UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549~~

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) ~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~OF ~~the~~THE ~~fiscal~~SECURITIES ~~year~~EXCHANGE ~~ended~~ACT ~~December 31,~~OF ~~2016~~1934

For the fiscal year ended December 31, 2017

Commission file number: 001-35072

(Exact name of registrant as specified in its charter)

Maryland

65-1310069

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

4655 Salisbury Road, Suite 110 Jacksonville, Florida 32256 (Address of principal executive offices, zip code) (800) 342-2824 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:

Jacksonville, Florida 32256

(Address of principal executive offices, zip code)

(800) 342-2824

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of class	Name of each exchange on which registered
Common Stock, $0.01 par value	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 ¨ ~~NOx~~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 ¨ ~~NOx~~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 twelve 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 website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding twelve 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, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨ Smaller Reporting Company x¨ Emerging Growth Company ¨

~~Indicate~~If an emerging growth company, indicate by check mark ~~whether~~if the registrant ishas aelected ~~shell~~not ~~company~~to ~~(as~~use ~~defined~~the inextended ~~Rule~~transition ~~12b-2~~period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act). ~~YES~~ ¨ ~~NOx.~~

~~The~~Indicate by ~~number~~check ofmark ~~shares~~whether ~~outstanding of~~ the registrant~~’s common~~ ~~stock~~is asa ofshell ~~March~~company 1,(as ~~2017~~defined ~~was~~in ~~15,553,709~~Rule ~~shares, par value $0.01 per share. The aggregate market value of common stock outstanding held by non~~12b-~~affiliates~~2 of the ~~registrant~~Exchange asAct). ofYES ~~June~~¨ NO ~~30, 2016 was $82,401,135~~x.

~~DOCUMENTS~~The ~~INCORPORATED~~number BYof ~~REFERENCE~~shares outstanding of the registrant’s common stock as of March 1, 2018 was 15,552,833 shares, par value $0.01 per share. The aggregate market value of common stock outstanding held by non-affiliates of the registrant as of June 30, 2017 was $107,887,189.

Portions of the registrant’s definitive proxy statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 22, 2017 are incorporated by reference into Part III of this Annual Report on Form 10-K.

ATLANTIC COAST FINANCIAL CORPORATION

ANNUAL REPORT ON FORM 10-K

Table of Contents

		Page
PART I.	~~PART I.~~
Item 1.	Business	4
	General	4
	Recent Events	5
	Market Areas	5
	Competition	7
	Lending Activities	7
	Nonperforming and Problem Assets	16
	Investment Activities	21
	Sources of Funds	23
	Subsidiary and Other Activities	25
	Employees	25
	Supervision and Regulation	25
	Federal Taxation	3736
	State Taxation	3836
	Available Information	3837
Item 1A.	Risk Factors	3837
Item 1B.	Unresolved Staff Comments	5450
Item 2.	Properties	5450
Item 3.	Legal Proceedings	5652
Item 4.	Mine Safety Disclosures	5652
PART II.	~~PART II.~~
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities	5753
Item 6.	Selected Financial Data	5854
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6056
	General Description of Business	6056
	Business Strategy	6056
	Critical Accounting Policies	6258
	Comparison of Financial Condition	6560
	Comparison of Results of Operations	7469
	Liquidity	84
	Selected Quarterly Financial Data	79
	Capital Resources	86
	Liquidity	79
	Inflation	86
	Capital Resources	81
	Off-Balance Sheet Arrangements	87
	Inflation	81
	Future Accounting Pronouncements	87
	Off-Balance Sheet Arrangements	82
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	87
	Future Accounting Pronouncements	82
Item 8.	Financial Statements and Supplementary Data	89
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	82
	Management’s Report on Internal Control Over Financial Reporting	89
Item 8.	Financial Statements and Supplementary Data	84
	Reports of Independent Registered Public Accounting Firms	90
	Management’s Report on Internal Control Over Financial Reporting	84
	Consolidated Balance Sheets	93
	Reports of Independent Registered Public Accounting Firms	85
	Consolidated Statements of Operations	94
	Consolidated Balance Sheets	88
	Consolidated Statements of Comprehensive Income	95
	Consolidated Statements of Operations	89
	Consolidated Statements of Stockholders’ Equity	96
	Consolidated Statements of Comprehensive Income	90
	Consolidated Statements of Cash Flows	97
	Consolidated Statements of Stockholders’ Equity	91
	Notes to Consolidated Financial Statements	98
	Consolidated Statements of Cash Flows	92
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	145
	Notes to Consolidated Financial Statements	93
Item 9A.	Controls and Procedures	145
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	140
Item 9B.	Other Information	146
Item 9A.	Controls and Procedures	140
Item 9B.	Other Information	141

ATLANTIC COAST FINANCIAL CORPORATION

ANNUAL REPORT ON FORM 10-K

Table of Contents, continued

PART III.	~~PART III.~~
Item 10.	Directors, Executive Officers and Corporate Governance	~~147~~142
Item 11.	Executive Compensation	~~147~~145
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~147~~159
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~147~~162
Item 14.	Principal Accountant Fees and Services	~~147~~163
PART IV.	~~PART IV.~~
Item 15.	Exhibits and Financial Statement Schedules	~~148~~164
Signature Page		~~149~~165
Index to Exhibits		~~150~~166

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K (this Report) contains forward-looking statements concerning Atlantic Coast Financial Corporation and Atlantic Coast Bank that involve risks, and uncertainties, ~~and~~as well as assumptions that, if they do not materialize or prove to be correct, could cause our results to differ materially from those expressed in or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements concerning: ~~our~~the Ameris merger, our plans, strategies and objectives for future operations; new loans and other products, services or developments; future economic conditions, performance or outlook; the outcome of contingencies; the continued suspension of dividends or share repurchases; potential acquisitions or divestitures; expected cash flows or capital expenditures; our beliefs or expectations; activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,” “projects” and similar words or expressions. You should not place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of the filing of this Report and are not guarantees of future performance or actual results. Forward-looking statements are made in reliance on the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).

Details and discussions concerning some of the factors that could affect our forward-looking statements or future results are set forth in this Report under Item 1A. “Risk Factors.” The factors set forth in Item 1A. “Risk Factors” included herein are not exhaustive. Additional risks and uncertainties not known to us or that we currently believe not to be material also may adversely impact our business, financial condition, results of operations and cash flows. Should any risks or uncertainties develop into actual events, these developments could have a material adverse effect on our business, financial condition, results of operations and cash flows. The forward-looking statements contained in this Report are made as of the date hereof and we disclaim any intention or obligation, other than imposed by law, to update or revise any forward-looking statements or to update the reasons actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or developments or otherwise. For further information concerning risk factors, see Item 1A. “Risk Factors” in this Report.

PART I.

ITEM 1. BUSINESS

General

Atlantic Coast Financial Corporation

Atlantic Coast Financial Corporation (the Company), a bank holding company headquartered in Jacksonville, Florida, is a Maryland corporation incorporated in 2007. Through our principal wholly owned subsidiary, Atlantic Coast Bank (the Bank), we serve the Northeast Florida, Central Florida and Southeast Georgia markets.

The Company does not maintain offices separate from those of the Bank or utilize personnel other than certain of the Bank’s officers. Any officer that serves as a director of the Company is not separately compensated for his or her service as a director.

Atlantic Coast Bank

The Bank was established in 1939 as a credit union to serve the employees of the Atlantic Coast Line Railroad. On November 1, 2000, after receiving the necessary regulatory and membership approvals, Atlantic Coast Federal Credit Union converted to a federal mutual savings bank (and subsequently a federally-chartered savings bank) known as Atlantic Coast Bank. The conversion allowed the Bank to diversify its customer base by marketing products and services to individuals and businesses in its market areas and make loans to customers who did not have a deposit relationship with the Bank. On December 27, 2016, the Bank consummated the conversion of its charter from that of a federally-chartered savings bank to that of a Florida state-chartered commercial bank supervised by the Florida Office of Financial Regulation (the OFR) and the Federal Deposit Insurance Corporation (the FDIC).

The Bank has traditionally focused on attracting deposits and investing those funds primarily in loans, including commercial real estate loans, consumer loans, first mortgages on owner-occupied, one- to four-family residences, and home equity loans. Additionally, the Bank invests funds in multi-family residential loans, commercial business loans, and commercial and residential construction loans. The Bank also invests funds in investment securities, primarily those issued by U.S. government-sponsored agencies or entities, including Fannie Mae, Freddie Mac and Ginnie Mae.

Revenues are derived principally from interest on loans and other interest-earning assets, such as investment securities~~, as well as from gains on the sale of loans~~. To a lesser extent, revenue is generated from service charges, gains on the sale of loans and other income ~~sources~~.

The Bank offers a variety of deposit accounts having a wide range of interest rates and terms, which generally include noninterest-bearing and interest-bearing demand, savings and money market ~~demand~~, and time deposit accounts with terms ranging from three months to five years. Deposits are primarily solicited in the Bank’s market areas of the Northeast Florida and Southeast Georgia to fund loan demand and other liquidity needs; however, ~~late~~ ~~in 2015,~~ the Bank also ~~started~~solicits ~~soliciting~~ deposits in Central Florida~~, which is expected to become a key deposit market for the Bank~~.

The Bank is headquartered at 4655 Salisbury Road, Suite 110, Jacksonville, Florida, 32256 and its telephone number is (800) 342-2824. Its website is www.AtlanticCoastBank.net. The Bank’s website is not incorporated into this Report.

Recent Events

~~Conversion~~Agreement toand ~~Florida~~Plan ~~State-chartered Commercial~~of ~~Bank~~Merger with Ameris Bancorp

On ~~December~~November 2716, ~~2016~~2017, the ~~Bank~~Company ~~consummated~~entered into ~~the~~an ~~conversion~~Agreement and Plan of ~~its~~Merger ~~charter~~(the ~~from~~Merger ~~that~~Agreement) ofwith Ameris Bancorp, a ~~federally-chartered~~Georgia ~~savings~~corporation ~~bank~~(Ameris). Pursuant to ~~that~~the ofMerger Agreement, athe ~~Florida~~Company ~~state-chartered~~will ~~commercial~~merge ~~bank supervised~~into byAmeris, with Ameris as the ~~OFR~~surviving ~~and~~entity (the ~~FDIC~~Ameris Merger). The ~~conversion~~Merger isAgreement ~~not~~provides that, ~~expected~~immediately tofollowing ~~affect~~the Ameris Merger, the Bank’s ~~customers~~will inbe ~~any~~merged ~~way.~~into Ameris Bank, ~~depositors will~~a ~~continue~~Georgia tobank ~~have~~wholly ~~the~~owned ~~protection~~by ofAmeris, with ~~Federal~~Ameris ~~Deposit~~Bank ~~Insurance~~as ~~provided~~the bysurviving entity (the ~~FDIC~~Bank Merger).

Under the terms and subject to the conditions of the Merger Agreement, the Company’s stockholders will have the right to receive $1.39 in cash and 0.17 shares of Ameris common stock for each share of the common stock of the Company they hold. The Merger Agreement provides that immediately prior to the closing of the Ameris Merger, the Company’s outstanding restricted stock awards will fully vest and be converted into the right to receive the same merger consideration per share as other outstanding shares of the Company’s common stock.

The Merger Agreement has been unanimously approved by the boards of directors of the Company and Ameris. The closing of the Ameris Merger is subject to the required approval of the Company’s stockholders, requisite regulatory approvals and other customary closing conditions. The Ameris Merger is expected to close during the second quarter of 2018.

Market Areas

The Bank’s primary deposit customers reside in Northeast Florida, Central Florida and Southeast Georgia markets with our lending areas primarily covering those same markets. The Bank operates seven branches and has its home and executive offices (which includes a stand-alone ATM) in greater Jacksonville, Florida, and three branches in Southeast Georgia. The Florida branches include Jacksonville Beach, Neptune Beach, the Southside of Jacksonville, Arlington, Julington Creek, the Westside of Jacksonville, and Orange Park. The Georgia branches include Waycross (two locations, one of which has a drive-up facility in addition to the branch) and Douglas. In addition to its branches, the Bank has mortgage lending offices in ~~Tampa and~~ Clearwater, Florida, and in Saint Simons Island, ~~and~~Georgia, a general lending office in Savannah, Georgia, as well as a combined mortgage lending and commercial banking office in Lake Mary (Orlando), Florida. The office in Lake Mary includes a small business lending group, which primarily funds small business loans in Florida, Georgia, North Carolina and South Carolina.

Although the majority of the Bank’s operations are in its primary market areas of Northeast Florida, Central Florida and Southeast Georgia, the Bank will also originate and purchase portfolio loans collateralized by property outside these areas.

Florida Market Area

The city of Jacksonville, Florida ranks as the 12th largest city in the United States in terms of population, with an estimated ~~868~~926,000 residents, based on ~~2015~~ 2016 estimates. When including the three beach cities east of Jacksonville, along with surrounding counties, the Jacksonville metropolitan area has an estimated 1,~~400~~500,000 residents, based on ~~2015~~2016 estimates. The Jacksonville metropolitan area, with deposits of approximately $59 billion as of June 30, ~~2016~~2017, is the third largest market in Florida by deposits. Jacksonville has an estimated median household income of $5359,~~000~~300, and the unemployment rate was 43.4% at December 31, ~~2016~~2017. There are a number of large companies with corporate or regional headquarters located in the Jacksonville metropolitan area, including four Fortune 1000 companies whose corporate headquarters are located in or near the city.

The city of Orlando, Florida ranks as the 73rd largest city in the United States in terms of population, with an estimated ~~271~~277,000 residents, based on ~~2015~~2016 estimates. When including the surrounding counties, the Orlando metropolitan area has an estimated 2,~~400~~500,000 residents, based on ~~2015~~2016 estimates. The Orlando metropolitan area, with deposits of approximately $4548 billion as of June 30, ~~2016~~2017, is the fourth largest market in Florida by deposits. Orlando has an estimated median household income of $5156,000, and the unemployment rate was 43.23% at December 31, ~~2016~~2017. There are a number of large companies with corporate or regional headquarters located in the Orlando metropolitan area, including ~~two~~one Fortune 1000 ~~companies~~company whose corporate headquarters ~~are~~is located in or near the city.

The city of Tampa, Florida ranks as the ~~53rd~~ ~~largest~~52nd largest city in the United States in terms of population, with an estimated ~~369~~377,000 residents, based on ~~2015~~2016 estimates. When including the surrounding counties, the Tampa metropolitan area (which includes Clearwater) has an estimated 3,~~000~~050,000 residents, based on 2016 ~~2015~~ estimates. The Tampa metropolitan area, with deposits of approximately $7682 billion as of June 30, ~~2016~~2017, is the second ~~largest~~ largest market in Florida by deposits. Tampa has an estimated median household income of $4953,000, and the unemployment rate was 4 3.54% at December 31, ~~2016~~2017. There are a number of large companies with corporate or regional headquarters located in the Tampa metropolitan area, including seven Fortune 1000 companies whose corporate headquarters are located in or near the city.

Georgia Market Area

The Bank was established in Waycross, Georgia, the county seat of Ware County, and began as a credit union for the Atlantic Coast Line Railroad and then the Seaboard System Railroad, which is now a part of CSX Transportation. Waycross has an estimated population of 14,000, based on ~~2015~~2016 estimates, with an estimated median household income of $25,000. The unemployment rate in Waycross was 54.14% at December 31, ~~2016~~2017. One of the largest employers in Waycross is the Satilla Regional Medical Center, with over 1,~~000~~300 employees ~~and 100 physicians~~. ~~Satilla Regional Medical Center became part of the Mayo Clinic Health System in 2012.~~ Waycross began as a crossroads for southeastern travel and became a hub for rail traffic in the mid-1800s. Today, it is home to the largest CSX Transportation rail yard on the East Coast, with over 1,200 employees.

Douglas, Georgia, which is in Coffee County, has a population of 12,000, based on ~~2015~~2016 estimates, with an estimated median household income of $31,000. The unemployment rate for Douglas was 5.50% at December 31, ~~2016~~2017. Wal-Mart is the biggest employer in the area, with a retail store and a distribution center, which employs over 900 people. The largest public employer is the Board of Education, with 1,~~600~~200 ~~people~~employees. Agriculture plays a major role in the area with products that include peanuts, corn, tobacco and cotton. Poultry is also a major part of the economy with a processing plant, operated by Pilgrim’s Pride Corporation, in the area.

Savannah, Georgia, which is in Chatham County, has an estimated population of ~~146~~147,000, based on ~~2015~~2016 estimates, with an estimated median household income of $36,000. The unemployment rate for the Savannah area was 4.90% at December 31, ~~2016~~2017. The Port of Savannah boasts the largest concentration of import distribution centers on the East Coast and has the largest single container terminal in North America. The terminal is the fourth largest container port in the United States (based on standard units for carrying and handling capacity), with two railroads on the terminal: CSX Transportation and Norfolk Southern Railway.

Competition

The Bank is competitive in attracting deposits and originating real estate and other loans, but faces strong competition in both areas. Historically, most of the Bank’s direct competition for deposits has come from credit unions, community banks, large commercial banks, and thrift institutions within our primary market areas. There are more than 1,~~800~~700 branches operating in the Bank’s markets, the majority of which are in the Jacksonville, Orlando and Tampa markets.

In recent years, competition also has come from institutions that largely deliver their services over the Internet. Internet banking has the competitive advantage of lower infrastructure costs. Particularly during times of extremely low or extremely high interest rates, the Bank has faced significant competition for customers’ funds from short-term money market securities and other corporate and government securities. During periods of increasing volatility in interest rates, competition for interest-bearing deposits increases as customers, particularly time-deposit customers, tend to move their accounts between competing businesses to obtain the highest rates in the market. The Bank competes for these deposits by offering convenient locations, superior service, competitive rates and attractive deposit products. An arrangement that gives all of our customers access to over 900 ATMs, at no charge, has proven to be a positive competitive advantage for the Bank. Additionally, the Bank’s “High Tide” deposit account is also a competitive advantage for the Bank, as it provides customers the ability to obtain refunds for ATM surcharges.

As of June 30, ~~2016~~2017 (the most recent date ~~for~~ for which market share peer data is available), the Bank was ranked number 1413 in Jacksonville deposit market share, holding $~~355~~ 372 million, or less than 1% of total deposits in the area. As of June 30, 2017, the Bank had $20 million in deposits in Orlando and $2 million in Tampa. In Waycross, the Bank was ranked number two with 22% of the deposit market share, holding $~~184~~199 million as of June 30, ~~2016~~ 2017. The Bank holds approximately 5% of total deposit market share in Douglas, with $3438 million as of June 30, ~~2016~~2017.

Competition within our geographic markets also affects the Bank’s ability to obtain loans through origination or purchase and to originate loans at rates that provide an attractive yield. Competition for loans comes principally from mortgage bankers, commercial banks, national homebuilders, and credit unions. Internet-based lenders also have become a greater competitive factor in recent years. Such competition for the origination and purchase of loans may limit the Bank’s future growth and earnings potential. However, the Bank’s website should help the Bank’s competitiveness in the electronic banking arena.

Lending Activities

General

Historically, the Bank has originated portfolio one- to four-family residential first and second mortgage loans, home-equity loans, and commercial real estate loans and, to a lesser extent, commercial and residential construction loans, multi-family real estate loans, commercial business loans, and automobile and other consumer loans. We have not originated any land loans since 2008 except for those associated with the development of property for a residential or commercial end user. We have not and currently do not originate or purchase non-QM loans (i.e., loans that do not comply with “Qualified Mortgage” rules), or offer “teaser” rate loans (i.e., loans with low, temporary introductory rates). Our current strategy has been to expand commercial real estate, one- to four-family mortgage and warehouse lending.

The Bank originates commercial real estate loans and commercial and industrial loans with small to mid-size businesses for the purposes of purchasing real estate and inventory, financing equipment, and providing working capital.

The Bank also originates warehouse lines of of credit secured by one- to four-family residential loans originated by third party originators under purchase and assumption ~~agreements~~ agreements (warehouse loans held-for-investment). Warehouse lending uses mortgage bankers to originate one- to four-family residential ~~mortgage~~ mortgage loans for sale in the secondary market. The third-party originator sells the loans and servicing rights to investors in order to repay the outstanding balance on warehouse loans held-for-investment. The Bank earns interest until the loan is sold and ~~typically~~ typically earns fee income as well. Loans originated within the warehouse lending program generally have commitments to purchase from investors, are sold with no recourse, and are sold with servicing released to the investor. The weighted average number of days outstanding of warehouse loans held-for-investment was 1210 days during ~~2016~~2017.

The Bank originates commercial loans through the Small Business Administration’s (SBA) 7(a) and 504 Programs, and the U.S. Department of Agriculture’s (USDA) Business & Industry (B&I) Program. The SBA 7(a) loans are guaranteed by the SBA up to 75% of the loan amount up to a maximum guaranty cap of $3,750,000. The Bank typically, but not always, sells the guaranteed portion of the SBA 7(a) loans into the secondary market at a premium. The Bank earns a 1% servicing fee on the amount sold. These loans are non-recourse, other than for proof of fraud or misrepresentation on the part of the lender. The Bank generally retains the unguaranteed portion of SBA 7(a) loans. In the 504 program, the Bank and the SBA are in different lien positions. The typical structure of an SBA 504 loan is that the Bank is in a first lien position at a 50% loan-to-value (LTV), and the SBA is in a second lien position at a 40% LTV. The remaining 10% is an equity investment from the borrower. USDA B&I loans are guaranteed on a scaled basis from 60% to 80% based on the size of the originated loan. The Bank typically, but not always, sells the guaranteed portion of the B&I loans on the secondary market at a premium. The Bank retains servicing for the B&I loan, but only earns a servicing fee on the portion that is sold. The servicing fees are determined by the secondary market, and range from 0.25% to 1%. These loans are non-recourse, other than for proof of fraud or misrepresentation on the part of the lender. The Bank generally retains the unguaranteed portion of the USDA B&I loans.

At December 31, ~~2016~~2017, the net loan portfolio totaled $~~639~~757.25 million, which constituted 7077.40% of total assets. Loans carry either a fixed or adjustable rate of interest. Mortgage loans have a longer-term amortization, with maturities generally up to 30 years, with principal and interest due each month. Commercial real estate loans, commercial and industrial loans, commercial construction loans, and multi-family real estate loans generally have larger balances and involve a greater degree of credit risk than one- to four-family residential mortgage loans.

Consumer loans are generally shorter in term and amortize monthly or have interest payable monthly. Warehouse loans held-for-investment are underwritten and funded on an individual loan basis. A percentage of loans are randomly selected for advanced quality control or a third-party fraud-risk analysis report in addition to the standard underwriting process. SBA loans are underwritten in accordance with SBA guidelines and the Bank’s commercial credit policy.

