 --
Effect to adjust for actual income tax expense (benefit) to 35% effective tax rate (7.78) 0.41 (4.04) 0.15
Core Return on Average Assets (Non-GAAP) 0.37% 0.63% 0.37% 0.56%
Core Return on Average Equity
Return on Average Equity (GAAP) 61.45% 6.79% 35.97% 14.57%
Effect to adjust for one-time deferred interest and discounts -- (2.21) -- (5.94)
Effect to adjust for negative provision for loan losses -- -- (2.74) --
Effect to adjust for FHLB prepayment penalty 6.33 -- 3.21 --
Effect to adjust for actual income tax expense (benefit) to 35% effective tax rate (64.73) 8.30 (33.35) 3.01
Core Return on Average Equity (Non-GAAP) 3.05% 12.88% 3.09% 11.64%
Core Efficiency Ratio
Efficiency ratio (GAAP) 105.88% 72.27% 94.61% 72.25%
Effect to adjust for one-time deferred interest and discounts -- 2.06 -- 5.35
Effect to adjust for FHLB prepayment penalty (22.81) -- (11.30) --
Core Efficiency Ratio (Non-GAAP) 83.07% 74.33% 83.31% 77.60%
(1) - The Company maintained a valuation allowance on its net deferred tax asset during the periods presented and therefore only recognized tax expense (benefit) for adjustments to its tax planning strategies and reversal of valuation allowance on net deferred tax assets. Core net income is reflected to adjust the income tax expense to an estimated 35% effective tax rate after the other adjustments have been applied.

CONTACT: Roger D. Plemens President and Chief Executive Officer (828) 524-7000

Source:Entegra Financial Corp.