At December 31, ~~2016~~2017, the maximum amount we we could have loaned to any one borrower and related entities under applicable regulations was approximately $13.17 million, a 15% limit for unsecured loans, and $2122.9 million, a 25% limit for amply and entirely secured loans. At December 31, ~~2016~~2017, there were no portfolio loans or group of portfolio loans to related borrowers with outstanding balances in excess of either of these amounts.

The following table presents the composition of the Bank’s net portfolio loans, and other loans (held-for-sale and warehouse), in dollar amounts and in percentages at the dates indicated:

	At December 31,
	2016						2015						2014
	2017						2016						2015
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in Thousands)
Real estate loans:
One- to four-family	$	~~276~~286,~~193~~671			4337.18	%	$	276,~~286~~193			4543.81	%	$	~~237~~276,~~151~~286			5345.08	%
Multi-family		7065,~~452~~419			118.06	%		8370,~~442~~452			1311.90	%		283,~~999~~442			013.79	%
Commercial		~~104~~220,~~143~~282			1629.30	%		61104,~~613~~143			1016.23	%		5061,~~322~~613			1110.32	%
Land		1713,~~218~~760			21.78	%		1617,~~472~~218			2.7	%		1116,~~681~~472			2.67	%
Total real estate loans		~~468~~586,~~006~~132			7377.12	%		~~437~~468,~~813~~006			7273.61	%		~~302~~437,~~153~~813			6772.6	%
Real estate construction loans:
One- to four-family		228,~~687~~579			31.51	%		22,~~526~~687			3.75	%		222,~~580~~526			03.67	%
Commercial		1417,~~432~~309			2.3	%		1214,~~527~~432			2.13	%		212,~~939~~527			02.61	%
Acquisition and development		−-			0.0	%		−-			0.0	%		−-			0.0	%
Total real estate construction loans		3725,~~119~~888			53.84	%		3537,~~053~~119			5.8	%		535,~~519~~053			15.28	%
Other portfolio loans:
Home equity		3734,~~748~~477			54.95	%		4137,~~811~~748			65.9	%		4641,~~343~~811			106.49	%
Consumer		3934,~~232~~743			64.16	%		4439,~~506~~232			76.41	%		4944,~~854~~506			117.24	%
Commercial		5778,~~947~~451			910.13	%		4457,~~076~~947			79.31	%		4344,~~119~~076			97.63	%
Total other portfolio loans		~~134~~147,~~927~~671			2119.14	%		~~130~~134,~~393~~927			21.61	%		~~139~~130,~~316~~393			3121.26	%
Total portfolio loans	$	~~640~~759,~~052~~691			100.0	%	$	~~603~~640,~~259~~052			100.0	%	$	~~446~~603,~~988~~259			100.0	%
Less:
Allowance for portfolio loan losses	$	(8,~~162~~600	)				$	(78,~~745~~162	)				$	(7,~~107~~745	)
Net deferred portfolio loan costs, and premiums and discounts on purchased loans		76,~~355~~415						7,~~993~~355						67,~~989~~993
Total portfolio loans, net	$	~~639~~757,~~245~~506					$	~~603~~639,~~507~~245					$	~~446~~603,~~870~~507
Total other loans (held-for-sale and warehouse loans held-for-investment)	$	8785,~~724~~310					$	5087,~~665~~724					$	4150,~~191~~665

	At December 31,
	2013						2012
	2014						2013
	Amount			Percent			Amount			Percent
	(Dollars in Thousands)
Real estate loans:
One- to four-family	$	~~167~~237,~~455~~151			4453.90	%	$	~~193~~167,~~057~~455			4544.39	%
Multi-family		32,~~197~~999			0.87	%		3,~~278~~197			0.8	%
Commercial		4850,~~356~~322			1211.93	%		5848,~~193~~356			1312.79	%
Land		1211,~~593~~681			32.46	%		1612,~~630~~593			3.94	%
Total real estate loans		~~231~~302,~~601~~153			6267.06	%		~~271~~231,~~158~~601			6362.70	%
Real estate construction loans:
One- to four-family		−2,580			0.06	%		−-			0.0	%
Commercial		2,~~582~~939			0.76	%		52,~~049~~582			10.27	%
Acquisition and development		−-			0.0	%		−-			0.0	%
Total real estate construction loans		25,~~582~~519			01.72	%		52,~~049~~582			10.27	%
Other portfolio loans:
Home equity		5246,~~767~~343			1410.14	%		6352,~~867~~767			1514.01	%
Consumer		5349,~~290~~854			1411.32	%		6153,~~558~~290			14.43	%
Commercial		3343,~~029~~119			8.9.6	%		2433,~~308~~029			58.79	%
Total other portfolio loans		139,~~086~~316			3731.32	%		~~149~~139,~~733~~086			3537.13	%
Total portfolio loans	$	~~373~~446,~~269~~988			100.0	%	$	~~425~~373,~~940~~269			100.0	%
Less:
Allowance for portfolio loan losses	$	(67,~~946~~107	)				$	(106,~~889~~946	)
Net deferred portfolio loan costs, and premiums and discounts on purchased loans		56,~~633~~989						65,~~150~~633
Total portfolio loans, net	$	~~371~~446,~~956~~870					$	~~421~~371,~~201~~956
Total other loans (held-for-sale and warehouse loans held-for-investment)	$	2241,~~179~~191					$	7222,~~568~~179

Portfolio Loans Maturities and Yields

The following table summarizes the contractual maturities of our portfolio loans at December 31, ~~2016~~2017:

One- to Four-family

Multi-Family

Amount

Weighted Average Rate (%)

Amount

Weighted Average Rate (%)

(Dollars in Thousands)

1 year or less (1)

948,~~062~~412

4.1103

17,~~667~~452

3.4855

Greater than 1 to 3 years

2080,~~205~~132

4.1105

1344,~~784~~115

3.3138

Greater than 3 to 5 years

1957,~~122~~816

4.1319

475,~~956~~915

34.3222

Greater than 5 to 10 years

5182,~~279~~140

4.2220

67,~~430~~931

4.7462

Greater than 10 to 20 years

~~101~~17,~~226~~560

4.3923

~~615~~6

54.6399

More than 20 years

~~75,299~~611

4.1415

−-

Total portfolio loans

~~276~~286,~~193~~671

7065,~~452~~419

Commercial Real Estate

Land

Amount

Weighted Average Rate (%)

Amount

Weighted Average Rate (%)

(Dollars in Thousands)

1 year or less (1)

725,~~916~~747

4.5280

65,~~548~~983

65.6806

Greater than 1 to 3 years

1934,~~585~~390

54.4858

15,~~469~~476

54.0358

Greater than 3 to 5 years

1863,~~608~~371

4.7137

~~6,189~~402

35.9563

Greater than 5 to 10 years

4186,~~749~~135

4.4948

~~1,641~~798

35.0744

Greater than 10 to 20 years

1310,~~579~~618

4.4239

~~932~~754

56.9419

More than 20 years

~~2,706~~21

54.5025

~~439~~347

56.9903

Total portfolio loans

~~104~~220,~~143~~282

1713,~~218~~760

One- to Four-family Construction (2)

Commercial Construction (2)

Acquisition and Development

Amount

Weighted Average Rate (%)

Amount

Weighted Average Rate (%)

Amount

Weighted Average Rate (%)

(Dollars in Thousands)

1 year or less (1)

−-

−

515,362

4.7338

−-

−

Greater than 1 to 3 years

−-

45,~~079~~470

34.5832

−-

Greater than 3 to 5 years

−-

42,~~433~~621

34.4914

−-

Greater than 5 to 10 years

−-

12,~~783~~239

43.5138

−-

Greater than 10 to 20 years

31,~~341~~701

3.4253

~~3,145~~-

~~2.47~~-

−-

More than 20 years

196,~~346~~878

4.0126

~~941~~1,617

5.7520

−-

Total portfolio loans

228,~~687~~579

1417,~~432~~309

−-

	Home Equity					Consumer					Commercial Other
	Amount		Weighted Average Rate (%)			Amount		Weighted Average Rate (%)			Amount		Weighted Average Rate (%)
	(Dollars in Thousands)
1 year or less (1)	$	15,~~824~~993		65.1378	%	$	615,~~342~~333		9.3694	%	$	2227,~~313~~132		45.5412	%
Greater than 1 to 3 years		39,~~691~~307		65.2070			129,~~812~~738		108.2014			922,~~259~~672		54.1598
Greater than 3 to 5 years		36,~~445~~865		65.0860			4,~~859~~672		8.3211			511,~~489~~196		54.2094
Greater than 5 to 10 years		68,~~964~~879		5.7036			84,~~316~~385		8.2807			915,~~758~~109		5.2239
Greater than 10 to 20 years		102,~~269~~733		5.1514			~~6,903~~615		7.82			81,~~835~~633		54.9086
More than 20 years		~~11,555~~700		45.9104			−-		−-			~~2,293~~709		54.4871
Total portfolio loans	$	3734,~~748~~477				$	3934,~~232~~743				$	5778,~~947~~451

	Total
	Amount		Weighted Average Rate (%)
	(Dollars in Thousands)
1 year or less (1)	$	55141,~~723~~414		5.2913	%
Greater than 1 to 3 years		84211,~~884~~300		54.4138
Greater than 3 to 5 years		~~110~~152,~~101~~858		4.1451
Greater than 5 to 10 years		~~127~~207,~~920~~616		4.7455
Greater than 10 to 20 years		~~148~~35,~~845~~620		4.6545
More than 20 years		~~112~~10,~~579~~883		4.2853
Total portfolio loans	$	~~640~~759,~~052~~691

(1)

Demand loans, loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

(2)

Construction loans include notes that cover both the construction period and the end permanent financing.

The following table sets forth the scheduled repayments of fixed- and adjustable-rate portfolio loans at December 31, ~~2016~~2017 that are contractually due after December 31, ~~2017~~2018:

Due After December 31, 2017

Due After December 31, 2018

Fixed Rate

Adjustable Rate

Total

(Dollars in Thousands)

Real estate loans:

One- to four-family

~~152~~142,~~072~~451

~~115~~95,~~059~~808

~~267~~238,~~131~~259

Multi-family

6240,~~473~~754

617,~~312~~213

6857,~~785~~967

Commercial

6498,~~179~~332

3296,~~048~~203

96194,~~227~~535

Land

54,~~126~~285

53,~~544~~492

107,~~670~~777

Total real estate loans

~~283~~285,~~850~~822

~~158~~212,~~963~~716

~~442~~498,~~813~~538

Real estate construction loans:

One- to four-family

165,~~139~~654

62,~~548~~925

228,~~687~~579

Commercial

2,~~079~~332

129,~~302~~615

1411,~~381~~947

Acquisition and development

−-

Total real estate construction loans

187,~~218~~986

1812,~~850~~540

3720,~~068~~526

Other portfolio loans:

Home equity

118,~~026~~948

2419,~~898~~536

3528,~~924~~484

Consumer

3119,~~622~~340

~~1,268~~70

3219,~~890~~410

Commercial

10,~~332~~832

2540,~~302~~487

3551,~~634~~319

Total other portfolio loans

5239,~~980~~120

5160,~~468~~093

~~104~~99,~~448~~213

Total portfolio loans

~~355~~332,~~048~~928

~~229~~285,~~281~~349

~~584~~618,~~329~~277

One- to Four-Family Real Estate Portfolio Lending

As of December 31, ~~2016~~2017, one- to four-family residential mortgage loans totaled $~~276~~286.27 million, or 4337.18% of gross portfolio loans. Generally, one- to four-family residential loans are underwritten based on the applicant’s employment, income, credit history and the appraised value of the subject property. The Bank underwrites all loans on a fully indexed, fully amortizing basis. The Bank will generally lend up to 80% of the lesser of the appraised value or purchase price for one- to four-family residential loans. Should a loan be granted with a loan-to-value ratio in excess of 80%, private mortgage insurance would be required to reduce overall exposure to below 80%. Such collateral requirements are intended to protect the Bank from loss in the event of foreclosure.

Properties securing one- to four-family ~~residential~~ residential mortgage loans are ~~generally~~ appraised by independent fee appraisers. Borrowers are required to obtain title and hazard insurance, and flood insurance, if necessary, in an amount not less than the value of the property improvements. Management’s pricing strategy for one- to four-family mortgage loans includes setting interest rates that are competitive with other local financial ~~institutions~~ institutions and consistent with the Bank’s internal needs. Adjustable-rate mortgage (ARM) loans are tied to a variety of indices, including rates based on U.S. Treasury securities. The majority of ARM loans carry an initial fixed rate of interest for ~~either~~ between three or and seven years, which then converts to an interest rate that is adjusted based upon the applicable index and in accordance with the promissory note. As of December 31, ~~2016~~2017, the total amount of one- to four-family residential mortgage loans allowing for interest only payments totaled $31.04 million, or 10.15% of the total one- to four-family mortgage loan portfolio, and 0.52% of the total portfolio loans. We do not currently originate or purchase interest-only one- to four-family residential mortgage loans and discontinued such activity in December 2007.

The Bank’s home mortgages are structured with five to 30-year maturities and with amortizations up to 30 years. The majority of the one- to four-family mortgage loans originated are secured by properties located in Northeast Florida, Central Florida and Southeast Georgia. During 2008 and continuing through and including ~~2016~~2017, the Bank implemented stricter underwriting guidelines related to the origination of one- to four-family residential mortgage loans secured by investment property.

All residential real estate loans contain a “due on sale” clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the underlying property that serves as collateral for the loan, subject to certain laws. Loans originated or purchased are generally underwritten and documented pursuant to Freddie Mac or Fannie Mae guidelines.

The Bank also originates investor loans ~~for~~ for one- to four-family properties, and the majority of our lending activity has focused on owner-occupied property. We have not in in the past, nor do we currently, originate sub-prime loans, option-ARM loans, or other similar loans. We do not currently originate non-QM loans for the Bank’s loan portfolio.

Multi-Family Loans

As of December 31, ~~2016~~2017, multi-family residential loans totaled $7065.54 million, or 118.06% of gross portfolio loans. The majority of the loans are to borrowers who are experienced, in-market real estate investors, and are secured by properties located in New York, New York and Philadelphia, Pennsylvania. The majority of the loans were purchased in two separate transactions during 2015; however, the Bank also began originating multi-family residential loans in 2017. The underwriting for multi-family residential loans is based on the cash flow of the property and includes underwriting stresses for interest rate increases and a rise in cap rates. Multi-family residential loans are generally originated with adjustable interest rates based on the prime rate, U.S. Treasury securities, or regional Federal Home Loan Bank (FHLB) indices. Loan-to-value ratios on multi-family residential loans do not exceed 75% of the appraised value of the property securing the loan. These ~~The~~loans ~~net~~require ~~operating~~monthly ~~income~~payments, ~~must~~amortize beup ~~sufficient~~ to ~~cover~~30 ~~the~~years, ~~payments~~and ~~related to~~generally ~~the~~have ~~outstanding~~maturities ~~debt. Assignments~~ of ~~rents~~up ~~and leases are required in order for us~~ to be10 ~~assured~~years ~~the~~and ~~cash~~may ~~flow~~carry ~~from the project will be used to repay the debt. Appraisals on properties securing multi~~pre-~~family residential loans are performed by independent,~~payment ~~state-licensed fee appraisers~~penalties.

The net operating income must be sufficient to cover the payments related to the outstanding debt. Assignments of rents and leases are required in order for us to be assured the cash flow from the project will be used to repay the debt. Appraisals on properties securing multi-family residential loans are performed by independent, state-licensed fee appraisers. Payments on loans secured by multi-family real estate properties are often dependent on the successful operation or management of the properties and, as such, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired.

Commercial Real Estate Lending

The Bank offers commercial real estate ~~loans~~ loans for both permanent financing and construction/mini-perm financing. Our current strategy has been to focus primarily on permanent financing for owner occupied businesses and income producing properties. These loans are typically secured by single tenant or small retail establishments, office buildings, or other income producing properties located in the Bank’s primary market areas. As of December 31, ~~2016~~2017, permanent commercial real estate loans totaled $~~104~~220.13 million, or 1629.30% of gross portfolio loans.

The Bank originates both fixed-rate and adjustable-rate commercial real estate loans. The interest rate on adjustable-rate loans is tied to a variety of indices, including rates based on the prime rate, LIBOR, and U.S. Treasury securities. The majority of the Bank’s adjustable-rate loans carry an initial fixed-rate of interest, for either five, seven or ten years, and then convert to an interest rate that is adjusted based upon the current index rate for another period up to ten years. Loan-to-value ratios on commercial real estate loans generally do not exceed 80% of the appraised value of the property securing the loan. These loans require monthly payments, amortize up to 25 years, and generally have maturities of up to 10 years and may carry pre-payment penalties.

Loans secured by commercial real estate are underwritten based on the cash flow of the borrower or income producing potential of the property and the financial strength of the borrower and guarantors. Loan guarantees are generally obtained from financially capable parties based on a review of personal financial statements. The Bank generally requires commercial real estate borrowers with aggregate balances in excess of $500,000 to submit financial statements, including rent rolls if applicable, annually. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. The Bank generally requires an income-to-debt service ratio of 1.2 times debt. Additionally, the Bank considers interest and cap rate stresses to account for the potential of rising interest rates and the effect on the borrower’s ability to repay and valuation of the collateral. Assignments of rents and leases are required in order for us to be assured the cash flow from the project will be used to repay the debt. Appraisals on properties securing commercial real estate loans are performed by independent, state-licensed fee appraisers approved by the Bank’s Board of Directors. The majority of the properties securing commercial real estate loans are located in the Bank’s market areas.

Loans secured by commercial real estate are underwritten based on the cash flow of the borrower or income producing potential of the property and the financial strength of the borrower and guarantors. Loan guarantees are generally obtained from financially capable parties based on a review of personal financial statements. The Bank generally requires commercial real estate borrowers with aggregate balances in excess of $500,000 to submit financial statements, including rent rolls if applicable, annually. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. The Bank generally requires an income-to-debt service ratio of 1.25 times debt. Additionally, the Bank considers interest and cap rate stresses to account for the potential of rising interest rates and the effect on the borrower’s ability to repay and valuation of the collateral. Assignments of rents and leases are required in order for us to be assured the cash flow from the project will be used to repay the debt. Appraisals on properties securing commercial real estate loans are performed by independent, state-licensed fee appraisers. The majority of the properties securing commercial real estate loans are located in the Bank’s market areas.

Loans secured by commercial real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation and management of the owner’s business or successful management of the property, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project or business is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired.

Land Loans

As of December 31, ~~2016~~2017, land loans totaled $1713.28 million, or 21.78% of gross portfolio loans. In an effort to prevent potential exposure to additional credit risk, the Bank no longer originates new land loans unless the borrower is acquiring the land as part of the development of a property for individual residential or commercial use. Generally, these loans carry a higher rate of interest than permanent residential loans. The Bank generally assesses the borrower’s ability to repay, credit history, appraised value of the subject property, and the intended end use of the property to underwrite land loans.

Loans secured by land generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and commercial real estate loans.

Real Estate Construction Lending

As of December 31, ~~2016~~2017, real estate construction loans totaled $3725.19 million, or 53.84% of gross portfolio loans. The real estate construction portfolio consists of both residential and commercial construction loans. As of December 31, ~~2016~~2017, the Bank had residential construction loans totaling $228.76 million, or 31.51% of gross portfolio loans, and commercial construction loans totaling $1417.43 million, or 2.3% of gross portfolio loans.

Residential construction loans are generally made to individual borrowers for the construction of a personal residence. Generally, construction loans are limited to a loan to value ratio not to exceed 80% based on the lesser of construction costs or the appraised value of the property upon completion. The Bank originates only residential construction loans to individual borrowers whose intent is to occupy the house upon completion.

Commercial construction loans are generally made for the construction of commercial, owner-occupied properties and investment income producing properties with ~~credit~~ tenant ~~leases~~ leases in place at closing with rents commencing upon completion of construction. These loans are limited to a loan to value not to exceed 80% based on the lesser of construction costs or the appraised value of the property upon completion, and are underwritten ~~based~~ based on the owner’s anticipated cash flow or the lease income from tenants.

Home-Equity Lending

The Bank generally originates fixed-term, ~~fully~~ fully amortizing home equity loans and home equity lines of credit. At December 31, ~~2016~~2017, the home equity portfolio totaled $3734.7 5 million, or 54.95%, of gross portfolio loans. Due to the decline of both real estate values in our market areas and the increased risk inherent with second lien real estate financing, the Bank ceased originating home equity lines of credit in January 2009, but began originating home equity lines of credit again in 2014 under stricter credit criteria. The Bank generally underwrites one- to four-family home equity loans and lines of credit based on the applicant’s employment and credit history and the appraised value of the subject property. Presently, the Bank will lend up to 80% of the appraised value less any prior liens. In limited circumstances, the Bank may lend up to 90% of the appraised value less any prior liens. This ratio may be reduced in accordance with internal guidelines given the risk and credit profile of the borrower. Properties securing one- to four-family mortgage loans are generally appraised by independent fee appraisers. The Bank requires a title search and hazard insurance, and flood insurance, if necessary, in an amount not less than the value of the property improvements. Currently, home equity loans are retained in our loan portfolio.

The Bank’s home equity lines of credit carry an adjustable interest rate based upon the prime rate of interest and generally have an interest rate floor. As of December 31, ~~2016~~2017, interest only lines of credit totaled $129.69 million, or 3328.38% of the total home equity loan portfolio, and 43.01% of total loans collateralized by one- to four-family residential property. All home equity lines of credit have a maximum draw period of 10 years with a repayment period of up to 20 years following such draw period depending on the outstanding balance.

Consumer Loans

The Bank currently offers a variety of ~~consumer~~ consumer loans, primarily manufactured home loans, automobile loans and ~~automobile~~unsecured loans. At December 31, ~~2016~~2017, consumer loans totaled $3934.2 7 million, or 64.16% of gross portfolio loans.

The most significant component of the Bank’s consumer loan portfolio consists of manufactured home loans originated primarily through an on-site financing broker after being underwritten by the Bank. Loans secured by manufactured homes totaled $2421.60 million, or 32.8% of gross portfolio loans as of December 31, ~~2016~~2017. Manufactured home loans have a fixed rate of interest and may carry terms up to 25 years. Down payments are required, and the amounts are based on several factors, including the borrower’s credit history. The Bank has not originated manufactured home loans since early in 2011, and does not intend to originate such loans in the future.

~~The~~Another ~~second most~~ significant component of our consumer loan portfolio consists of automobile loans. The loans are originated primarily through our branch network and are ~~underwritten~~ underwritten by Atlantic Coast Bank. Loans secured by automobiles totaled $65.23 million, or 1.0.7% of gross portfolio loans as of December 31, ~~2016~~ 2017. Automobile loans have a fixed rate of interest and may carry terms up to six years. Down payments are required, and the amounts are based on several factors, including the borrower’s credit history.

Consumer loans, except for those secured by manufactured homes, have shorter terms to maturity and are principally fixed rate, thereby reducing exposure to changes in interest rates, and carry higher rates of interest than one- to four-family residential mortgage loans. Consumer loans have an inherently greater risk of loss because they are predominantly secured by rapidly depreciable assets, such as automobiles or manufactured homes. In these cases, repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Commercial Business Lending

The Bank also offers commercial business ~~loans~~ loans that may be secured by assets other than real estate. At December 31, ~~2016~~2017, commercial business loans totaled $5778.95 million, or 9or 10.13% of gross portfolio loans. The purpose of these loans is to provide working capital, inventory financing, or equipment financing. Generally, working capital and inventory loans carry a floating rate of interest based on the prime rate plus a margin and mature annually. Loans to finance equipment generally carry a fixed rate of interest and terms of up to seven years. The collateral securing these types of loans is other business assets such as inventory, accounts receivable, and equipment. Once a loan is in the portfolio, the credit department monitors based on loan size, payment status, and borrower risk rating. Relationships with aggregate exposure of $500,000 or greater and lines of credit (regardless of amount) are required to submit financial statements annually. The Bank reviews the performance of these companies and affirms or changes their risk rating accordingly. Loans with borrowers whose risk ratings are classified as monitor or special mention are reviewed and documented quarterly and those rated substandard are reviewed monthly. Loans that become past due 30 days or more are monitored daily and borrower risk ratings are adjusted accordingly. Commercial business loans generally have higher interest rates than other loans in our portfolio because they have a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of any collateral. In addition, the Bank originates commercial loans through the 7(a) Program and the 504 Program of the SBA, as well as the B&I Program of the USDA.

Loan Originations, Purchases, and Sales

The Bank originates portfolio loans through its branch network, its lending offices, ~~the Internet,~~ and its call center. Referrals from current customers, advertisements, real estate brokers, mortgage loan brokers and builders are also important sources of loan originations. While the Bank originates both adjustable-rate loans and fixed-rate loans, origination volume is dependent upon customer loan demand within the Bank’s market areas. Demand is affected by local competition, the real estate market and the interest rate environment.

The Bank shut down its internal mortgage ~~origination~~ origination division in 2012, and moved to a referral model to originate mortgages. However, with the success of the Company’s ~~capital~~ capital raise in December 2013, the Bank reentered the business of originating one- to four-family residential loans for investment ~~and~~ and sale, and intends to continue originating such loans in the future. Additionally, the Company has ~~five~~two mortgage ~~lending~~loan production offices, with ~~three~~one in Florida and ~~two~~one in Georgia.

Prior to 2008, the Bank occasionally purchased pools of residential loans originated by other banks when organic growth was not sufficient. These loan purchases were made based on the Bank’s underwriting standards, such as loan-to-value ratios and borrower credit scores. The Bank ceased purchasing pools of loans between 2008 and 2012. However, during 2013, the Bank reentered the business of purchasing pools of residential loans originated by other banks, and intends to continue purchasing such loans to supplement organic growth. The Bank ~~did~~had ~~not purchase~~limited ~~any~~purchase ~~pooled~~activity ~~loans~~ during the year ended December 31, ~~2016~~2017. The Bank may purchase pooled loans secured by properties located in ~~areas~~ areas other than the Bank’s market areas.

Similarly, prior to 2008, the Bank also participated in commercial real estate loans originated by other banks. These participation loans were subject to the Bank’s usual underwriting standards as described above applicable to this type of loan. The Bank had not participated in a commercial real estate loan originated by another bank from mid-2007 through 2015. However, during 2016, the Bank reentered the business of participating in commercial real estate loans originated by other banks, and intends to continue participating in such loans in the future.

From time-to-time, the Bank may sell performing residential loans from our portfolio to enhance liquidity or to appropriately manage interest rate risk. The Bank ~~sold approximately $31.0 million (in principal balance) of performing loans during the year ended December 31, 2016. The Bank~~ has also utilized ~~the~~ the services of a national loan sale advisor to sell nonperforming residential mortgage loans in the past. ~~The Bank did not sell any such nonperforming loans during the year ended December 31, 2016.~~

Loans Held-for-Sale

Beginning in 2008 and continuing into 2012, the Bank regularly sold originated, conforming one- to four-family residential loans, both fixed rate and adjustable rate, including the related servicing, to other financial institutions in the secondary market for favorable fees. The Bank had not originated residential loans to be held-for-sale from mid-2012 through 2013, but began originating such loans again early in 2014.

Beginning in 2010, the Bank began to sell the guaranteed portion of the internally originated SBA 7(a) loans to investors, while maintaining the servicing rights. Additionally, beginning in 2016, the Bank began to sell the guaranteed portion of the internally originated USDA B&I loans to investors, while maintaining the servicing rights. The Bank intends to continue originating such loans for the foreseeable future.

Warehouse Loans Held-for-Investment

Beginning in 2010, the Bank began to originate warehouse loans held-for-investment and permit third-party originators to sell the loans and servicing rights to investors in order to repay the warehouse balance outstanding. The Bank intends to continue originating such loans for the foreseeable future.

Loan Approval Procedures and Authority

Lending authority per credit officer ranges from $100,000 to $1.0 million based on the individual credit officer’s lending and loan underwriting experience. Loans which exceed an individual credit officer’s lending authority may be approved using the combined authority of another credit officer on loan amounts up to and including $1.0 million. Loans exceeding $1.0 million must be approved by our management loan committee.

Nonperforming and Problem Assets

General

When a borrower fails to make a timely payment on a loan, contact is made initially in the form of a reminder letter sent at either 10 or 15 days after the payment due date depending on the terms of the loan agreement. If a response is not received within a reasonable period of time, contact by telephone is made in an attempt to determine the reason for the delinquency and to request payment of the delinquent amount in full or to establish an acceptable repayment plan to bring the loan current.

Modifications are considered at the request of the borrower or upon the Bank’s determination that a modification of terms may be beneficial to the Bank. Generally, the borrower and any guarantors must provide current financial information and communicate to the Bank the underlying cause of their financial hardship and expectations for the near future. The Bank must then verify the hardship and structure a modification that addresses the situation accordingly.

If the borrower is unable to make or keep payment arrangements, additional collection action is taken in the form of repossession of collateral for secured, non-real estate loans and small claims or legal action for unsecured loans. If the loan is secured by real estate, a letter of intent to foreclose is sent to the borrower when an agreement for an acceptable repayment plan cannot be established or agreed upon. The letter of intent to foreclose allows the borrower up to 30 days to bring the account current. Once the loan becomes delinquent and an acceptable repayment plan has not been established, a foreclosure action is initiated on the loan.

Delinquent Loans

Total portfolio loans past due 60 days or more totaled $108.51 million, or 1.61% of total portfolio loans at December 31, ~~2016~~2017. Real estate loans 60 days or more past due ~~totaled~~ totaled $97.20 million, or 10.49% of total loans at December 31, ~~2016~~2017. There were no construction loans 60 days or more past due at ~~December~~ December 31, ~~2016~~2017. Other portfolio loans (consisting of home equity, consumer, and commercial non-real estate) 60 days or more past due totaled $1.31 million, or 0.21% of total loans at December 31, ~~2016~~2017.

Nonperforming Assets

Nonperforming assets consist of nonperforming portfolio loans, accruing portfolio loans past due 90 days or more, and foreclosed assets. Loans to a customer whose financial condition has deteriorated are considered for nonperforming status whether or not the loan is 90 days and over past due. Generally, all loans past due 90 days or more are classified as nonperforming. For portfolio loans classified as nonperforming, interest income is not recognized until actually collected. At the time the loan is placed on nonperforming status, interest previously accrued, but not collected, is reversed and charged against current income.

The following table sets forth the amounts and categories of the Bank’s nonperforming assets:

	At December 31,
	2016			2015			2014			2013			2012
	2017			2016			2015			2014			2013
	(Dollars in Thousands)
Nonperforming portfolio loans
Real estate loans:
One- to four-family	$	1,~~533~~136		$	21,~~932~~533		$	2,~~850~~932		$	2,~~677~~850		$	102,~~555~~677
Multi-family		―			―			―			―			―
Commercial		~~2,276~~210			~~128~~2,276			~~501~~128			―501			~~8,643~~―
Land		5,~~548~~510			445,548			~~111~~44			75111			~~595~~75
Real estate construction loans:
One- to four-family		―			―			―			―			―
Commercial		―			―			―			―			~~739~~―
Acquisition and development		―			―			―			―			―
Other portfolio loans:
Home equity		58210			~~429~~58			~~212~~429			~~400~~212			~~2,212~~400
Consumer		~~237~~97			~~423~~237			~~539~~423			~~229~~539			~~969~~229
Commercial		~~502~~625			~~269~~502			~~322~~269			―322			~~1,171~~―
Total nonperforming portfolio loans		107,~~154~~788			410,~~225~~154			4,~~535~~225			34,~~381~~535			243,~~884~~381
Real estate owned
Real estate loans:
One- to four-family		~~308~~78			~~321~~308			94321			~~191~~94			~~1,592~~191
Multi-family		—			—			—			—			~~778~~—
Commercial		21,~~514~~643			2,~~628~~514			32,~~410~~628			3,~~251~~410			13,~~868~~251
Land		—18			~~283~~—			~~404~~283			~~1,783~~404			31,~~663~~783
Real estate construction loans:
One- to four-family		—			—			—			—			—
Commercial		—			—			—			—			~~164~~—
Acquisition and development		—			—			—			—			—
Other portfolio loans:
Home equity		—			—			—			—			—
Consumer		—			—			—			—			—
Commercial		64—			―64			―			―			―
Total real estate owned		21,~~886~~739			32,~~232~~886			3,~~908~~232			53,~~225~~908			85,~~065~~225
Total nonperforming assets		139,~~040~~527			713,~~457~~040			87,~~443~~457			8,~~606~~443			328,~~949~~606
Troubled debt restructurings classified as impaired portfolio loans	$	3430,~~843~~889		$	34,~~977~~843		$	34,~~881~~977		$	34,~~199~~881		$	3334,~~222~~199
Ratios
Nonperforming portfolio loans to total portfolio loans		1.60	%		01.76	%		1.0.7	%		01.90	%		50.89	%
Nonperforming portfolio loans to total assets		10.18	%		01.51	%		0.65	%		0.56	%		30.25	%
Nonperforming assets to total assets		1.40	%		01.94	%		10.29	%		1.2	%		41.32	%

At December 31, ~~2016~~2017, the Bank had $107.~~1 million~~8 million in nonperforming portfolio loans, or 1.60% of total portfolio loans. Our largest nonperforming portfolio loan at December 31, ~~2016~~ 2017 was a $5.5 million nonperforming land loan.

Real estate acquired as a result of foreclosure is classified as other real estate owned (OREO). At the time of foreclosure or repossession, the property is recorded at estimated fair value less selling costs, with any write-down charged against the allowance for portfolio loan losses. As of December 31, ~~2016~~2017, the Bank had OREO of $21.97 million.

Portfolio loans for which terms have been ~~modified~~ modified as a result of the borrower's financial difficulties are considered troubled debt restructurings (TDR). Portfolio loans ~~modified~~ modified as TDRs with market rates of interest are classified as impaired portfolio loans. Once the TDR loan has performed for 12 months in accordance with the modified terms, it is classified as a performing impaired loan. TDRs which do not perform in accordance with modified terms are reported as nonperforming portfolio loans, and as of December 31, ~~2016~~2017, such portfolio loans totaled $85.29 million and included the previously mentioned land loan.

Classified Assets

Banking regulations provide for the classification of portfolio loans and other assets, such as OREO, debt and equity securities considered by the Bank and regulators to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered not collectable and of such little value that their continuance as assets without the establishment of a full specific loss reserve is not warranted. Those assets classified as “loss” are generally charged-off.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for portfolio loan losses in an amount deemed prudent by management and reviewed by its board of directors. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The Bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OFR and the FDIC, which may order the establishment of additional general or specific loss allowances.

In connection with the filing of the Bank’s regulatory reports with the OFR and in accordance with its classification of assets policy, management regularly reviews the problem assets in the portfolio to determine whether any assets require classification in accordance with applicable regulations. The total amount of classified assets (consisting primarily of portfolio loans secured by real estate and OREO) represented 1813.57% of the Bank‘s equity capital and 1.83% of the Bank’s total assets at December 31, ~~2016~~2017.

There were no portfolio loans classified ~~doubtful~~ doubtful or loss at December 31, ~~2016~~2017. Assets classified substandard were $1512.94 million at December 31, ~~2016~~2017. The Bank also designates ~~certain~~ certain portfolio loans as special mention when it is determined a loan relationship should be monitored more closely. Portfolio ~~loans~~ loans are classified as special mention for a variety of reasons including changes in recent borrower financial condition, changes in in borrower operations, changes in value of available collateral, concerns regarding changes in economic conditions in a borrower’s industry, and other matters. A portfolio loan classified as special mention in many instances may be performing in accordance with the loan terms. Special mention portfolio loans were $1.72 million at December 31, ~~2016~~2017. As of December 31, ~~2016~~2017, $107.17 million of of classified portfolio loans were on nonperforming status.

Allowance for Portfolio Loan Losses

An allowance for portfolio loan losses (the allowance) is maintained to reflect probable incurred losses in the loan portfolio. The allowance is based on ongoing assessments of the estimated losses incurred in the loan portfolio and is established as these losses are recognized through a provision for portfolio loan losses (provision expense) charged to earnings. Generally, portfolio loan losses are charged against the allowance when management believes the loan balance is not fully collectible. Subsequent recoveries, if any, are credited to the allowance.

At December 31, ~~2016~~2017, the allowance was $8.2 6 million, or 1.31% of total portfolio loans and 80110.4% of total nonperforming portfolio loans. The following table sets forth ~~activity~~ activity in the Bank’s allowance for the years indicated:

	At December 31,
	2016			2015			2014			2013			2012
	2017			2016			2015			2014			2013
	(Dollars in Thousands)
Balance at beginning of year	$	78,~~745~~162		$	7,~~107~~745		$	67,~~946~~107		$	106,~~889~~946		$	1510,~~526~~889
Charge-offs:
Real estate loans:
One- to four-family		(~~353~~82	)		(~~313~~353	)		(~~606~~313	)		(~~4,485~~606	)		(64,~~347~~485	)
Multi-family		—			—			—			—			~~(196~~—	)
Commercial		—			—			~~(191~~—	)		(~~2,452~~191	)		(2,~~756~~452	)
Land		—			~~(56~~—	)		(856	)		(~~790~~8	)		(~~1,710~~790	)
Real estate construction loans:
One- to four-family		—			—			—			—			—
Commercial		—			—			—			—			~~(1,145~~—	)
Acquisition and development		—			—			—			—			—
Other portfolio loans:
Home equity		(~~141~~183	)		(~~146~~141	)		(~~403~~146	)		(~~2,017~~403	)		(32,~~215~~017	)
Consumer		(~~566~~411	)		(~~540~~566	)		(~~595~~540	)		(~~2,131~~595	)		(12,~~567~~131	)
Commercial		(91119	)		—(91	)		~~(119~~—	)		(~~880~~119	)		(~~1,769~~880	)
Total charge-offs		(~~1,151~~795	)		(1,~~055~~151	)		(1,~~922~~055	)		(121,~~755~~922	)		(1812,~~705~~755	)
Recoveries:
Real estate loans:
One- to four-family		~~561~~235			~~356~~561			~~224~~356			~~961~~224			~~1,036~~961
Multi-family		—			8—			—8			—			—
Commercial		—			51—			8351			—83			3—
Land		325			~~138~~32			42138			6342			863
Real estate construction loans:
One- to four-family		—			—			—			—			—
Commercial		—			—			—			—			—
Acquisition and development		—			—			—			—			—
Other portfolio loans:
Home equity		4533			5645			~~161~~56			~~395~~161			~~223~~395
Consumer		~~310~~240			~~277~~310			~~301~~277			~~289~~301			~~305~~289
Commercial		127			—1			6—			786			278
Total recoveries		~~949~~540			~~886~~949			~~817~~886			~~1,786~~817			1,~~577~~786
Net charge-offs		(~~202~~255	)		(~~169~~202	)		(~~1,105~~169	)		(101,~~969~~105	)		(1710,~~128~~969	)
Provision for portfolio loan losses		~~619~~693			~~807~~619			~~1,266~~807			71,~~026~~266			127,~~491~~026
Balance at end of year	$	8,~~162~~600		$	78,~~745~~162		$	7,~~107~~745		$	67,~~946~~107		$	106,~~889~~946
Net charge-offs to average total portfolio loans during this year (1)		0.0	%(2)		0.0	%(2)		0.30	%(2)		20.83	%		3.2.8	%
Net charge-offs to average nonperforming portfolio loans during this year		2.89	%		42.18	%		284.01	%		7728.0	%		4777.90	%
Allowance for portfolio loan losses to nonperforming portfolio loans		80110.4	%		~~183~~80.314	%		~~156~~183.731	%		~~205~~156.47	%		43205.84	%
Allowance for portfolio loan losses as % of total portfolio loans (end of year) (1)		1.31	%		1.3	%		1.63	%		1.86	%		21.58	%

(1)

Total portfolio loans are net of deferred fees and costs and purchase premiums or discounts.

(2) Net charge-offs were $0.3 million, $0.2 million, and $0.2 million in ~~both~~2017, 2016 and 2015, respectively; however, the ratio appears as zero due to rounding.

The following table summarizes the allocation of the allowance by portfolio loan category at the dates indicated:

	At December 31,
	2016					2015					2014
	2017					2016					2015
	Amount of Allowance for Portfolio Loan Loss		Percent of Loans in Each Category to Total Portfolio Loans			Amount of Allowance for Portfolio Loan Loss		Percent of Loans in Each Category to Total Portfolio Loans			Amount of Allowance for Portfolio Loan Loss		Percent of Loans in Each Category to Total Portfolio Loans
	(Dollars in Thousands)
Real estate loans:
One- to four-family	$	32,~~090~~684		4337.18	%	$	3,~~142~~090		4543.81	%	$	3,~~206~~142		5345.08	%
Multi-family		~~268~~170		118.06	%		~~217~~268		1311.90	%		28217		013.79	%
Commercial		2,~~209~~989		1629.30	%		12,~~337~~209		1016.23	%		1,~~023~~337		1110.32	%
Land		~~207~~159		21.78	%		~~260~~207		2.7	%		~~197~~260		2.67	%
Real estate construction loans:
One- to four-family		~~159~~55		31.51	%		~~144~~159		3.75	%		16144		03.67	%
Commercial		~~120~~178		2.3	%		~~116~~120		2.13	%		19116		02.61	%
Acquisition and development		—		0.0	%		—		0.0	%		—		0.0	%
Other portfolio loans:
Home equity		~~560~~604		54.95	%		~~972~~560		65.9	%		~~992~~972		106.49	%
Consumer		~~457~~345		64.16	%		~~871~~457		76.41	%		~~844~~871		117.24	%
Commercial		~~880~~1,342		910.13	%		~~556~~880		79.31	%		~~663~~556		97.63	%
Unallocated		~~212~~74		0.0	%		~~130~~212		0.0	%		~~119~~130		0.0	%
Total	$	8,~~162~~600		100.0	%	$	78,~~745~~162		100.0	%	$	7,~~107~~745		100.0	%

	At December 31,
	2013					2012
	2014					2013
	Amount of Allowance for Portfolio Loan Loss		Percent of Loans in Each Category to Total Portfolio Loans			Amount of Allowance for Portfolio Loan Loss		Percent of Loans in Each Category to Total Portfolio Loans
	(Dollars in Thousands)
Real estate loans:
One- to four-family	$	3,~~188~~206		4453.90	%	$	43,~~166~~188		4544.39	%
Multi-family		5828		0.87	%		~~203~~58		0.8	%
Commercial		~~827~~1,023		1211.93	%		~~958~~827		1312.79	%
Land		~~224~~197		32.46	%		~~783~~224		3.94	%
Real estate construction loans:
One- to four-family		—16		0.06	%		—		0.0	%
Commercial		~~125~~19		0.76	%		50125		10.27	%
Acquisition and development		—		0.0	%		—		0.0	%
Other portfolio loans:
Home equity		~~1,046~~992		1410.14	%		21,~~636~~046		1514.01	%
Consumer		~~1,223~~844		1411.32	%		1,~~448~~223		14.43	%
Commercial		~~214~~663		8.9.6	%		~~645~~214		58.79	%
Unallocated		41119		0.0	%		—41		0.0	%
Total	$	67,~~946~~107		100.0	%	$	106,~~889~~946		100.0	%

The reasonableness of the allowance is established and reviewed by management, within the context of applicable accounting and regulatory guidelines, based upon its evaluation of then-existing economic and business conditions affecting the Bank’s key lending areas. Senior credit officers monitor those conditions continuously and reviews are conducted quarterly with the Bank’s senior management and Board of Directors. Management’s methodology for assessing the reasonableness of the allowance consists of several key elements, which include a general loss component by type of portfolio loan and specific allowances for identified problem portfolio loans. The allowance also incorporates the results of measuring impaired portfolio loans. Furthermore, the allowance allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

Investment Activities

General

The Bank maintains an amount of liquid assets, such as cash and short-term securities, for the purposes of meeting operational needs. The Bank is permitted to make certain other securities investments. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is provided.

The Bank is authorized to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and government sponsored enterprises, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, Florida-state chartered banks may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds.

The Bank’s Board of Directors has adopted an investment policy which governs the nature and extent of investment activities, and the responsibilities of management and the Board of Directors. Investment activities are directed by the Chief Financial Officer in coordination with the Bank’s Asset and Liability Committee (ALCO). Various factors are considered when making decisions, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions, including the current and anticipated short and long term interest rates, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds through deposit withdrawals and loan originations and purchases.

The structure of the investment portfolio is intended to provide liquidity when loan demand is high, assist in maintaining earnings when loan demand is low and maximize earnings while managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk.

Investment Securities

The Bank invests in investment securities, such as U.S. government sponsored enterprises and state and municipal obligations, as part of its asset liability management strategy.

Accounting principles generally accepted in the United States of America (U.S. GAAP) require that investments be categorized as “held-to-maturity,” “trading securities” or “available-for-sale,” based on management’s intent as to the ultimate disposition of each security. Securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available-for-sale when they might be sold before maturity.

At December 31, ~~2016~~2017, $6537.37 million of ~~investment~~ investment securities, representing the entire balance in investment securities, were classified as available-for-sale. The Bank held no non-agency collateralized mortgage-backed securities or non-agency collateralized mortgage obligations, as of December 31, ~~2016~~2017.

Management evaluates investment securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at the determination date.

When OTTI is determined to have occurred, the amount of the OTTI recognized in earnings depends on whether we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI recognized in earnings is equal to the entire difference between its amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized as a charge to earnings. The amount of the OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The following table sets forth the composition of the Company’s investment securities portfolio, excluding FHLB stock, at the dates indicated:

	At December 31,
	2016					2015					2014
	2017					2016					2015
	Carrying Amount		% of Total Investment Securities			Carrying Amount		% of Total Investment Securities			Carrying Amount		% of Total Investment Securities
	(Dollars in Thousands)
Securities available-for-sale:
U.S. Government – sponsored enterprises	$	~~19,997~~—		~~30.6~~—	%	$	419,~~871~~997		430.16	%	$	4,~~738~~871		34.51	%
State and municipal		45,~~991~~526		714.67	%		54,~~142~~991		47.36	%		5,~~083~~142		34.73	%
Mortgage-backed securities – residential		27,328		41.9	%		101,654		84.6	%		98,514		72.1	%
Mortgage-backed securities – residential (U.S. Government)		23,528		62.4	%		27,328		41.9	%		101,654		84.6	%
U.S. Government collateralized mortgage obligation		32,~~059~~301		46.71	%		83,~~443~~059		74.07	%		108,~~364~~443		7.60	%
Corporate debt		96,~~918~~328		1516.28	%		—9,918		—15.2	%		—		—	%
Total securities available-for-sale	$	6537,~~293~~683		100.0	%	$	~~120~~65,~~110~~293		100.0	%	$	~~118~~120,~~699~~110		86100.90	%
Securities held-to-maturity:
Total investment securities	$	37,683		100.0	%	$	65,293		100.0	%	$	120,110		100.0	%
Mortgage-backed securities – residential		—		—	%		—		—	%		17,919		13.1	%
Total securities held-to-maturity		—		—	%		—		—	%		17,919		13.1	%
Total investment securities	$	65,293		100.0	%	$	120,110		100.0	%	$	136,618		100.0	%

Portfolio Maturities and Yields

The composition and scheduled maturities of of the investment securities portfolio at December 31, ~~2016~~2017, are summarized in the following table:

	Less than One Year					More than One Year through Five Years					More than Five Years through Ten Years
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
U.S. Government – sponsored enterprises	$	19,999		0.30	%	$	—		—	%	$	—		—	%
	(Dollars in Thousands)
State and municipal	$	—		—	%	$	~~414~~967		42.0083	%	$	43,~~303~~727		23.4050	%
Mortgage-backed securities – residential		—		—			—		—			—		—
Mortgage-backed securities – residential (U.S. Government)		—		—			—		—			10,260		2.50
U.S. Government collateralized mortgage obligations		—		—			—		—			—2,390		—1.51
Corporate debt		—		—			—		—			106,~~000~~536		42.5092
Total investment securities	$	~~19,999~~—		~~0.30~~—	%	$	~~414~~967		42.0083	%	$	1422,~~303~~913		32.8768	%

	More than Ten Years					Total Investment Securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Yield
U.S. Government – sponsored enterprises	$	—		—	%	$	19,999	$	19,997		0.30	%
	(Dollars in Thousands)
State and municipal	$	~~307~~806		3.2510	%	$	5,~~024~~500	$	45,~~991~~526		23.5932	%
Mortgage-backed securities – residential		28,515		2.59			28,515		27,328		2.59
Mortgage-backed securities – residential (U.S. Government)		13,915		2.65			24,175		23,528		2.59
U.S. Government collateralized mortgage obligations		~~3,152~~—		~~1.50~~—			32,~~152~~390		32,~~059~~301		1.5051
Corporate debt		—		—			106,~~000~~536		96,~~918~~328		42.5092
Total investment securities	$	3114,~~974~~721		2.4968	%	$	6638,~~690~~601	$	6537,~~293~~683		2.1468	%

Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal investment securities yields have not been adjusted to a tax equivalent basis.

Sources of Funds

General

The Bank’s sources of funds are deposits, payment of principal and interest on loans, interest earned on or maturation of investment securities, borrowings, and funds provided from operations.

Deposits

The Bank offers a variety of deposit accounts to consumers and businesses with a wide range of interest rates and terms. Deposits consist of noninterest-bearing and interest-bearing demand, savings and money market, and time deposit accounts. The Bank relies primarily on competitive pricing policies, customer service and marketing to attract and retain these deposits. Additionally, the Bank has purchased time deposit accounts from brokers at costs and terms which are comparable or better to time deposits originated in the Bank’s branch offices. The Bank had $8474.09 million in brokered deposits at December 31, ~~2016~~2017, of which approximately $1338.57 million is included in money market accounts and approximately $7036.50 million is included in time deposits.

The variety of deposit accounts offered has allowed the Bank to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. Pricing of deposits are managed to be consistent with overall asset and liability management, liquidity and growth objectives. Management considers numerous factors including: (1) the need for funds based on loan demand, current maturities of deposits, and other cash flow needs; (2) rates offered by market area competitors for similar deposit products; (3) current cost of funds and yields on assets; and (4) the alternative cost of funds on a wholesale basis, in particular the cost of advances from the FHLB and short-term borrowings from securities sold under agreements to repurchase (repurchase agreements). Interest rates are reviewed regularly by senior management as a part of its asset and liability management. Based on historical experience, management believes the Bank’s deposits are a relatively stable source of funds.

The following table sets forth the distribution of total deposit accounts, by account type, and weighted average annual interest rate payable for each account type, ~~for~~at the ~~years~~dates ~~ended December 31, 2016, 2015, and 2014~~indicated:

	December 31, 2016								December 31, 2015								December 31, 2014
	December 31, 2017								December 31, 2016								December 31, 2015
	Average Balance		Percent			Weighted Average Interest Rate			Average Balance		Percent			Weighted Average Interest Rate			Average Balance		Percent			Weighted Average Interest Rate
	(Dollars in Thousands)
Noninterest-bearing demand	$	5467,~~407~~931		910.3910	%		—	%	$	4854,~~529~~407		109.1139	%		—%	%	$	4148,~~670~~529		910.2711	%		—	%
Interest-bearing demand		~~103~~110,~~309~~265		1716.8339	%		0.4445	%		65103,~~057~~309		1317.5683	%		0.1644	%		6765,~~844~~057		1513.1056	%		0.2416	%
Savings		58,~~974~~986		108.1877	%		0.1112	%		6258,~~087~~975		1210.9418	%		0.1411	%		6662,~~936~~087		1412.8994	%		0.2514	%
Money market		~~132~~211,~~923~~423		2231.9443	%		0.6692	%		~~112~~132,~~381~~923		2322.4294	%		0.5466	%		~~103~~112,~~576~~381		23.0442	%		0.4854	%
Total transaction accounts		~~349~~448,~~613~~605		6066.3470	%		0.4056	%		~~288~~349,~~054~~614		60.0334	%		0.2840	%		~~280~~288,~~026~~054		6260.3003	%		0.3028	%
Time deposits		~~229~~223,~~816~~986		3933.6630	%		01.9619	%		~~191~~229,~~804~~815		39.9766	%		0.8596	%		~~169~~191,~~473~~804		3739.7097	%		0.9885	%
Total deposits	$	~~579~~672,~~429~~591		100.00	%		0.6277	%	$	~~479~~579,~~858~~429		100.00	%		0.5162	%	$	~~449~~479,~~499~~858		100.00	%		0.5551	%

As of December 31, ~~2016~~2017, the aggregate ~~amount~~ amount of outstanding retail time deposits in amounts equal to or greater than $100,000 were approximately $98150.76 million. The following table sets forth the maturity of those deposits in excess of $100,000 as of December 31, ~~2016~~2017:

	Amounts Maturing
	(Dollars in Thousands)
Three months or less	$	720,~~667~~305
Over three months through six months		816,~~925~~387
Over six months through one year		2339,~~631~~823
Over one year to three years		4645,~~218~~628
Over three years		1228,~~219~~414
Total	$	98150,~~660~~557

Securities Sold Under Agreements to Repurchase

Information concerning repurchase agreements as of and for the years indicated is summarized as follows:

	As of and For the Years Ended December 31,
	2016			2015			2014
	2017			2016			2015
	(Dollars in Thousands)
Balance at end of year	$	—		$	~~9,991~~—		$	669,~~300~~991
Average daily balance outstanding during the year	$	82—		$	~~31,370~~82		$	6931,~~075~~370
Maximum month-end balance during the year	$	—		$	~~66,300~~—		$	7866,300
Weighted average coupon interest rate during the year		~~0.80~~—	%		40.8980	%		4.9689	%
Weighted average coupon interest rate at end of year		—	%		~~0.80~~—	%		40.9480	%
Weighted average maturity (months) at end of year		—			—			30—

Federal Home Loan Bank Advances

Although deposits are the primary source of funds, the Bank may utilize borrowings when it is a less costly source of funds, and can be invested at a positive interest rate spread, when additional capacity is required to fund loan demand or when the borrowings meet asset and liability management goals. Borrowings have historically consisted primarily of advances from the FHLB; however, the Bank also has the ability to borrow from the Federal Reserve Bank of Atlanta under the Primary Credit program and daylight overdraft capacity.

FHLB advances may be obtained upon the security of mortgage loans and mortgage-backed securities. These advances may be obtained pursuant to several different credit programs, each of which has its own interest rate, range of maturities, and call features.

The Bank’s remaining borrowing capacity with the FHLB was $9263.13 million at December 31, ~~2016~~2017. The FHLB requires that the Bank collateralize the excess of the fair value of the FHLB advances over the book value with cash and investment securities. In the event the Bank prepays advances prior to maturity, it must do so at the fair value of such FHLB advances. As of December 31, ~~2016~~2017, fair value exceeded the book value of the individual advances by $10.14 million, which was collateralized by portfolio loans. The Bank has the ability to supplement its loan collateral with investment securities as needed to secure the FHLB borrowings or prepay advances to reduce the amount of collateral required to secure the debt. Unpledged investment securities available for collateral amounted to $4134.21 million as of December 31, ~~2016~~2017.

The following table sets forth information as to FHLB advances, for the years indicated:

	As of and For the Years Ended December 31,
	2016			2015			2014
	2017			2016			2015
	(Dollars In Thousands)
Balance at end of year	$	~~188~~213,~~758~~525		$	~~207~~188,~~543~~758		$	~~123~~207,~~667~~543
Average daily balance outstanding during the year	$	~~223~~117,~~399~~216		$	~~178~~223,~~706~~399		$	~~118~~178,~~879~~706
Maximum month-end balance during the year	$	~~267~~213,~~425~~525		$	~~237~~267,~~457~~425		$	~~134~~237,~~333~~457
Weighted average coupon interest rate during the year		1.7088	%		21.6470	%		32.8364	%
Weighted average coupon interest rate at end of year		1.2677	%		1.0026	%		31.5100	%
Weighted average maturity (months) at end of year		1610			1916			3019

Subsidiary and Other Activities

At December 31, ~~2016~~2017, the Company did not ~~have~~ have any subsidiaries other than the Bank, and the Bank did not have any subsidiaries other than Atlantic Coast Financial Investments, Inc.

Employees

At December 31, ~~2016~~2017, the Company had a ~~total~~ total of ~~174~~165 employees, including 2 part-time employees. The Company’s employees are not represented by any collective bargaining group.

Supervision and Regulation

General

The U.S. banking industry is highly regulated under federal and state law. These regulations affect the operations of the Company and its subsidiaries, including the Bank. Investors should understand that the primary objectives of the U.S. bank regulatory regime are the protection of depositors and consumers and maintaining the stability of the U.S. financial system, and not the protection of stockholders.

As a bank holding company, the Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the FRB). The Company is also subject to the rules and regulations of the Securities and Exchange Commission (the SEC) under the federal securities laws.

As of December 27, 2016, the Bank is a Florida state-chartered commercial bank, subject to supervision and regulation by the FDIC and the OFR. Prior to December 27, 2016, the Bank was a federally-chartered federal savings bank, subject to the supervision and regulation by the Office of Comptroller Currency (the OCC). Some of the Bank’s retail operations are also subject to supervision and regulation by the Consumer Financial Protection Bureau (the CFPB).

The aforementioned regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund and depositors. Under this system of federal and state regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the applicable federal agency critiques the institution’s operations and assigns its rating (known as an institution’s CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public.

Set forth below is a brief description of the bank regulatory framework that is or will be applicable to the Company and the Bank. This description is not intended to describe all laws and regulations applicable to the Company. Banking statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies, including changes in how they are interpreted or implemented, could have a material adverse impact on the Company or its subsidiaries (including the Bank) and their respective operations. In addition to laws and regulations, state and federal bank regulatory agencies (including the FRB, the FDIC, the OCC and the OFR) may issue policy statements, interpretive letters and similar written guidance applicable to the Company and its subsidiaries (including the Bank). These issuances also may affect the conduct of the Company’s business or impose additional regulatory obligations. The brief description below is qualified in its entirety by reference to the full text of the statutes, regulations, policies, interpretive letters and other written guidance that are described.

Dodd-Frank Wall Street Reform and Consumer Protection Act

InThe ~~2010, Congress enacted the~~ Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). ~~The Dodd-Frank Act~~ has had and will continue to have a broad impact on the financial services industry, imposing significant regulatory and compliance changes, including a fundamental restructuring of the supervisory regime applicable to federal savings banks and bank holding companies, the imposition of increased capital, leverage and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. Additionally, the Dodd-Frank Act established a new framework of authority to conduct systemic risk oversight within the financial system distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, or Oversight Council, the FRB and the FDIC.

Many of the requirements called for in the Dodd-Frank Act remain subject to final rulemaking or phase-in over time. Given the uncertainty associated with the implementation of the Dodd-Frank Act, the full extent of the impact such requirements will have on our operations continues to be unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.

The following items provide a brief description of the relevant provisions of the Dodd-Frank Act and their potential impact on the Company’s operations and activities, both currently and prospectively.

~~Change in Thrift Supervisory Structure.~~ The ~~Dodd-Frank~~following ~~Act,~~items ~~among~~provide ~~other things, as of July 21, 2011, transferred the functions and personnel of the OTS among the OCC, FDIC and FRB. As~~ a ~~result,~~brief ~~the OTS no longer supervises or regulates savings associations or savings and loan holding companies.~~description ~~The~~of ~~Dodd-Frank Act preserves~~ the ~~federal~~relevant ~~savings~~provisions ~~association charter (which includes both federal savings associations and federal savings banks); however, supervision~~ of ~~federal savings banks (which~~ the ~~Bank was prior to December 27, 2016), has been transferred to the OCC. Most significantly for the Company, the~~ Dodd-Frank Act ~~has transferred the supervision of savings~~ and ~~loan~~their ~~holding companies,~~potential ~~such~~impact ason the Company,’s tooperations ~~the FRB while taking a number of steps to align the regulation of savings~~ and loan holding companies to that of bank holding companies. The FRB has issued final rules to implement changes mandated by the Dodd-Frank Act, including requiring a savings and loan holding company to serve as a source of strength for its subsidiary depository institutions, requiring savings and loan holding companies to satisfy supervisory standards applicable to financial holding companies (e.g., “well capitalized” and “well managed” status) and, for most savings and loan holding companies, to elect to be treated as a financial holding company, in order to conduct those activities ~~permissible for a financial holding company~~, ~~and promulgating~~both ~~capital~~currently ~~requirements for savings~~ and ~~loan holding companies (for example, under the so-called “Collins Amendment”)~~prospectively. As a result of this change in supervision and related requirements, the Company and the Bank would generally be subject to new and potentially heightened examination and reporting requirements prior to the Company’s conversion to a bank holding company and the Bank’s conversion to Florida state-chartered commercial bank. The Dodd-Frank Act also provides various agencies with the authority to assess additional supervisory fees.

Creation of New Governmental Agencies. The Dodd-Frank Act creates various new governmental agencies such as the Financial Stability Oversight Council and the CFPB. The CFPB has a broad mandate to issue regulations, examine compliance and take enforcement action under the federal consumer financial laws, including with respect to the Company. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB, and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against certain institutions.

Mortgage Loan Origination and Risk Retention. The Dodd-Frank Act contains additional regulatory requirements that may affect our mortgage origination and servicing operations, result in increased compliance costs and may impact revenue. For example, in addition to numerous new disclosure requirements, the Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including state-chartered banks. Most significantly, the new standards prohibit the Bank from originating a residential mortgage loan without verifying a borrower's ability to repay, limit the total points and fees that the Bank and/or a broker may charge on conforming and jumbo loans to 3% of the total loan amount and prohibit certain prepayment penalty practices. Also, the Dodd-Frank Act, in conjunction with the FRB's final rule on loan originator ~~compensation issued on August 16, 2010 and effective April 1, 2011,~~ prohibits certain compensation payments to loan originators and the steering of consumers to loans not in their interest because the loans will result in greater compensation for a loan originator. These standards will result in a myriad of new system, pricing and compensation controls in order to ensure compliance and to decrease repurchase requests and foreclosure defenses. In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans the lender sells and other asset-backed securities that the securitizer issues if the loans have not complied with the ability to repay standards. The risk retention requirement generally will be 5%, but could be increased or decreased by regulation.

Basel III. The Dodd-Frank Act will subject the Company to new capital requirements that are not less stringent than such requirements generally applicable to insured depository institutions, such as the Bank, or quantitatively lower than such requirements in effect for insured depository institutions as of July 21, 2010.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement to a strengthened set of capital requirements for internationally active banking organizations in the United States and around the world, known as “Basel III”. The agreement is supported by the U.S. federal banking agencies and the final text of the Basel III rules was released by the Basel Committee on Banking Supervision on December 16, 2010.

As discussed in greater detail below in the subheading titled “Capital Requirements”, in July 2013, the Company’s primary federal regulator, the FRB, and the Bank’s primary federal regulator, the FDIC, published final rules establishing a new comprehensive capital framework for U.S. banking organizations intended to implement some of the capital requirements proposed by Basel III. The enactment of these could increase the required capital levels of the Company and the Bank.

FDIC Insurance Assessments. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. 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.

Corporate Governance and Executive Compensation. The Dodd-Frank Act requires companies to give stockholders a non-binding vote on executive compensation and change-in-control payments. The legislation also directs the FRB to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

Delayed, Phased-in Implementation. As As noted above, many of the provisions of the Dodd-Frank Act involve delayed effective dates and/or require implementing regulations. Accordingly, it will be some time before management can assess the full impact on operations. However, ~~there is a significant possibility that~~ the Dodd-Frank Act ~~will,~~has atalready resulted ~~a minimum, result~~ in an increased regulatory burden and compliance, operating and interest expense for the Company and its subsidiaries (including the Bank).

Federal Banking Regulation

Business Activities. A Florida state-chartered commercial bank derives its lending and investment powers from the laws and the regulations enforced and administered by the FDIC and the OFR. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and nonresidential real estate, commercial business loans and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Bank also may establish subsidiaries that may engage in activities not otherwise permissible for the Bank, including real estate investment and securities and insurance brokerage. ~~The Dodd-Frank Act authorizes, for the first time, the payment of interest on commercial checking accounts.~~

Capital Requirements. OnIn ~~July~~accordance with 2Dodd-Frank, ~~2013,~~ the FRB ~~approved~~and ~~final~~the ~~rules~~FDIC ~~that~~adopted ~~substantially~~new ~~amend~~capital requirements for depository institutions, which would be phased in from 2015 to 2019, and would refine the ~~regulatory~~definition ~~risk-based~~of what constitutes “capital” ~~rules~~for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the ~~Bank.~~are: ~~The~~(i) ~~FDIC~~a ~~has~~common ~~subsequently~~equity ~~approved~~Tier ~~these~~1 ~~rules.~~capital ~~The~~ratio ~~final~~of ~~amended~~4.5%; (ii) ~~rules~~a ~~were~~Tier ~~adopted~~1 ~~following~~capital ~~the~~ratio ~~issuance~~ of ~~proposed rules~~6% by(increased ~~the~~from ~~FRB~~4%); in(iii) ~~June~~a ~~2012~~total ~~and~~capital ~~implement~~ratio ~~the~~of ~~“Basel~~8% ~~III”~~(unchanged ~~regulatory~~from ~~capital~~current ~~reforms~~rules); and ~~changes~~(iv) a ~~required~~Tier by1 ~~the Dodd-Frank~~leverage ~~Act~~ratio of 4% for all institutions.

Prior to the final amended rules, FDIC regulations required depository institutions to meet minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings banks receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.27

The ~~risk-based~~rules ~~capital~~also ~~standard~~establish ~~for~~a ~~depository~~“capital conservation ~~institutions~~buffer” ~~required~~above the ~~maintenance~~regulatory ofminimum ~~Tier 1 (core) and total~~ capital (requirements, which ismust ~~defined~~consist asentirely ~~core capital and supplementary capital) to risk-weighted assets~~ of atcommon ~~least~~equity 4%Tier ~~and~~1 ~~8%, respectively~~capital. InThe capital ~~determining~~conservation ~~the~~buffer ~~amount~~will ofbe ~~risk~~phased-~~weighted~~in ~~assets,~~over ~~all~~four ~~assets,~~years ~~including certain~~beginning ~~off-balance~~on ~~sheet~~January ~~assets~~1, ~~were multiplied by a risk-weight factor of 0% to 100%~~2016, ~~assigned~~as byfollows: the ~~FDIC,~~maximum ~~based~~buffer ~~on the risks~~will ~~believed~~be ~~inherent~~0.625% ~~in the type~~ of ~~asset. Core capital was defined as common stockholders’ equity (including retained earnings), certain non~~risk-~~cumulative~~weighted ~~perpetual~~assets ~~preferred~~for ~~stock and related surplus and minority interests in equity accounts of consolidated subsidiaries~~2016, ~~less intangibles other than certain mortgage servicing rights and credit card relationships~~1.25% ~~The~~for ~~components of supplementary capital included cumulative preferred stock~~2017, ~~long-term~~1.875% ~~perpetual~~for ~~preferred stock~~2018, ~~mandatory convertible securities, subordinated debt~~ and ~~intermediate~~2.5% ~~preferred stock, the allowance~~ for ~~loan~~2019 and ~~lease losses limited to a maximum of 1~~thereafter.~~25%~~ ofThis ~~risk-weighted~~will ~~assets~~result ~~and~~in upthe tofollowing ~~45%~~minimum ofratios ~~net~~beginning ~~unrealized~~in ~~gains~~2019: on(i) ~~available-for-sale~~a common equity ~~securities~~Tier ~~with~~1 ~~readily~~capital ~~determinable~~ratio ~~fair~~of ~~values~~7.0%; ~~Overall,~~(ii) ~~the amount~~a ofTier ~~supplementary~~1 capital ~~included as part~~ ratio of ~~total capital could not exceed 100~~8.5%; ofand ~~core~~(iii) ~~capital. Additionally,~~ a ~~depository institution~~total ~~that retained credit risk in connection with an asset sale may have been required to maintain additional regulatory~~ capital ~~because~~ratio of ~~the purchaser’s recourse to the depository institution~~10.5%.

An institution is also 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 establish a maximum percentage of eligible retained income that could be utilized for such actions.

Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the final amended rules permit the countercyclical buffer to be applied only to “advanced approach banks” (i.e., banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Company and the Bank. The rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final amended rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Company) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

In addition, smaller banking institutions (less than $250 billion in consolidated assets) were permitted to make a one-time election to opt-out of including most elements of accumulated other comprehensive income in regulatory capital. Importantly, the opt-out excluded from regulatory capital not only unrealized gains and losses on available-for-sale debt securities, but also accumulated net gains and losses on cash-flow hedges and amounts attributable to defined benefit postretirement plans. The Bank elected to opt-out on its March 31, 2015 Call Report.

The rules also contain revisions to the Prompt Corrective Action (PCA) framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions took effect January 1, 2015. Under the PCA requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in order to qualify as “well-capitalized:”(i) a common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

The rules set forth certain changes for the calculation of risk-weighted assets, which were effective for us beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.

As of December 31, 2017, the Bank met the PCA requirements in order to qualify as “well-capitalized.”

~~The~~Loans-to-One ~~final~~Borrower. ~~amended~~Generally, ~~rules include new risk-based~~a ~~capital~~state-chartered ~~and~~bank ~~leverage~~may ~~ratios,~~not ~~which~~make ~~would~~a beloan ~~phased~~or inextend ~~from~~credit ~~2015~~ to ~~2019,~~a ~~and~~single ~~would~~or ~~refine~~related ~~the~~group ~~definition~~ of ~~what~~borrowers ~~constitutes~~in ~~“capital” for~~excess ~~purposes~~ of ~~calculating~~15% ~~those~~of ~~ratios. The new minimum~~ unimpaired capital ~~level requirements applicable to the Company~~ and ~~the~~surplus. ~~Bank~~An ~~under the~~additional ~~final~~amount ~~amended~~may ~~rules would~~ be: ~~(i)~~loaned, aequal ~~new~~to ~~common~~10% ~~equity~~of ~~Tier~~unimpaired 1 capital ~~ratio~~and ofsurplus, ~~4.5%;~~if ~~(ii)~~the aloan ~~Tier~~is 1secured by ~~capital~~readily ~~ratio~~marketable ofcollateral, 6%which ~~(increased from~~generally ~~4%);~~does ~~(iii)~~not ainclude ~~total~~real ~~capital~~estate. ~~ratio~~As of 8%December ~~(unchanged~~31, ~~from~~2017, ~~current~~the ~~rules);~~Bank ~~and~~was ~~(iv)~~in acompliance with ~~Tier~~the 1loans-to-one ~~leverage~~borrower ~~ratio of 4% for all institutions~~limitations.

The final amended rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%.

Under the final amended rules, institutions are 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 establish a maximum percentage of eligible retained income that could be utilized for such actions.

Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the final amended rules permit the countercyclical buffer to be applied only to “advanced approach banks” (i.e., banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Company and the Bank. The final amended rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final amended rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Company) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

In addition, the final amended rules provide for smaller banking institutions (less than $250 billion in consolidated assets) an opportunity to make a one-time election to opt-out of including most elements of accumulated other comprehensive income in regulatory capital. Importantly, the opt-out excludes from regulatory capital not only unrealized gains and losses on available-for-sale debt securities, but also accumulated net gains and losses on cash-flow hedges and amounts attributable to defined benefit postretirement plans. The Bank elected to opt-out on its March 31, 2015 Call Report.

The final amended rules also contain revisions to the Prompt Corrective Action (PCA) framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions took effect January 1, 2015. Under the PCA requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well-capitalized:”(i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

The final amended rules set forth certain changes for the calculation of risk-weighted assets, which were effective for us beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.

As of December 31, 2016, the Bank met the PCA requirements in order to qualify as “well-capitalized.”

Loans-to-One Borrower. Generally, a state-chartered 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 December 31, 2016, the Bank was in compliance with the loans-to-one borrower limitations.

Capital Distributions. The laws and regulations enforced and administered by the FDIC and the OFR govern capital distributions by a Florida state-chartered commercial bank, which include cash dividends, stock repurchases and other transactions charged to the capital account.

A depository institution must file an application for approval of a capital distribution with the FDIC if:

the depository institution’s eligible retained income (i.e., net income for the four calendar quarters preceding the current calendar quarter, based on the FDIC-supervised institution's quarterly call reports, net of any distributions and associated tax effects not already reflected in net income) is negative; and (b) the depository institution’s capital conservation buffer ratio is less than 2.5 percent as of the end of the previous calendar quarter;

the depository institution would not be at least adequately capitalized following the distribution;

the distribution would violate any applicable statute, regulation, agreement or FDIC-imposed condition; or

the depository institution is not eligible for expedited treatment of its filings.

Additionally, a Florida state-chartered commercial bank must obtain approval of the OFR to declare a dividend from retained net profits which accrued prior to the preceding two years, but each bank or trust company shall, before the declaration of a dividend on its common stock, carry 20 percent of its net profits for such preceding period as is covered by the dividend to its surplus fund, until the same shall at least equal the amount of its common and preferred stock then issued and outstanding. No Florida state-chartered commercial bank shall declare any dividend at any time at which its net income from the current year combined with the retained net income from the preceding two years is a loss or which would cause the capital accounts of the bank or trust company to fall below the minimum amount required by law, regulation, order, or any written agreement with the office or a state or federal regulatory agency.

The FDIC or FRB may disapprove a notice or application if:

the depository institution 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 after making such distribution the institution would be undercapitalized.

Liquidity. A depository institution 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 depository institutions have a responsibility under the Community Reinvestment Act and related regulations of the FDIC to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a depository institution, the FDIC is required to assess the 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. Failure to comply with 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 FDIC, as well as other federal regulatory agencies and the Department of Justice. The Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

Transactions with Related Parties. A depository institution’s authority to engage in transactions with its affiliates is limited by FDIC regulations and by Sections 23A and 23B of the Federal Reserve Act and it’s implementing regulation, Regulation W. 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 affiliate are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliate are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the institution. In addition, FDIC regulations prohibit a depository institution 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. The FDIC requires depository institutions to maintain detailed records of all transactions with affiliates.29

Transactions with Related Parties. A depository institution’s authority to engage in transactions with its affiliates is limited by FDIC regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing regulation, Regulation W. 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 affiliate are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliate are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the institution. In addition, FDIC regulations prohibit a depository institution 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. The FDIC requires depository institutions to maintain detailed records of all transactions with affiliates.

The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, 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 promulgated by the FRB. Among other things, these provisions require that extensions of credit to insiders (i) 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 (ii) 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. In addition, extensions of credit in excess of certain limits must be approved by the Bank’s Board of Directors. The Bank is in compliance with Regulation O.

A Florida state-chartered commercial bank is also subject to other limitations under Fla. Stat. § 655.0386 that limit “financial institution-affiliated parties” (including directors, officers, employees, or controlling stockholders) from engaging or participating, directly or indirectly, in any business or transaction conducted on behalf of or involving the Florida state-chartered commercial bank, subsidiary, or service corporation which would result in a conflict of the party’s own personal interests with those of the Florida state-chartered commercial bank, subsidiary, or service corporation with which he or she is affiliated.

Enforcement. The FDIC and the OFR have primary enforcement responsibility over Florida state-chartered commercial banks, including the Bank, and have the authority to bring enforcement actions against all “institution-affiliated parties,” including stockholders, 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 FDIC or the OFR 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 money 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 with respect to a particular depository institution.

3130

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. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. 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 banking agency may require the institution to submit a compliance plan.

Prompt Corrective Action Regulation. Under the PCA rules, the FDIC is required and authorized to take supervisory actions against undercapitalized depository institutions. For this purpose, a depository institution is placed in one of the following five categories based on the depository institution’s capital:

· well -capitalized (total risk-based capital ratio of 10% or greater, tier 1 risk-based capital ratio of 8% or greater, common equity tier 1 capital ratio of 6.5% or greater and leverage ratio of 5% or greater);

adequately capitalized (total risk-based capital ratio of 8% or greater, tier 1 risk-based capital ratio of 6% or greater, common equity tier 1 capital ratio of 4.5% or greater and leverage ratio of 4% or greater);

undercapitalized (total risk-based capital ratio less than 8%, tier 1 risk-based capital ratio less than 6%, common equity tier 1 capital ratio less than 4.5% or leverage ratio less than 4%);

significantly undercapitalized (total risk-based capital ratio less than 6%, tier 1 risk-based capital ratio less than 4%, common equity tier 1 capital ratio less than 3% or leverage ratio less than 3%); or

critically undercapitalized (ratio of tangible equity to total assets equal to or less than 2%).

Generally, the FDIC is required to appoint a receiver or conservator for a depository institution that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the FDIC within 45 days of the date a depository institution 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 depository institution 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 depository institution. Any holding company for the depository institution required to submit a capital restoration plan must guarantee the lesser of: an amount equal to 5% of a depository institution’s assets at the time it was notified or deemed to be undercapitalized by the FDIC, or the amount necessary to restore the depository institution to adequately capitalized status. This guarantee remains in place until the FDIC notifies the depository institution that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the FDIC 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 depository institution, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The FDIC may also take any one of a number of discretionary supervisory actions against undercapitalized depository institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

32Insurance of Deposit Accounts. The Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in the Bank are insured up to $250,000 by the FDIC. The FDIC imposes an assessment for deposit insurance on all depository institutions. 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. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with institutions deemed less risky paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2 ½ to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking.

Insurance of Deposit Accounts. The Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in the Bank are insured by the FDIC. The Dodd-Frank Act increased the general individual deposit insurance available on deposit accounts from $100,000 to $250,000. The FDIC imposes an assessment for deposit insurance on all depository institutions. 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. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with institutions deemed less risky paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2 ½ to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking.31

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC and the FDIC has exercised that discretion by establishing a long term fund ratio of 2%.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what assessment rates will be in the future. 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 or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

In addition to the FDIC assessments, the Financing Corporation (FICO) is authorized to impose and collect, with the approval of the FDIC, assessments ~~for~~ for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former ~~Federal~~ Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ~~ended~~ ended December 31, ~~2016~~2017, the annualized FICO assessment was equal to 1412 basis points for each $100 in domestic deposits maintained at at an institution.

Prohibitions Against Tying Arrangements. Depository institutions 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 well as other ~~entities~~ entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, ~~2016~~2017, the Bank was in compliance with this requirement.

Federal Reserve System

FRB regulations ~~require~~ require depository institutions to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At December 31, ~~2016~~2017, the Bank was in compliance with these reserve requirements.

Other Laws/Regulations

The Bank’s operations are also subject to federal or state laws and regulations applicable to financial institutions which relate to credit transactions, products and services offered to consumers, anti-money laundering, anti-terrorism financing and financial privacy. These laws, include, without limitation, the following:

State usury laws and federal laws concerning interest rates and other charges collected or contracted for by the Bank;

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

Truth in Savings Act;

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

Check Clearing for the 21^st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

The Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970, as amended (commonly known as the “Bank Secrecy Act”), which, among other things, requires U.S. financial institutions to maintain appropriate records, file certain reports involving currency transactions and a financial institution’s customer relationships and to implement anti-money laundering programs;

The economic or financial sanctions, requirements or trade embargoes imposed, administered or enforced from time to time by the U.S. Department of the Treasury’s Office of Foreign Assets Control, which require all U.S. persons, including U.S. banks, bank holding companies, and nonbank subsidiaries to comply with these sanctions, and require banks to block accounts and other property of, or reject unlicensed trade and financial transactions with specified countries, entities, and individuals;

The USA PATRIOT Act, which requires depository institutions to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the sanctions programs enforced and administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control;

The Gramm-Leach-Bliley Act, which, among other things, places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt-out” of the sharing of certain personal financial information with unaffiliated third parties; and

Rules and regulations of the various state and federal agencies charged with the responsibility of implementing such state or federal laws.

Holding Company Regulation

General. Atlantic Coast Financial Corporation is a bank holding company, subject to regulation and supervision by the FRB. The FRB has enforcement authority over Atlantic Coast Financial Corporation and its non-banking institution subsidiaries. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a risk to the Bank.

Atlantic Coast Financial Corporation’s activities are limited to those activities permissible for financial holding companies (if elected) or for bank holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, incidental to financial activities or complementary to a financial activity. A bank holding company must elect such status in order to engage in activities permissible for a financial holding company and conduct the activities in accordance with the requirements that would apply to a financial holding company’s conduct of the activity. A bank holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act (BHCA), subject to the prior approval of the FRB, and certain additional activities authorized by FRB regulations.

Federal law prohibits a bank holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control of another depository institution or holding company thereof, without prior written approval of the FRB. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the equity securities of a 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 depository institutions, the FRB must consider the financial and managerial resources and future prospects of the depository institution involved, the effect of the acquisition on the risk to the insurance fund, and the convenience and needs of the community and competitive factors.

Capital. The Dodd-Frank Act required the FRB to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to depository institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital as is currently the case with bank holding companies. Instruments issued by May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. The Company had no cumulative preferred stock or trust preferred securities outstanding as of December 31, ~~2016~~2017.

Source of Strength. The Dodd-Frank Act also extended the “source of strength” doctrine to bank holding companies, savings and loan holding companies, and other companies that control insured depository institutions and requires the regulatory agencies to issue regulations requiring that these companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. FRB policies also provide that holding companies should pay dividends 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.

Dividends. The Company is a legal entity separate and distinct from its subsidiaries. The majority of the Company’s revenue is from dividends paid to the Company by the Bank. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. In addition, the Company and the Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums, and to remain “well-capitalized” under the prompt corrective action regulations summarized above. Federal banking regulators have indicated that banking organizations should generally pay dividends only if (1) the organization’s net income available to common stockholders over the past year has been sufficient to fully fund the dividends and (2) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. Florida law states that, subject to certain capital requirements, the board of directors of a bank chartered under the laws of Florida may quarterly, semiannually, or annually declare a dividend of so much of the aggregate of the net profits of that period combined with its retained net profits of the preceding two years as they shall judge expedient, and, with the approval of the OFR, declare a dividend from retained net profits which accrued prior to the preceding two years.

Federal Securities Laws

Atlantic Coast Financial Corporation common stock is registered with the SEC. Atlantic Coast Financial Corporation is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of common stock issued in Atlantic Coast Financial Corporation’s public offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of Atlantic Coast Financial Corporation may be resold without registration. Shares purchased by an affiliate of Atlantic Coast Financial Corporation are subject to the resale restrictions of Rule 144 under the Securities Act of 1933 or the requirements of other available exemptions from registration for resales of restricted securities. If Atlantic Coast Financial Corporation meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of Atlantic Coast Financial Corporation that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Atlantic Coast Financial Corporation, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, Atlantic Coast Financial Corporation may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

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. As directed by the Sarbanes-Oxley Act, the Company’s Chief Executive Officer and Chief Financial Officer will be required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the SEC under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of internal control over financial reporting; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about internal control over financial reporting; and they have included information in the Company’s quarterly and annual reports about their evaluation and whether there have been changes in internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. The Company has existing policies, procedures and systems designed to comply with these regulations, and it continues to enhance 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 bank 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 acquirer 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 bank holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as will be the case with the Company, 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 bank holding company without the prior approval of the FRB. Any company that acquires such control becomes a “bank holding company” subject to registration, examination and regulation by the FRB.

Federal Taxation

General

The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank.

The Tax Cuts and Jobs Act (Tax Reform) was enacted on December 22, 2017. The Tax Reform reduced the corporate income tax rate to 21% effective January 1, 2018 and changed certain other provisions. Accounting guidance required the Company to remeasure its deferred tax assets and deferred tax liabilities using the new enacted tax rate. The Company has recorded additional expense of $1.6 million to reflect changes that resulted from the enactment of the Tax Reform.

Method of Accounting

For federal income tax purposes, the Company currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns.

Alternative Minimum Tax

The ~~Internal~~Company ~~Revenue~~and ~~Code~~the ofBank ~~1986,~~have asbeen ~~amended,~~subject ~~imposes~~to anthe alternative minimum tax (AMT) atin aprior ~~rate~~years ~~of 20% on a base of regular taxable income modified by certain adjustments~~ and ~~tax~~ ~~preferences~~have ~~(alternative minimum taxable income (AMTI))~~$0.5 ~~The~~million ~~AMTI~~available isas ~~reduced~~credits ~~by an exemption amount~~ to ~~calculate~~offset ~~AMT.~~future ~~AMT~~tax isliability; ~~payable~~however, to the ~~extent~~utilization ~~AMT~~of ~~exceeds~~ the ~~regular income tax. Net operating losses generally can offset no more than 90% of AMTI. Certain payments of~~ AMT ~~may~~credit becarryforward ~~used~~is assubject ~~credits~~to ~~against~~annual ~~regular~~limitation ~~tax~~under ~~liabilities~~Internal inRevenue ~~future~~Code ~~years.~~§ ~~The Company and the Bank have been subject~~382 to(IRC ~~the~~§ ~~AMT and have $0~~382).~~5 million available as credits for carryover.~~

Net Operating Loss Carryovers

Generally, a financial institution may ~~carry~~ carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, ~~2016~~2017, the Company and the Bank have $5.40 million in net operating loss carryovers for federal income tax purposes which begin to expire in 2027. The utilization of these net operating loss carryovers will be restricted due to Internal Revenue Service (IRS) limitations. See Note 14. Income Taxes of the Notes contained in this Report for additional information.

Internal Revenue Code § 382

Under the rules of ~~Internal Revenue Code § 382 (~~IRC § 382), a change in the ownership of a company limits the gross amount of net operating loss carryover a company can use per year (the annual limitation). After a change in ownership occurs, recognition of certain losses during years one to five will have an adverse effect on the utilization of the annual limitation on net operating losses. Those recognized losses will be applied to the annual limitation before the net operating losses are applied. The annual limitation is discussed in detail in Note 14. Income Taxes of the Notes contained in this Report.

Corporate Dividends-Received Deduction

The Company may exclude from its federal taxable income 100% of dividends received from the Bank as a wholly owned subsidiary pursuant to Internal Revenue Code § 243.

State Taxation

Net Operating Loss Carryovers

ANet operating losses in Florida may only be carried forward for 20 taxable years; however, a corporation may carry back Georgia net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years~~; however, net operating losses in Florida may only be carried forward for 20 taxable years~~. Through December 31, ~~2016~~2017, ~~The~~the Company and the Bank had a Florida and Georgia net operating loss carryover of $5.96 million, which begins to expire in ~~2027~~2018. The utilization of these net operating loss carryovers will be restricted due to IRS limitations. See Note 14. Income Taxes of the Notes contained in this Report for additional information.

Income Taxation

The Company and the Bank are subject to ~~Georgia~~ Florida corporate income tax, which is assessed at the rate of 65.05%. The Company and the Bank are subject to ~~Florida~~Georgia corporate income tax, which is assessed at the rate of 56.50%. For both states, taxable income generally means federal taxable income subject to certain modifications provided for in the applicable state statutes. The Company and the Bank are not currently under audit with respect to their state income tax returns, and their state income tax returns have not been audited for the past five years. As a Maryland corporation, the Company is required to file annual returns and pay annual fees to the State of Maryland.

Available Information

The Company makes available financial information, news releases and other information on the Company’s website at www.atlanticcoastbank.net. The Company’s website is not incorporated into this Report. There is a link to obtain all filings made by the Company with the SEC, including the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. The reports or amendments are available free of charge as soon as reasonably practicable after the Company files such reports and amendments with, or furnishes them to, the SEC. Stockholders of record may also contact the Company’s Investor Relations Department, 4655 Salisbury Road, Suite 110, Jacksonville, Florida 32256 or call (904) 559-8599 to obtain copies of these reports and amendments without charge.

ITEM 1A. RISK FACTORS

Our business, and an investment in our common stock, involves risks. The risk factors which management believes are material to our business and could negatively affect our results of operations, our financial condition and the trading value of our common stock are summarized below. Other risk factors not currently known to management, or risk factors that are currently deemed to be immaterial or unlikely, could also adversely affect our business. In assessing the following risk factors, investors should also refer to the other information contained in this Report and the Company’s other filings with the SEC.

Risks Relating to ~~Our~~our ~~Business~~Merger ~~and~~with ~~Operations~~Ameris

IfBecause ~~our~~the ~~nonperforming~~market ~~assets~~price ~~increase,~~of Ameris common stock may fluctuate, our ~~earnings~~shareholders ~~may~~cannot be ~~reduced~~sure of the market value of the merger consideration they will receive until the closing.

~~Our~~Upon ~~nonperforming~~completion ~~assets~~of ~~may~~the ~~increase~~Ameris inMerger, each ~~future~~share ~~periods.~~of ~~Our~~Company ~~nonperforming~~common ~~assets~~stock ~~adversely~~outstanding ~~affect~~immediately ~~our~~prior ~~net~~to ~~income~~the ineffective ~~various~~time ~~ways.~~of Wethe domerger ~~not~~will ~~record~~be ~~interest~~converted ~~income~~into onthe ~~nonperforming~~right ~~loans~~to orreceive ~~real~~(i) ~~estate~~0.17 ~~owned~~shares of Ameris common stock and (ii) a cash amount equal to $1.39 We((i) ~~must~~and ~~establish~~(ii) together, the ~~allowance~~merger ~~for~~consideration). The ~~losses~~market ~~inherent~~value inof the ~~loan~~stock ~~portfolio~~portion ~~that~~of ~~are~~the ~~both~~merger ~~probable~~consideration ~~and reasonably~~will ~~estimable~~fluctuate ~~through~~from the ~~current~~closing ~~period~~price ~~provision~~of ~~expenses~~Ameris common stock on the date Ameris and we announced the merger, ~~which~~the ~~are~~date ~~recorded~~of asour aspecial ~~charge~~meeting relating to ~~income~~the merger, and the date the merger is completed and thereafter. ~~From~~There ~~time~~will be no adjustment to ~~time,~~the merger consideration for changes in the market price of either weshares ~~also~~of ~~write~~Ameris ~~down~~common stock or shares of Company common stock; provided that if (i) the ~~value~~average closing price of ~~properties~~Ameris incommon stock ~~our~~over ~~OREO~~a ~~portfolio~~specified period prior to ~~reflect~~completion ~~changing~~of ~~market~~the ~~values.~~merger ~~Additionally,~~decreases ~~there~~below ~~are~~certain ~~substantial~~specified thresholds and (ii) we elect ~~collections~~to ~~costs,~~terminate the merger agreement due to such decrease, then Ameris may elect to increase the merger consideration as ~~legal~~outlined in ~~fees~~the ~~associated~~merger ~~with~~agreement. Stock price changes may result from a variety of factors that are beyond the ~~resolution~~control of ~~problem~~Ameris, ~~assets~~including, but asnot ~~well~~limited asto, ~~carrying~~general ~~costs~~market and economic conditions, ~~such~~changes asin ~~taxes~~Ameris’ business, ~~insurance~~ operations and ~~maintenance~~prospects, ~~related~~and regulatory considerations. We make no assurances as to ~~OREO~~whether or when the merger will be completed. ~~Further~~Therefore, at the ~~resolution~~time of ~~nonperforming~~our ~~assets~~special meeting, ~~requires~~shareholders will not know the ~~active~~precise ~~involvement~~market value of ~~management,~~the aggregate merger consideration shareholders will be entitled ~~which~~to ~~can~~receive ~~distract~~at ~~management~~the ~~from~~effective ~~our~~time ~~overall~~of ~~supervision~~the merger. You should obtain current market quotations for shares of ~~operations~~Ameris and ~~other~~Company ~~income-producing~~common stock ~~activities~~before you vote.

The Ameris Merger will not be completed unless important conditions are satisfied or waived, including approval by our shareholders.

Specified conditions set forth in the Merger Agreement must be satisfied or waived to complete the merger. If the conditions are not satisfied or waived, to the extent permitted by law, the merger will not occur or will be delayed and each of Ameris and the Company may lose some or all of the intended benefits of the merger.

The termination fees and the restrictions on third party proposals set forth in the Merger Agreement may discourage others from trying to acquire the Company.

Until the completion of the Ameris Merger, with some exceptions, we are prohibited from participating in any discussion of or otherwise considering any inquiries or proposals that may lead to a proposal to acquire the Company, such as a merger or other business combination transaction, with any person other than Ameris. In addition, we have agreed to pay to Ameris in certain circumstances a termination fee equal to $5.75 million. These provisions could discourage a potential competing acquiror from trying to acquire us even though this third party might be willing to offer greater value to our shareholders than Ameris has offered in the merger. Similarly, such a competing acquiror might propose a price lower than it might otherwise have been willing to offer because of the potential added expense of the termination fee that may become payable to Ameris in certain circumstances under the Merger Agreement. The payment of any termination fee could also have a material adverse effect on our financial condition.

The Ameris Merger is subject to the receipt of consents and approvals from regulatory authorities that may impose conditions that could have an adverse effect on Ameris.

Before the Ameris Merger can be completed, various approvals or consents must be obtained from bank regulatory authorities. These authorities may impose conditions on the completion of the or require changes to its terms. Such conditions or changes and the process of obtaining regulatory approvals or waivers could have the effect of delaying completion of the merger. The regulatory approvals or waivers may not be received at all, may not be received in a timely fashion or may contain conditions on the completion of the merger that are that are burdensome, not anticipated or cannot be met. If the completion of the merger is delayed, including by a delay in receipt of necessary governmental approvals or waivers, the business, financial condition and results of operations of each company may also be materially adversely affected.

We will be subject to business uncertainties and contractual restrictions while the Ameris Merger is pending.

Uncertainty about the effect of the Ameris Merger on employees, customers, suppliers and vendors may have an adverse effect on our business, financial condition and results of operations, which could negatively affect our and Ameris combined business operations. These uncertainties may impair our ability to attract, retain and motivate key personnel, depositors and borrowers pending the consummation of the merger, as such personnel, depositors and borrowers may experience uncertainty about their future roles following the consummation of the merger. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with us to seek to change existing business relationships with us or fail to extend an existing relationship with us. In addition, competitors may target each party’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger.

The pursuit of the merger and the preparation for the integration of our operations into Ameris’ may place a burden on each company’s management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on each company’s business, financial condition and results of operations. Our retention of certain employees also may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with Ameris after the merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us, our business could be harmed.

In addition, in the merger agreement requires us to operate our business in the ordinary course prior to closing and we are restricted from taking certain actions without Ameris’ consent while the merger is pending. These restrictions may, among other matters, prevent us from pursuing otherwise attractive business opportunities, selling assets, incurring indebtedness, engaging in significant capital expenditures in excess of certain limits set forth in the merger agreement, entering into other transactions or making other changes to our business prior to consummation of the merger or termination of the merger agreement. These restrictions could have a material adverse effect on our business, financial condition and results of operations.

Failure of the Ameris Merger to be consummated, the termination of the Merger Agreement or a significant delay in the consummation of the merger could negatively impact the Company.

If the Ameris Merger is not consummated, our ongoing business, financial condition and results of operations may be materially adversely affected and the market price of our or Ameris’ common stock may decline significantly, particularly to the extent that the current market prices reflect a market assumption that the merger will be consummated. If the consummation of the merger is delayed, the business, financial condition and results of operations of each company may be materially adversely affected. If the merger agreement is terminated and our board of directors seeks another merger or business combination, our shareholders cannot be certain that we will be able to find a party willing to engage in a transaction on more attractive terms than the merger.

Additionally, the Ameris/Company Joint Proxy Statement/Prospectus filed on Form S-4, filed on February 14, 2018, includes “Risk Factors” related to the merger and an investment in Ameris’ common stock.

Risks Relating to Our Business and Operations

Repayment risk associated with our adjustable rate loans may increase as interest rates rise.

Given the historically low interest rate ~~environment~~ environment in recent years, our adjustable rate loans have not been subject to an interest rate environment that causes them to adjust to the maximum level. As interest rates rise, such loans may involve repayment risks resulting from potentially increasing ~~payment~~ payment obligations by borrowers due to re-pricing. At December 31, ~~2016~~2017, there were approximately $~~257~~354.87 million in adjustable rate loans, which made up 3946.83% of our loan portfolio.

Interest rate volatility could significantly reduce our profitability, business, financial condition, results of operations and liquidity.

Our earnings largely depend on the relationship between the yield on our earning assets, primarily loans and investment securities, and the cost of funds, primarily deposits and borrowings. This relationship, commonly known as the net interest margin, is susceptible to significant fluctuation and is affected by economic and competitive factors that influence the yields and rates for, and the volume and mix of, our interest-earning assets and interest-bearing liabilities.

Interest rate risk can be defined as an exposure to movement in interest rates that could have an adverse impact on our net interest income. Interest rate risk arises from the imbalance in the re-pricing, maturity and/or cash flow characteristics of assets and liabilities. We are subject to interest rate risk to the degree that our interest-bearing liabilities re-price or mature more slowly or more rapidly or on a different basis than our interest earning assets. Significant fluctuations in interest rates could have a material adverse impact on our business, financial condition, results of operations or liquidity.

Our interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of our balance sheet and off-balance sheet instruments as they relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Management’s objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in our balance sheet.

Future changes in interest rates could impact our financial condition and results of operations.

The FRB maintained the federal funds rate at at the historically low rate of 0.25% during 2014 and through mid-December 2015. The rate was raised to a target rate of 0.50% in December 2015, 0.75% in December ~~2015~~2016, and then to1.00%, a1.25%, ~~target~~and ~~rate of 0~~1.7550% in March, June, and December ~~2016~~2017, respectively. It is currently unclear what the FRB intends to do in ~~2017~~2018. The federal funds rate has a direct correlation to general rates of interest, including our interest-bearing deposits. Our mix of asset and liabilities are considered to be sensitive to interest rate changes. Generally, customers may prepay the principal amount of their outstanding loans at any time. The speeds at which such prepayments occur, as well as the amount of such prepayments, are within our customers’ discretion. If customers prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, our interest income will be reduced. A similar prepayment risk exists for our investment portfolio which is primarily made up of mortgage-related securities, with the added impact of accelerated recognition of premiums paid to acquire the investment security. A significant reduction in interest income could have a negative impact on our results of operations and financial condition. On the other hand, if interest rates rise, net interest income might be reduced because interest paid on interest-bearing liabilities, including deposits, increases more quickly than interest received on interest-earning assets, including loans and mortgage-backed and related securities. In addition, rising interest rates may negatively affect our financial condition and results of operations because higher rates may reduce the demand for loans and the value of mortgage-related investment securities.

A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market, including the secondary market for residential mortgage loans, could hurt our business.

As of December 31, ~~2016~~2017, approximately 88 91.73% of our portfolio loans had real estate as a primary or secondary component of collateral. The real estate collateral in each ~~case~~ case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the ~~time~~ time the credit is extended. Real estate values and the real estate markets are generally affected by a variety of factors including, but not limited to, changes in economic conditions, fluctuations in interest rates, the availability of credit, changes in tax laws and other statutes, regulations, and policies, and acts of nature. Weakening of the real estate market could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing those loans, which in turn could adversely affect our profitability and asset quality. If we were required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.

Additionally, weakness in the secondary market for residential lending could have an adverse impact on our profitability. Significant disruptions in the secondary market for residential mortgage loans may limit the market for and liquidity of mortgage loans other than conforming Fannie Mae and Freddie Mac loans. The effects of potential market challenges and uncertainty, including uncertainty with respect to U.S. monetary policy, could result in price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans held, any future mortgage loan originations and gains on sale of mortgage loans. Declines in real estate values and home sales volumes and financial stress on borrowers as a result of job losses or other factors could have further adverse effects on borrowers that result in higher delinquencies and charge-offs in future periods, which could adversely affect our financial condition and results of operations.

Our loan portfolio possesses increased risk due to our number of commercial real estate, commercial business, construction and multi-family loans and consumer loans, which could increase our level of provision expense.

Our outstanding commercial real estate, ~~commercial~~ commercial business, construction and multi-family real estate loans and our manufactured home, automobile and other consumer loans, in aggregate, accounted for approximately 4855.39% of our total loan portfolio as of December 31, ~~2016~~2017. Generally, management considers these types of loans to involve a higher degree of risk compared to first mortgage loans on one- to four-family, owner occupied ~~residential~~ residential properties.

Historically, these loans have had higher risks than loans secured by residential real estate for the following reasons:

•· Commercial Real Estate and Commercial Business Loans. Repayment is dependent on income being generated by the rental property or business in amounts sufficient to cover operating expenses and debt service;

•· Multi-Family Real Estate Loans. Repayment is dependent on income being generated by the rental property in amounts sufficient to cover operating expenses and debt service;

•· Single Family Construction Loans. Repayment is dependent upon the successful completion of the project and the ability of the contractor or builder to repay the loan from the sale of the property or obtaining permanent financing;

•· Commercial and Multi-Family Construction Loans. Repayment is dependent upon the completion of the project and income being generated by the rental property or business in amounts sufficient to cover operating expenses and debt service. The collateral cannot be liquidated as easily as residential real estate and may involve expensive workout techniques. It may also involve large balances of loans to single borrowers or related groups of borrowers. Commercial business loans may be collateralized by equipment, inventory, accounts receivable, etc. which are difficult to liquidate in an event of default; and

40· Consumer Loans. Consumer loans (such as automobile and manufactured home loans) are collateralized, if at all, with assets that may not provide an adequate source of repayment of the loan due to depreciation, damage or loss.

• Consumer Loans. Consumer loans (such as automobile and manufactured home loans) are collateralized, if at all, with assets that may not provide an adequate source of repayment of the loan due to depreciation, damage or loss.

If these non-residential loans become nonperforming, we may have to increase our provision expense which would negatively affect our results of operations.

Our current asset mix and our current investments may not be indicative of our future asset mix and investments, which may make it difficult to predict our future financial and operating performance.

Certain factors make it difficult to predict our future financial and operating performance including, among others: (i) our current asset mix may not be representative of our anticipated future asset mix and may change as we continue to execute on our plans for organic loan origination and banking activities and potentially grow through future acquisitions; (ii) our significant liquid securities portfolio may not necessarily be representative of our future liquid securities position; and (iii) our cost structure and capital expenditure requirements during the periods for which financial information is available may not be reflective of our anticipated cost structure and capital spending as we continue to realize efficiencies in our business, integrate future acquisitions and continue to grow our organic banking platform.

If economic conditions deteriorate or the economic recovery from such deterioration remains slow over an extended period of time in our primary market areas of Northeast Florida, Central Florida and Southeast Georgia, our results of operation and financial condition could be adversely impacted as borrowers’ ability to repay loans declines and the value of the collateral securing the loans decreases. This geographic concentration in loans secured by one- to four-family residential real estate may increase credit losses, which could increase the level of provision expense.

Our financial results and financial condition may be adversely affected by changes in prevailing economic conditions, including decreases in real estate values, changes in interest rates, which may cause a decrease in interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the federal and the Florida and Georgia state governments and other significant external events. Our market share of loans in Ware County, Georgia is significantly greater than our share of the loan market in the Jacksonville, Orlando or Tampa, Florida metropolitan areas. As a result of the concentration in Ware County, we may be more susceptible to adverse market conditions in that market. Due to the significant portion of real estate loans in the loan portfolio, decreases in real estate values could adversely affect the value of property used as collateral.

Adverse changes in the economy may also have a negative effect on the ability of borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.

Our loan portfolio possesses increased risk due to portfolio lending during a period of rising real estate values, high sales volume activity and historically low interest rate environment. The resulting high loan-to-value ratios on a portion of our residential mortgage loan portfolio expose us to greater risk of loss.

Much of our portfolio lending is in one- to to four-family residential properties generally located throughout Northeast Florida, Central Florida and Southeast Georgia. Because many of our portfolio loans were originated during a period of rising real estate values and historically low interest rates, based on the Company’s most recent analysis, approximately 52.5% of the residential loan portfolio collateral is deficient due to a decline in real estate values since origination.

Many of our residential mortgage loans are secured by liens on real property, and we believe some of our borrowers may have reduced equity. Residential loans with high loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and, therefore, may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full from the sale. As a result, these loans may experience higher rates of delinquencies, defaults and losses.

If our nonperforming assets increase, our earnings may be reduced.

Our nonperforming assets may increase in future periods. Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonperforming loans or real estate owned. We must establish the allowance for losses inherent in the loan portfolio that are both probable and reasonably estimable through the current period provision expenses, which are recorded as a charge to income. From time to time, we also write down the value of properties in our OREO portfolio to reflect changing market values. Additionally, there are substantial collections costs, such as legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance and maintenance related to OREO. Further, the resolution of nonperforming assets requires the active involvement of management, which can distract management from our overall supervision of operations and other income-producing activities.

Legislative action regarding foreclosures or bankruptcy laws may negatively impact our business, financial condition, liquidity and results of operations.

Certain laws adopted following the financial crisis delay the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans (some for a limited period of time), or otherwise limit the ability of residential loan servicers to take actions that may be essential to preserve the value of the mortgage loans. Any such limitations are likely to cause delayed or reduced collections from mortgagors and generally increased servicing costs. Any restriction on our ability to foreclose on a loan, any requirement that we forego a portion of the amount otherwise due on a loan or any requirement that we modify any original loan terms will in some instances require us to advance principal, interest, tax and insurance payments, which is likely to negatively impact our business, financial condition, liquidity and results of operations.

4142

We continue to hold and acquire ~~“other real estate owned,” or~~ OREO, which may lead to increased operating expenses and vulnerability to declines in real property values.

We foreclose on and take title to the real estate serving as collateral for some of our loans as part of our business. Real estate owned by us and not used in the ordinary course of operations is referred to as OREO. In the past, increased OREO balances have led to greater expenses as we incur costs to manage and dispose of the properties. Our earnings could be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with property ownership, as well as by the funding costs associated with assets that are tied up in OREO. Any decrease in real estate market prices could lead to additional OREO write-downs, with a corresponding expense in our statement of operations. We evaluate OREO properties periodically and write down the carrying value of the properties if the results of our evaluation require it. The potential expenses associated with OREO and any further write-downs on such properties could have a material adverse effect on our financial condition and results of operations.

We may be exposed to environmental liabilities with respect to properties that we take title to upon foreclosure that could increase our costs of doing business and harm our results of operations.

In the course of our activities, we may foreclose and take title to residential and commercial properties and become subject to environmental liabilities with respect to those properties. The laws and regulations related to environmental contamination often impose liability without regard to responsibility for the contamination. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. Moreover, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based upon damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations would be significantly harmed.

Hurricanes or other adverse weather events could negatively affect our local markets or disrupt our operations, which would have an adverse effect on our business and results of operations.

Our market areas in Florida and Georgia are susceptible to hurricanes, tropical storms and related flooding and wind damage. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where we operate. We cannot predict whether or to what extent damage that may be caused by such future weather events will affect our operations or the economies in our current or future market areas, but such weather events could result in a decline in loan originations, a decline in the value or destruction of properties securing our loans and an increase in the delinquencies, foreclosures or loan losses. Our business and results of operations may be adversely affected by these and other negative effects of future hurricanes, tropical storms, related flooding and wind damage and other similar weather events. As a result of the potential for such weather events, many of our customers have incurred significantly higher property and casualty insurance premiums on their properties located in our markets, which may adversely affect real estate sales and values in our markets.

If the allowance for portfolio loan losses is not sufficient to cover actual portfolio loan losses, results of operations and financial condition will be negatively affected.

In the event loan customers do not repay their loans according to their terms and the collateral security for the payments of these loans is insufficient to satisfy any remaining loan balance, we may experience significant loan losses. Such credit risk is inherent in the lending business, and failure to adequately assess such credit risk could have a material adverse effect on our financial condition and results of operations. Management makes various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of the borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of the loans. In determining the amount of the allowance, management reviews the loan portfolio and our historical loss and delinquency experience, as well as overall economic conditions. For larger balance non-homogeneous real estate loans, the estimate of impairment is based on the underlying collateral if collateral-dependent, and if such loans are not collateral-dependent, the estimate of impairment is based on a cash flow analysis. If management’s assumptions are incorrect, the allowance may be insufficient to cover probable incurred losses in the loan portfolio, resulting in additions to the allowance for portfolio loan losses. The allowance for portfolio loan losses is also periodically reviewed by the OFR and the FDIC, who may require us to increase the amount. Additions to the allowance for portfolio loan losses would be made through increased provision expense and would negatively affect our net income and results of operations.

4243

Operating expenses are high as a percentage of our net interest income and noninterest income, making it more difficult to maintain profitability.

Noninterest expense, which consists primarily of the costs associated with operating our business, represents a high percentage of the income we generate. The cost of generating our income is measured by our efficiency ratio, which represents noninterest expense divided by the sum of our net interest income and our noninterest income. If we are able to lower our efficiency ratio, our ability to generate income from our operations will be more effective. For the years ended December 31, ~~2016~~2017, ~~2015~~2016, and ~~2014~~2015, our efficiency ratios were 7075.12%, ~~103~~70.51%, and 89103.25%, respectively. Generally, this means we spent approximately $0.7075, $10.0470, and $01.8904 during those periods to generate $1.00 of income.

If we are unable to generate noninterest income from sales of loans originated for sale, it could have an adverse effect on our business because service charges and deposit fees are expected to continue to be under pressure.

For the year ended December 31, ~~2016~~2017, our ~~service~~ service charges and deposit fees were 25.14% of total noninterest income, while gains from the sale of mortgage loans and the sale of commercial loans originated for sale under government programs was 2432.74% of total noninterest income. Gains earned from the sale of mortgage loans originated for sale and from the sale of commercial loans originated for sale under government programs are expected to be an increasingly larger part of our noninterest income under our business strategy. If our plans to increase our mortgage banking business and SBA/USDA lending are not successful, resulting in less loan originations or smaller levels of gains, our operating results could be materially affected.

We may not be able to realize our deferred tax asset.

We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The realization of the deferred tax asset is dependent upon generating taxable income, and future tax benefits will be recognized as a reduction to income tax expense which will have a positive non-cash impact on our net income and stockholders’ equity.

We could be subject to changes in tax laws, regulations and interpretations or challenges to our income tax provision.

We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. Any change in enacted tax laws, rules or regulatory or judicial interpretations, any adverse outcome in connection with tax audits in any jurisdiction or any change in the pronouncements relating to accounting for income taxes could adversely affect our effective tax rate, tax payments and results of operations. In addition, changes in enacted tax laws, such as adoption of a lower income tax rate in any of the jurisdictions in which we operate, could impact our ability to obtain the future tax benefits represented by our deferred tax assets.

~~The soundness of other financial institutions could adversely affect us.~~44

Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of other banks’ difficulties or failure, which would increase the capital we need to support our growth.

Strong competition in our primary market areas may reduce our ability to attract and retain deposits and also increase our cost of funds.

The Bank operates in very competitive markets for the attraction of deposits, the primary source of our funding. Historically, our most direct competition for deposits has come from credit unions, community banks, large commercial banks and thrift institutions within our primary market areas. In recent years, competition has also come from institutions that largely deliver their services over the internet. Such competitors have the competitive advantage of lower infrastructure costs and substantially greater resources and lending limits and may offer services we do not provide. Particularly during times of extremely low or extremely high interest rates, we have faced significant competition for investors’ funds from short-term money market securities and other corporate and government securities. During periods of regularly increasing interest rates, competition for interest-bearing deposits increases as customers, particularly time deposit customers, tend to move their accounts between competing businesses to obtain the highest rates in the market. As a result, we incur a higher cost of funds in an effort to attract and retain customer deposits. We strive to grow our lower cost deposits, such as noninterest-bearing checking accounts, in order to reduce our cost of funds.

Wholesale funding sources may be unavailable to replace deposits at maturity and support our liquidity needs or growth, which could materially adversely impact our operating margins and profitability.

The Bank must maintain sufficient funds to respond to the needs of depositors and borrowers. As part of our liquidity management, we use a number of wholesale funding sources in addition to non-maturity deposit growth and repayments and maturities of loans and investments.

Our financial flexibility will be severely constrained if we are unable to maintain our access to wholesale funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

Our deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect on our profitability or ability to pursue certain business opportunities.

The FDIC insures deposits at FDIC-insured ~~depository~~ depository institutions, such as Atlantic Coast Bank, up to $250,000 per account. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. ~~Recent market developments and bank failures significantly depleted the FDIC’s Deposit Insurance~~ Fund and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, banks are now assessed deposit insurance premiums based on the bank’s average consolidated total assets, and the FDIC has modified certain risk-based adjustments which increase or decrease a bank’s overall assessment rate. This has resulted in increases to the deposit insurance assessment rates and thus raised deposit premiums for insured depository institutions. If these increases are insufficient for the Deposit Insurance Fund to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If ~~there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. If~~ our financial condition deteriorates or if the Bank's regulators otherwise have supervisory concerns, then our assessments could rise. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could reduce our profitability, may limit our ability to pursue certain business opportunities, or otherwise negatively impact our operations.

New mortgage lending rules may constrain Atlantic Coast Bank’s residential mortgage lending business.

Over the course of the last few years, the CFPB has issued several rules on mortgage lending, notably a rule requiring all home mortgage lenders to determine a borrower’s ability to repay the loan. Loans with certain terms and conditions and that otherwise meet the definition of a “qualified mortgage” may be protected from liability. In either case, the Bank may find it necessary to tighten its mortgage loan underwriting standards, which may constrain our ability to make loans consistent with our business strategies.

~~Conversion~~Financial toreform ~~Florida~~legislation ~~State-Chartered Bank and Bank Holding Company~~ may ~~subject~~continue to ~~the~~result ~~Company~~in ~~and the Bank to~~ new ~~and~~laws ~~potentially heightened examination~~ and ~~reporting requirements~~regulations that ~~may~~are expected to increase our costs of operations and compliance.

On December 27, 2016, the Bank, a wholly-owned subsidiary of the Company, consummated the conversion of its charter from that of a federally-chartered savings bank to that of a Florida state-chartered commercial bank supervised and examined by the FDIC and the OFR. On that same date, the Company also consummated its conversion from a federal savings and loan holding company to a bank holding company supervised and examined by the FRB.

As a result of these conversions, the Company and the Bank may be subject to new and potentially heightened examination and reporting requirements that may increase our costs of operations and compliance.

Financial reform legislation has, among other things, tightened capital standards and created the CFPB and will continue to result in new laws and regulations that are expected to increase our costs of operations and compliance.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

~~Among~~We ~~other~~expect ~~things~~that our operating and compliance costs, and possibly our interest expense, could increase as a result of the Dodd-Frank Act: and the implementing rules and regulations. The need to comply with additional rules and regulations, as well as state laws and regulations, will also divert management’s time from managing our operations. Higher capital levels would reduce our ability to grow and increase our interest-earning assets which would adversely affect our return on stockholders’ equity.

• the OCC became the primary federal regulator for federal savings banks, such as Atlantic Coast Bank (replacing the OTS), and the FRB now supervises and regulates all savings and loan holding companies that were formerly regulated by the OTS, which included the Company prior to December 27, 2016;

• effective July 21, 2011, the federal prohibition on paying interest on demand deposits has been eliminated, thus allowing businesses to have interest-bearing checking accounts. This change has increased our interest expense;

• the FRB is 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;

• the federal banking regulators are required 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 CFPB has been established with broad powers to supervise and enforce consumer protection laws. The CFPB 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 CFPB 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 Atlantic Coast Bank, will be examined by their applicable bank regulators; and

• 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.

In addition to the risks noted above, we expect that our operating and compliance costs, and possibly our interest expense, could increase as a result of the Dodd-Frank Act and the implementing rules and regulations. The need to comply with additional rules and regulations, as well as state laws and regulations, to which we were not previously subject, will also divert management’s time from managing our operations. Higher capital levels would reduce our ability to grow and increase our interest-earning assets which would adversely affect our return on stockholders’ equity.

We are also subject to fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act. Both federal/state agencies and individuals can challenge an institution's performance under these laws. This can impact our ratings under the Community Reinvestment Act and result in sanctions, including damages and civil money penalties, injunctive relief, etc., which could negatively impact business and operations.

Anti-money laundering laws and regulations require institutions to maintain effective programs and file suspicious activity and currency transaction reports. If our policies and procedures are deficient, we may be subject to liability, which would negatively impact our business.

The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules are uncertain and could materially adversely impact our business and ability to pay dividends or buyback our shares in the future.

On July 2, 2013, the federal banking agencies issued final capital rules that substantially amend the regulatory risk-based capital rules applicable to us. The rules implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The rules phase in over time beginning in 2015 and will become fully effective in 2019. The rules apply both to our Company, which currently is not subject to formal capital rules, and Atlantic Coast Bank. The final rules resulted in higher regulatory capital standards, which may result in lower returns on equity, require the raising of additional capital, or result in regulatory actions if we were to be unable to comply with such requirements. As of December 31, 2017, the Bank would have been in compliance with the minimum capital requirements set forth in Basel III.

~~The~~Additionally, ~~final~~in ~~rules~~any ~~increase~~economic ~~capital~~or ~~requirements~~regulatory ~~and generally include two new capital measurements that will affect us~~environment, abank ~~risk-based~~regulators ~~common~~may ~~equity~~impose ~~Tier 1 ratio and a~~ capital ~~conservation buffer.~~requirements Common Equity Tier 1 (CET1) capital is a subset of Tier 1 capital and is limited to common equity (plus related surplus), retained earnings, accumulated other comprehensive income and certain other items. Other instruments that ~~have historically qualified for Tier 1 treatment, including noncumulative perpetual preferred stock,~~ are ~~consigned~~more tostringent athan ~~category~~those ~~known~~required asby ~~Additional~~applicable ~~Tier 1~~existing ~~capital~~regulations. ~~Tier 2 capital consists of instruments that have historically been placed in Tier 2, as well as cumulative perpetual preferred stock.~~ The ~~final~~application ~~rules adjust all three categories~~ of ~~capital~~more bystringent ~~requiring new deductions from and adjustments to~~ capital. ~~Beginning in 2015, our minimum capital~~ requirements ~~were~~for (i) a CET1 ratio of 4.5%, (ii) a Tier 1 capital (CET1 plus Additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (the current requirement). Our leverage ratio requirement will remain at the 4% level now required of Atlantic Coast Bank. ~~Beginning in 2016~~could, aalso ~~capital~~limit ~~conservation~~our ~~buffer~~ability ~~will~~to ~~phase in over three~~make ~~years~~distributions, ~~ultimately~~including resulting in a requirement of 2.5% on top of the CET1, Tier 1 and total capital requirements, resulting in a CET1 ratio of 7%, a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions. While the final rules will result in higher regulatory capital standards, it is difficult at this time to predict when or ~~how~~buying ~~any~~back ~~new~~our ~~standards will ultimately be applied to us~~shares. ~~As of December 31, 2016, the Bank would have been in compliance with the minimum capital requirements set forth in Basel III.~~

In addition to the higher required capital ratios that became effective in 2015, the new capital rules require new deductions from and adjustments to capital that will result in even more stringent capital requirements and changes in the ways we do business. Among other things, commercial real estate loans that do not meet certain new underwriting requirements must be risk-weighted at 150%, rather than the previous 100%. There are also new risk weights for unsettled transactions and derivatives. We also will be required to hold capital against short-term commitments that are not unconditionally cancelable; currently, there are no capital requirements for these off-balance sheet assets.

Additionally, in any economic or regulatory environment, bank regulators may impose capital requirements that are more stringent than those required by applicable existing regulations. The application of more stringent capital requirements for Atlantic Coast Bank could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Higher capital requirements will reduce returns on equity and may make it more difficult to raise capital. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital or additional capital conservation buffers, could result in management modifying our business strategy and could limit our ability to make distributions, including paying dividends or buying back our shares.

The federal banking agencies are likely to issue new liquidity standards that could result in our having to lengthen the term of our funding, restructure our business models, and increase our holdings of liquid assets.

As part of the Basel III capital process, the Basel Committee on Banking Supervision has finalized a new Liquidity Coverage Ratio, which requires a banking organization to hold sufficient “high quality liquid assets” to meet liquidity needs for a 30 calendar day liquidity stress scenario, and a Net Stable Funding Ratio, which imposes a similar requirement over a one-year period. The U.S. banking regulators have said that they intend to adopt such liquidity standards, although they have not yet proposed a rule. New rules could restrict our operations and adversely affect our results and financial condition, by requiring us to lengthen the term of our funding, restructure our business models, and increase our holdings of liquid assets.

New regulations could adversely impact our growth or profitability due to, among other things, increased compliance costs or costs due to noncompliance.

The CFPB has issued a rule, effective as of January 14, 2014, 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 satisfy this “qualified mortgage” safe-harbor will be presumed to have complied with the new ability-to-repay standard. Under the CFPB’s rule, a “qualified mortgage” loan must not contain certain features, including, but not limited to: (i) excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans); (ii) interest-only payments; (iii) negative-amortization; and (iv) 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 CFPB’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 adversely impact our growth or profitability.

Additionally, on December 10, 2013, five financial regulatory agencies, including our primary federal regulator, the FRB, adopted final rules (the Final Rules) implementing the so-called Volcker Rule embodied in Section 13 of the BHCA, which was added by Section 619 of the Dodd-Frank Act. The Final Rules prohibit banking entities from, among other things, (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests in and relationships with hedge funds or private equity funds (covered funds). The Final Rules are intended to provide greater clarity with respect to both the extent of those primary prohibitions and of the related exemptions and exclusions. The Final Rules also require each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include (for the largest entities) making regular reports about those activities to regulators. Community banks, such as the Company, have been afforded some relief under the Final Rules. If such banks are engaged only in exempted proprietary trading, such as trading in U.S. government, agency, state and municipal obligations, they are exempt entirely from compliance program requirements. Moreover, even if a community bank engages in proprietary trading or covered fund activities under the rule, they need only incorporate references to the Volcker Rule into their existing policies and procedures. The Final Rules became effective April 1, 2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2015. The FRB has extended the conformance period to July 21, 2016 for investments in and relationships with covered funds and foreign funds that were in place prior to December 31, 2013. The FRB has also announced an extension of the conformance period until July 21, 2017 for ownership interests in and relationships with legacy funds. The expiration of the conformance periods may impact the types of investments we may make, which in turn could impact our profitability.

Florida financial institutions face a higher risk of noncompliance and enforcement actions with the Bank Secrecy Act and other Anti-Money Laundering statutes and regulations.

~~Since~~Banking ~~September 11, 2001, banking~~ regulators ~~have~~ ~~intensified~~intensely ~~their~~ focus on Anti-Money Laundering and Bank Secrecy Act compliance requirements, particularly the Anti-Money Laundering provisions of the USA PATRIOT Act. There is also ~~increased~~ scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. ~~Since~~Banking ~~2004, federal banking~~ regulators and examiners are ~~have been extremely~~ aggressive in their supervision and examination of financial institutions located in the State of Florida with respect to institutions’ Bank Secrecy Act and Anti-Money Laundering compliance. Consequently, a number of formal enforcement actions have been issued against Florida financial institutions.

In order to comply with regulations, guidelines, and examination procedures in this area, the Bank has been required to adopt new policies and procedures and to install new systems. If the Bank orhas ~~future Bank acquisitions have~~ policies, procedures, and systems that are deemed deficient, then the Bank would be subject to liability, including fines and regulatory actions such as restrictions on its ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of its business plan including its acquisition plans.

We may be unable to successfully implement our business strategy and as a result, our financial condition and results of operations may be negatively affected.

Our future success will depend on management’s ability to successfully implement its business strategy, which includes managing nonperforming assets and operating expenses, continuing to grow our mortgage banking, our commercial and industrial lending, warehouse lending, and small business lending businesses, as well as our banking services to small businesses. While we believe we have the management resources and internal systems in place to successfully implement our strategy, it will take time to fully implement our strategy. We expect that it may take a significant period of time before we can achieve the intended results of our business strategy. During the period we are implementing our plan, our results of operations may be negatively impacted. In addition, even if our strategy is successfully implemented, it may not produce positive results.

Additionally, future success in the expansion of mortgage banking, commercial and industrial lending, warehouse lending, and small business lending businesses will depend on management’s ability to attract and retain highly skilled and motivated loan originators. The Bank competes against many institutions with greater financial resources to attract these qualified individuals. Failure to recruit and retain adequate talent could reduce our ability to compete successfully and adversely affect our business and profitability.

We may face risks with respect to future expansion.

To supplement our current growth strategy, we may engage in additional de novo branch expansion, expansion through acquisitions of existing branches of other financial institutions, or the acquisition of existing financial institutions. Branch expansion, acquisitions and mergers involve a number of risks, including, but not limited to the following:

• the time and costs associated with identifying and evaluating potential acquisitions and merger partners, and negotiations and consummation of any such transaction;

• the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution may not be accurate;

• the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

• our ability to finance an acquisition and possible dilution to our existing stockholders;

• the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses;

• entry into new markets where we lack experience;

• the introduction of new products and services into our business;

• the incurrence and possible impairment of goodwill and other intangible assets associated with an acquisition and possible adverse effects on our results of operations; and

• the risk of loss of key employees and customers.

We may incur substantial costs to expand and can give no assurance that such expansion will result in the levels of profits we would expect. We may issue equity securities, including common stock, in connection with future acquisitions, which could cause ownership and economic dilution to our stockholders. There is no assurance that, following any future mergers or acquisitions, our integration efforts will be successful or, after giving effect to the acquisition that we will achieve profits comparable to, or better than, our historical experience.

Our internal controls may be ineffective.

Management regularly reviews and updates our internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, can provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our financial condition and results of operations.

Our enterprise risk management framework may not be effective in mitigating the risks to which we are subject, or in reducing the potential for losses in connection with such risks.

Our enterprise risk management framework is designed to minimize or mitigate the risks to which we are subject, as well as any losses stemming from such risks. Although we seek to identify, measure, monitor, report, and control our exposure to such risks, and employ a broad and diversified set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited in their ability to anticipate the existence or development of risks that are currently unknown and unanticipated. The ineffectiveness of our enterprise risk management framework in mitigating the impact of known risks or the emergence of previously unknown or unanticipated risks may result in our incurring losses in the future that could adversely impact our financial condition and results of operations.

Failure to keep pace with technological changes, invest in technological improvements, and manage our information systems and related risks could have an adverse effect on our financial condition and results of operations.

The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to serving clients better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs. Our future success will depend, in part, upon our ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in operations. We may need to make significant additional capital investments in technology in the future, and we may not be able to effectively implement new technology-driven products and services. Many competitors have substantially greater resources to invest in technological improvements.

4947

We rely on our information technology and telecommunications systems and third-party service providers. Failures or interruptions affecting information technology and telecommunications systems maintained by us or our service providers could have an adverse effect on our financial condition and results of operations.

Third parties provide key components of our business infrastructure, such as banking services, processing, and internet connections and network access. Any disruption in such services provided by these third parties or any failure of these third parties to handle currently or higher volumes of use could adversely affect our ability to deliver products and services to clients and otherwise to conduct business. Technological or financial difficulties of a third party service provider could adversely affect our business to the extent those difficulties result in the interruption or discontinuation of services provided by that party. Further, in some instances we may be responsible for the failure of such third parties to comply with government regulations. We may not be insured against all types of losses as a result of third party failures and our insurance coverage may not be inadequate to cover all losses resulting from system failures or other disruptions. Failures in our business infrastructure could interrupt the operations or increase the cost of doing business.

Our business is subject to cybersecurity risks associated with our on-line banking services and our reliance on electronic data transfer. Failure to detect or prevent a ~~breach~~ breach of our technological infrastructure or information security systems, or those of our third party vendors and other service providers, including as a result of a cyberattack, “hacking” or identity theft, could disrupt our business, result in a disclosure or misuse of confidential or propriety information, damage our reputation, increase our costs, or have an adverse effect on our financial condition and results of operations.

We depend on our ability to process, record and monitor a large number of client transactions on a continuous basis. As client, public and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business, financial, accounting, data processing, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our businesses and clients.

Information security risks for financial ~~institutions~~ institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of hackers, terrorists, activists, and other external parties. As noted, above, our operations rely on the secure processing, transmission, and storage of confidential information in our computer systems and networks. Our banking and other businesses ~~rely~~ rely on our digital technologies, computer and e-mail systems, software and networks to conduct our operations. In addition, to access our products and services, our clients may use personal smartphones, tablets, personal computers, and other mobile devices that are beyond our control systems. Although we have information security procedures and controls in places, our technologies, systems, networks and our client’s devices may become the target of cyber-attacks or information security breaches that could result in the misappropriation of clients’ funds, the unauthorized release, gathering, monitoring, misuse, loss ofor destruction of our or our client’s confidential, proprietary and other information, or otherwise disrupt our or our clients’ or other third parties’ business operations. Therefore, a successful breach could result in significant financial loss to the Company, as well as damage our reputation in the markets we serve, the banking industry in general, and among our counterparties.

We may be subject to losses due to the errors or fraudulent behavior of employees or third parties.

We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical recordkeeping errors and transactional errors. Our business is dependent on our employees as well as third-party service providers to process a large number of increasingly complex transactions. We could be materially adversely affected if any of our employees cause a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems or if one of our third-party service providers experiences an operational breakdown or failure. When we originate loans, we rely upon information supplied by loan applicants and third parties, including the information contained in the loan application, property appraisal and title information, if applicable, and employment and income documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior to loan funding, we generally bear the risk of loss associated with the misrepresentation. Any of these occurrences could result in a diminished ability of us to operate our business, potential liability to customers, reputational damage and regulatory intervention, which could negatively impact our business, financial condition and results of operations.

5048

We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, may adversely affect us.

The Bank is currently subject to extensive laws and regulations, as well as supervision and examination by the FDIC (which insures the Bank’s deposits) and the OFR. As a bank holding company, we are also currently subject to regulation and supervision by the FRB. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities. Intended to protect clients, depositors, the deposit insurance fund, and the overall financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations or restrictions on the business activities in which we can engage, limit the dividend or distributions that the Bank can pay to the Company, restrict the ability of institutions to guarantee our debt, impose certain specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than U.S. GAAP, among other things.

Our operations are also subject to extensive regulation by other federal, state and local governmental authorities, and are subject to various laws and judicial and administrative decisions that impose requirements and restrictions on our operations. These laws, rules and regulations are frequently changed by legislative and regulatory authorities. In the future, changes to existing laws, rules and regulations, or any other new laws, rules or regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.

Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. We are currently facing increased regulation and supervision of our industry as a result of the financial crisis in the banking and financial markets, and, to the extent that we participate in any programs established or to be established by the U.S. Treasury or by the federal bank regulatory agencies, there will be additional and changing requirements and conditions imposed on us. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure is inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities.

We rely on our management team for the successful implementation of our business strategy.

Turnover of key management and directors, or the loss of other senior managers could have a disproportionate impact on the Company and may have a material adverse effect on our ability to implement our business plan. As we are a relatively small bank with a relatively small management team, certain members of our senior management team have more responsibility than his or her counterpart typically would have at a larger institution with more employees, and we have fewer management-level personnel who are in a position to assume the responsibilities of our executive management team.

Risks Relating to Ownership of Our Common Stock

Our stock price may be volatile due to limited trading volume.

Our common stock is traded on the NASDAQ ~~Global~~ Global Market. However, the average daily trading volume in our common stock is relatively small, approximately 1952,000 shares per ~~day~~ day in ~~2016~~2017, and sometimes significantly less than that. As a result, trades involving a relatively small number of shares may ~~have~~ 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. If our Market Value of Publicly Held Shares (as defined ~~under~~ under NASDAQ rules) falls below $5.0 million or the price per share of the common stock falls below $1.00 for a specified amount of time, under applicable NASDAQ rules, we will generally have 180 calendar days from the date of the receipt of the notification from NASDAQ that we have failed to comply with its applicable listing standards to regain compliance with those standards. If we are unable to regain compliance, we may have to transfer the listing of our common stock to the NASDAQ Capital Market or begin trading on the over-the-counter market, which may adversely affect the trading market for our shares.

Our ability to pay dividends is limited.

We have not paid dividends to our common ~~stockholders~~ stockholders since July 2009. Our ability to pay dividends is limited by the Merger Agreement, regulatory requirements and the need to maintain ~~sufficient~~ sufficient consolidated capital to meet the capital needs of our business, including capital needs related to future growth. The Company’s primary source of funds available for the payment of dividends is the dividend payments we receive from Atlantic Coast Bank. A Florida state-chartered commercial bank may not pay cash dividends that would cause the bank’s capital to fall below the minimum amount required by federal or state law. Accordingly, Florida state-chartered commercial banks may only pay dividends out of the total of current net profits plus retained net profits of the preceding two years to the extent it deems expedient, except no bank may pay a dividend at any time such that the total of net income for the current year when combined with retained net income from the preceding two years, produces a loss. We cannot provide assurances that we will be able to pay dividends to common stockholders in the future, and, if we are able to pay dividends, we cannot provide assurances as to the amount or timing of any such dividends. If we are able to pay dividends in the future, we cannot provide assurances that those dividends will be maintained, at the same level or at all, in future periods.

A Florida state-chartered commercial bank may not pay cash dividends that would cause the bank’s capital to fall below the minimum amount required by federal or state law. Accordingly, Florida state-chartered commercial banks may only pay dividends out of the total of current net profits plus retained net profits of the preceding two years to the extent it deems expedient, except no bank may pay a dividend at any time such that the total of net income for the current year when combined with retained net income from the preceding two years, produces a loss. We cannot provide assurances that we will be able to pay dividends to common stockholders in the future, and, if we are able to pay dividends, we cannot provide assurances as to the amount or timing of any such dividends. If we are able to pay dividends in the future, we cannot provide assurances that those dividends will be maintained, at the same level or at all, in future periods.

We may need additional financing in the future, and any additional financing may result in substantial dilution to our stockholders.

WeIf the Ameris Merger is not consummated for any reason, we may need to obtain additional financing in the future for a variety of reasons, including meeting our regulatory obligations, conducting our ongoing operations, or funding expansion, as well as to respond to unanticipated situations. We may try to raise additional funds through public or private financings, strategic relationships or other arrangements. Our ability to obtain additional financing will depend on a number of factors, including market conditions, our operating performance and investor interest. Additional funding may not be available to us on acceptable terms or at all. If we succeed in raising additional funds through the issuance of equity or convertible securities, it could result in substantial dilution to existing stockholders.

Our ~~Board~~ability ofto ~~Directors~~obtain ~~may~~additional ~~issue~~financing ~~shares~~will depend on a number of ~~preferred~~factors, ~~stock~~including ~~that~~market ~~would~~conditions, ~~adversely~~our ~~affect~~operating performance and investor interest. Additional funding may not be available to us on acceptable terms or at all. If we succeed in raising additional funds through the ~~rights~~issuance of ~~our~~equity or ~~common~~convertible securities, it could result in substantial dilution to existing stockholders.

Our authorized capital stock includes 25,000,000 shares of preferred stock of which no preferred shares are issued and outstanding. Our Board of Directors, in its sole discretion, may designate and issue one or more series of preferred stock from the authorized and unissued shares of preferred stock. Subject to limitations imposed by law or our articles of incorporation, our Board of Directors is empowered to determine:

• the designation and number of shares constituting each series of preferred stock;

• the dividend rate for each series;

• the terms and conditions of any voting, conversion and exchange rights for each series;

• the amounts payable on each series on redemption or our liquidation, dissolution or winding-up;

• the provisions of any sinking fund for the redemption or purchase of shares of any series; and

• the preferences and the relative rights among the series of preferred stock.

We could issue preferred stock with voting and conversion rights that could adversely affect the voting power of the shares of our common stock and with preferences over the common stock with respect to dividends and in liquidation.

We may issue additional shares of common stock, preferred stock or equity, debt or derivative securities, which could adversely affect the value or voting power of the shares of our common stock.

In addition to the securities that we expect to issue upon the exercise of outstanding stock options and the vesting of restricted stock, we may also issue shares of capital stock in future offerings, acquisitions or other transactions, or may engage in recapitalizations or similar transactions in the future, the result of which could cause stockholders to suffer dilution in book value, market value or voting rights. Our Board of Directors has authority to engage in some of these transactions, particularly additional equity, debt or derivative securities offerings or issuances, without stockholder approval. If our Board of Directors decides to approve transactions that result in dilution, the value and voting power of shares of our common stock could decrease.

Our articles of incorporation and bylaws may prevent or delay favored transactions, including our sale or merger or our issuance of stock or sale of assets.

Certain provisions of our articles of incorporation and bylaws and various other factors may make it more difficult and expensive for companies or persons to acquire control of us without the consent of our Board of Directors, including:

• our classified Board of Directors;

• notice and information requirements for stockholders to nominate candidates for election to the Board of Directors or to propose business to be acted on at the Annual Meeting of Stockholders;

• requirement that a special meeting called by stockholders may be called only by the holders of at least a majority of all votes entitled to be cast at the meeting;

• limitations on voting rights;

• restrictions on removing directors from office;

• authorized but unissued shares;

• stockholder voting requirements for amendments to the articles of incorporation and bylaws; and

• consideration of other factors by the Board of Directors when evaluating change in control transactions.

It is possible, however, that a takeover attempt could be beneficial because, for example, a potential buyer could offer a premium over the then prevailing price of our common stock which would provide an opportunity for stockholders to liquidate investments in our common stock.

Our regulators could adversely affect our ability to enter into corporate transactions, including acquisitions of and mergers with other entities.

The Company is a bank holding company subject to supervisory regulation and examination by the FRB. The Home Owners’ Loan Act, the Dodd-Frank Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. These laws may discourage certain persons from acquiring control of us. Additionally, federal and state approval requirements may delay or prevent certain persons from acquiring us.

As a Maryland corporation, we are subject to Maryland General Corporation Law (MGCL). Subject to certain exceptions, MGCL provides that a “business combination” between a Maryland corporation and an “interested stockholder,” or an affiliate of an interested stockholder, is prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder, and after the five-year prohibition, any business combination between a Maryland corporation and an interested stockholder generally must be recommended by the Board of Directors and approved by the affirmative vote of at least: (i) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock, voting together as a single voting group, and (ii) two-thirds of the votes entitled to be cast by holders of voting stock other than the shares held by the interested stockholder or an affiliate or associate of the interested stockholder, voting together as a single voting group.

The supermajority vote requirements do not apply, however, if the corporation’s common stockholders receive a minimum price, as defined under the MGCL, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

The MGCL generally defines an interested stockholder as: (i) any person who beneficially owns 10% or more of the voting power of the voting stock after the date on which the corporation had 100 or more beneficial owners of its stock; or (ii) an affiliate or associate of the corporation who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the corporation’s then-outstanding voting stock at any time within the two-year period immediately prior to the date in question, and after the date on which it had 100 or more beneficial owners of its stock.

A person is not an interested stockholder under the statute if the Board of Directors approved in advance the transaction by which the person otherwise would have become an interested stockholder.

The business combinations covered by the MGCL generally include mergers, consolidations, statutory share exchanges, or, in certain circumstances, certain transfers of assets, certain stock issuances and transfers, liquidation plans and reclassifications involving interested stockholders and their affiliates, or issuances or reclassifications of equity securities.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

At December 31, ~~2016~~2017, the Company had ten full-service branch offices, one drive-up facility, office space for the home and executive offices (which includes a drive-up ATM) and ~~five~~four lending offices. The Company owns many of these locations; however, the home and executive offices in Jacksonville, Florida, the branch location in Orange Park, Florida, and the ~~five~~four lending offices are all leased.

Management believes the Company’s facilities are suitable for their intended purposes and adequate to support its current and projected business needs. Management continuously reviews the branch and office locations in order to improve the visibility and accessibility of the Bank.

5450

The following table provides a list of the Company’s offices as of December 31, ~~2016~~2017:

	Owned or	Lease Expiration	Net Book Value
Location	Leased	Date (if applicable)	as of December 31, ~~2016~~2017
			(Dollars in Thousands)
Home and Executive Offices:
4655 Salisbury Road, Suites 110 & 350	Leased	May 2020	$	~~167~~129
Jacksonville, Florida 32256
Branch Offices:
10328 Deerwood Park Blvd.	Owned	n/a		1,~~574~~329
Jacksonville, Florida 32256
8048 Normandy Blvd.	Owned	n/a		~~856~~878
Jacksonville, Florida 32221
2766 Race Track Road	Owned	n/a		1,~~758~~755
Jacksonville, Florida 32259
930 University Avenue North	Owned	n/a		~~910~~914
Jacksonville, Florida 32211
1700 South Third Street	Owned	n/a		1,~~500~~499
Jacksonville Beach, Florida 32200
1425 Atlantic Blvd.	Owned	n/a		3,~~410~~398
Neptune Beach, Florida 32233
1567 Kingsley Avenue	Leased	~~September~~July ~~2017~~2018		~~476~~459
Orange Park, Florida 32073
1390 South Gaskin Avenue	Owned	n/a		~~340~~355
Douglas, Georgia 31533
505 Haines Avenue	Owned	n/a		21,~~115~~840
Waycross, Georgia 31501
2110 Memorial Drive	Owned	n/a		~~525~~540
Waycross, Georgia 31501
Drive-Up Facility:
400 Haines Avenue	Owned	n/a		5171
Waycross, Georgia 31501
Lending Offices:
605 Crescent Executive Court, Suite 112	Leased	November 2018		4937
Lake Mary, Florida 32746
711 South Howard Avenue, Unit 2	Leased	January 2017 (1)		1
107 Hampton Road, Suite 200	Leased	February 2019		4
Tampa, Florida 33606
107 Hampton Road, Suite 200	Leased	February 2019		5
Clearwater, Florida 33759
400 Main Street, Cottage 6E	Leased	January ~~2017~~2018 (21)		32
Saint Simons Island, Georgia 31522
617 Stephenson Avenue	Leased	February 2019		1523
Savannah, Georgia 31405

~~Savannah~~(1) This lease term was extended on a month to month basis, ~~Georgia~~subsequent ~~31405~~to December 31, 2017.

~~(1) This lease term was not extended, subsequent to December 31, 2016.~~51

(2) This lease term was extended through January 2018, subsequent to December 31, 2016.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

5652

Part II.

Atlantic Coast Financial Corporation’s common stock is traded on the NASDAQ Global Market under the symbol “ACFC.” As of March 1, ~~2017~~2018, there were 15,~~509~~552,~~061~~833 shares of common stock issued and outstanding, with approximately 2,~~300~~000 stockholders, including stockholders of record and beneficial stockholders.

The Company paid quarterly cash dividends from May 2005 until September 2009, at which time the Company suspended its regular quarterly cash dividend. Future cash dividend payments by the Company and the amount thereof will depend on a number of factors, including financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors that the Company’s Board of Directors may deem relevant and will also be substantially dependent on cash dividends the Company receives from its subsidiary, the Bank. The Bank is limited in the amount of cash dividends that may be paid, and such amount is based on the Bank’s net earnings of the current year combined with the Bank’s retained earnings of the preceding two years, as defined by state banking regulations. In addition, bank regulators have the authority to prohibit banks from paying dividends if they deem such payment to be an unsafe or unsound practice.

The following table sets forth the quarterly high and low sales prices and cash dividends declared on the Company’s common stock for the years ended December 31, ~~2016~~2017 and ~~2015~~2016:

	High		Low		Cash Dividends
Fiscal 2017:
Fourth quarter (October 1 – December 31)	$	9.95	$	8.27	$	0.00
Third quarter (July 1 – September 30)		8.89		7.05		0.00
Second quarter (April 1 – June 30)		8.35		7.27		0.00
First quarter (January 1 – March 31)		8.27		6.76		0.00
Fiscal 2016:
Fourth quarter (October 1 – December 31)	$	7.35	$	6.26	$	0.00
Third quarter (July 1 – September 30)		6.95		5.84		0.00
Second quarter (April 1 – June 30)		6.50		5.53		0.00
First quarter (January 1 – March 31)		6.20		5.16		0.00
Fiscal 2015:
Fourth quarter (October 1 – December 31)	$	6.50	$	5.03	$	0.00
Third quarter (July 1 – September 30)		6.75		4.32		0.00
Second quarter (April 1 – June 30)		4.60		3.93		0.00
First quarter (January 1 – March 31)		4.20		3.60		0.00

The Company did not repurchase any shares of its common stock during the year ended December 31, ~~2016~~2017.

The table below sets forth information, as of December 31, ~~2016~~2017, regarding equity compensation plans categorized by those plans that have been approved by stockholders and those plans that have not been approved by stockholders.

Plan Category

Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1)

Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (2)

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (3) (4)

Equity compensation plans approved by stockholders

20,776

14.95

~~500~~455,~~000~~352

Equity compensation plans not approved by stockholders

−-

Total

20,776

14.95

~~500~~455,~~000~~352

(1)

Consists of options to purchase 20,776 shares of common stock under the Atlantic Coast Federal Corporation 2005 Stock Option Plan.

(2)

The weighted average exercise price reflects the weighted average exercise price of stock options awarded under the Atlantic Coast Federal Corporation 2005 Stock Option Plan.

(3)

In accordance with its provisions, the Atlantic Coast Federal Corporation 2005 Stock Option Plan was terminated on July 27, 2015; therefore, no securities remain available for future issuance under this plan.

(4) The Atlantic Coast Financial Corporation 2016 Omnibus Incentive Plan was approved at the Company’s 2016 Annual Meeting of Stockholders; therefore, ~~500~~455,~~000~~352 securities are available for future issuance under this plan.

5753

ITEM 6. SELECTED FINANCIAL DATA

The following is a summary of selected consolidated financial data of the Company at and for the years indicated. The summary should be read in conjunction with the consolidated financial statements and accompanying notes to the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data herein.

Selected Consolidated Balance Sheet Data

At December 31,

2016

2015

2014

2013

2012

2017

2016

2015

2014

2013

(Dollars in Thousands)

Total assets

~~907~~983,~~459~~256

~~857~~907,~~198~~459

~~706~~857,~~498~~198

~~733~~706,~~633~~498

~~772~~733,~~619~~633

Cash and cash equivalents

5950,~~893~~409

2359,~~581~~893

2223,~~398~~581

~~114~~22,~~194~~398

67114,~~828~~194

Total investment securities

6537,~~293~~683

~~120~~65,~~110~~293

~~136~~120,~~618~~110

~~178~~136,~~998~~618

~~159~~178,~~745~~998

Portfolio loans, net

~~639~~757,~~245~~506

~~603~~639,~~507~~245

~~446~~603,~~870~~507

~~371~~446,~~956~~870

~~421~~371,~~201~~956

Other loans (held-for-sale and warehouse)

8785,~~724~~310

5087,~~665~~724

4150,~~191~~665

2241,~~179~~191

7222,~~568~~179

Federal Home Loan Bank stock, at cost

89,~~792~~892

98,~~517~~792

69,~~257~~517

56,~~879~~257

75,~~260~~879

Deposits

~~628~~675,~~413~~803

~~555~~628,~~821~~413

~~440~~555,~~780~~821

~~460~~440,~~098~~780

~~499~~460,~~760~~098

Total borrowings

~~188~~213,~~758~~525

~~217~~188,~~534~~758

~~189~~217,~~967~~534

~~202~~189,~~800~~967

~~227~~202,800

Total stockholders’ equity

8790,~~018~~660

8087,~~738~~018

7280,~~336~~738

6572,~~525~~336

4065,~~260~~525

Selected Consolidated Statement of Operations Data

	Years Ended December 31,
	2016		2015			2014			2013			2012
	2017		2016			2015			2014			2013
	(Dollars in Thousands, Except Share Information)
Total interest and dividend income	$	3334,~~889~~372	$	2933,~~796~~889		$	2829,~~135~~796		$	28,~~836~~135		$	3328,~~505~~836
Total interest expense		7,~~417~~378		87,~~686~~417			108,~~512~~686			1210,~~695~~512			1412,~~270~~695
Net interest income		26,~~472~~994		2126,~~110~~472			1721,~~623~~110			1617,~~141~~623			1916,~~235~~141
Provision for portfolio loan losses		~~619~~693		~~807~~619			~~1,266~~807			71,~~026~~266			127,~~491~~026
Net interest income after provision for portfolio loan losses		2526,~~853~~301		2025,~~303~~853			1620,~~357~~303			916,~~115~~357			69,~~744~~115
Total noninterest income		96,~~247~~985		69,~~850~~247			6,~~439~~850			6,~~328~~439			106,~~096~~328
Total noninterest expense		25,~~050~~559		2825,~~942~~050			2128,~~469~~942			2621,~~849~~469			2326,~~357~~849
Income (loss) before income tax expense (benefit)		107,~~050~~727		(110,~~789~~050	)		(1,~~327~~789	)		~~(11~~1,~~406~~327	)		(611,~~517~~406	)
Income tax expense (benefit)		34,~~632~~559		(93,~~507~~632	)		−(9,507	)		−-			~~150~~-
Net income (loss)	$	63,~~418~~168	$	76,~~718~~418		$	17,~~327~~718		$	~~(11~~1,~~406~~327	)	$	(611,~~667~~406	)
Income (loss) per common share:
Basic	$	0.4221	$	0.5042		$	0.0950		$	(30.2309	)	$	(23.6723	)
Diluted	$	0.4221	$	0.5042		$	0.0950		$	(30.2309	)	$	(23.6723	)
Dividends declared per common share	$	−-	$	−-		$	−-		$	−-		$	−-

5854

Selected Consolidated Financial Ratios and Other Data

	At or For the Year Ended December 31,
	2016			2015			2014			2013			2012
	2017			2016			2015			2014			2013
Interest rate:
Net interest spread (1)		3.0106	%		23.8101	%		2.4181	%		2.1841	%		2.4218	%
Net interest margin (2)		3.1220	%		23.9512	%		2.6195	%		2.3161	%		2.5831	%
Performance ratios:
Return (loss) on average total assets		0.7236	%		10.0072	%		01.1900	%		(10.5519	)%		(01.8555	)%
Return (loss) on average stockholders’ equity		73.5450	%		97.9454	%		19.8994	%		~~(30~~1.4589	)%		(1430.5145	)%
Ratio of operating expense to average total assets		2.8189	%		32.7581	%		3.0175	%		3.6401	%		23.9964	%
Efficiency ratio (3)		7075.1322	%		~~103~~70.5113	%		89103.2251	%		~~119~~89.4922	%		79119.6349	%
Ratio of average interest-earning assets to average interest-bearing liabilities		~~113~~116.2977	%		~~111~~113.6729	%		~~113~~111.2967	%		~~107~~113.1429	%		~~108~~107.1114	%
Dividend payout ratio		−	%		−	%		−	%		−	%		−	%
Credit and liquidity ratios:
Nonperforming assets to total assets		10.4497	%		01.8744	%		10.2087	%		1.1720	%		41.2617	%
Nonperforming portfolio loans to total portfolio loans		1.5702	%		01.6957	%		10.0069	%		01.8900	%		50.7689	%
Allowance for portfolio loan losses to nonperforming portfolio loans		80110.3843	%		~~183~~80.3138	%		~~156~~183.7131	%		~~205~~156.4471	%		43205.7644	%
Allowance for portfolio loan losses to total portfolio loans		1.2612	%		1.2726	%		1.5727	%		1.8357	%		21.5283	%
Net charge-offs to average outstanding portfolio loans		0.0304	%		0.0403	%		0.2704	%		20.7727	%		32.5977	%
Capital Ratios:
Average stockholders’ equity to average total assets		910.525	%		109.154	%		910.907	%		59.186	%		5.908	%
Total capital to risk weighted assets		1412.853	%		1314.983	%		1713.691	%		2017.564	%		920.847	%
Common equity tier 1 capital to risk weighted assets		1311.643	%		1213.758	%		~~n/a~~12.66	%		n/a			n/a
Tier 1 capital to risk weighted assets		1311.643	%		1213.758	%		1612.466	%		1916.238	%		819.622	%
Tier 1 capital to adjusted assets		9.467	%		9.544	%		109.449	%		910.735	%		59.173	%
Other Data:
Number of full-service branch offices		10			1110			11			11			11
Number of loans		65,~~319~~995			6,~~270~~319			6,~~588~~270			6,~~835~~588			76,~~889~~835
Number of deposit accounts		30,~~615~~291			3330,~~769~~615			3433,~~438~~769			3534,~~960~~438			3735,~~681~~960

(1)

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 period.

(2)

Net interest margin represents net interest income divided by average interest earning assets.

(3)

Efficiency ratio represents noninterest expense as a percentage of net interest income plus noninterest income.

5955

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis (this MD&A) is provided as a supplement to, should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements and accompanying Notes of the Company appearing elsewhere in this Report (the Notes).

General Description of Business

The Company and the Bank have traditionally focused on attracting deposits and investing those funds primarily in loans, including commercial real estate loans, consumer loans, first mortgages on owner-occupied, one- to four-family residences and home equity loans. Additionally, the Bank invests funds in multi-family residential loans, commercial business loans, and commercial and residential construction loans. The Bank also invests funds in investment securities, primarily those issued by U.S. government-sponsored agencies or entities, including Fannie Mae, Freddie Mac and Ginnie Mae.

Revenues are derived principally from interest on loans and other interest-earning assets, such as investment securities. To a lesser extent, revenue is generated from service charges, gains on the sale of loans and other income.

The Bank offers a variety of deposit accounts having a wide range of interest rates and terms, which generally include noninterest-bearing and interest-bearing demand, savings and money market, and time deposit accounts with terms ranging from three months to five years. Deposits are primarily solicited in the Bank’s market areas of the Northeast Florida and Southeast Georgia to fund loan demand and other liquidity needs; however, late in 2015 the Bank also started soliciting deposits in Central Florida.

See Item 1. Business and Item 8. Financial Statements and Supplementary Data in this Report for further information related to financial condition and results of operation.

Business Strategy

Overview

Our primary objective is to operate a community-oriented financial institution, serving customers in our market areas while providing stockholders with a solid long-term return on capital. Accomplishing this objective will require financial strength based on a strong capital position and the implementation of business strategies designed to keep the Company profitable consistent with safety and soundness considerations. The Company’s operating strategies are focused on increasing revenues from traditional small business commercial lending, including SBA and USDA lending activity, mortgage banking through the Bank’s internal mortgage loan origination platform, and warehouse loans held-for-investment origination. In addition, the Company will focus on a conservative credit culture designed to keep nonperforming assets at a low level. Finally, the Company will seek to increase non-maturity deposits through added customer relationships to improve our cost of funds and to help further reduce our cost structure.

Management has pursued, and plans to continue to pursue, various options to aid in the steady improvement of the Company’s financial condition and results of operations. The following are the key elements of our business strategy:

Increasing Revenue By Continuing to Focus on Commercial Lending to Small Businesses, Continuing to Build Our Internal Mortgage Originations, and Growing Our Warehouse Loans Held-For-Investment Operations. In 2014, the Bank began emphasizing increased production in commercial lending to small businesses. As a result, at December 31, ~~2016~~2017, our commercial real estate and commercial business loans totaled $~~162~~298.17 million, or 2539.3% of our loan portfolio. Since the beginning of 2014, the Bank has emphasized the origination of one- to four-family residential mortgage loans in Northeast Florida and Southeast Georgia, and expanded into Central Florida in the beginning of 2015. At December 31, ~~2016~~2017, our one- to four-family residential loan portfolio was $~~276~~286.27 million, or 4337.18% of our loan portfolio. Additionally, during 2012, management shifted our business model to include an emphasis on growth in warehouse loans held-for-investment lending.

6056

Commercial lending strategy. Management plans to increase commercial business lending and owner-occupied commercial real estate lending with an emphasis on small businesses. The Bank intends to participate in government programs relating to commercial business loans, such as the programs administered by the USDA and the SBA. The Company generally sells the guaranteed portion of SBA and USDA loans to investors at attractive premiums. Our focus on owner-occupied commercial real estate loans will be to professional service businesses. The Bank does not intend to originate or purchase higher risk loans, such as commercial real estate development projects or land acquisition and development loans.

Internal mortgage originations strategy. Early in 2014, the Bank reentered the business of originating one- to four-family residential loans for investment, and intends to continue originating such loans internally. Additionally, the Bank intends to originate one- to four-family residential loans for sale on the secondary market to supplement noninterest income.

Warehouse loans held-for-investment lending strategy. In the latter part of 2009, the Bank began a program for warehouse loans held-for-investment lending where we finance lines of credit secured by one- to four-family residential loans originated under purchase and assumption agreements by third-party originators and hold a lien position for a short duration (usually less than 30 days) while earning interest and often a fee until a sale is completed to an investor. During 2012, management started emphasizing growth in this business by expanding relationships with existing counterparties, as well as establishing relationships with new counterparties. The Bank expects to continue modestly expanding this aspect of mortgage banking in the future.

Continuing Our Proactive Approach to Keeping Nonperforming Assets at a Low Level Through Aggressive Resolution and Disposition Initiatives. As a result of management’s proactive strategy, our nonperforming assets were $139.05 million at December 31, ~~2016~~2017. Management plans to continue to use a proactive strategy to keep nonperforming assets at a low level through loan workout programs with borrowers and enhanced collection practices.

A conservative charge-off policy. Management utilizes a conservative charge-off strategy for one- to four-family residential mortgage loans and home equity loans by taking partial or full charge-offs in the period that such loans became nonaccruing, generally when loans are 90 days or more past due.

· Loan workout programs with borrowers. The Bank is committed to working with responsible borrowers to renegotiate loan terms. The Bank had $3430.89 million in TDRs (including $2015.37 million of TDRs performing for more than 12 months under the modified terms) at December 31, ~~2016~~2017. TDRs avoid the expense of foreclosure proceedings and holding and disposition expenses of selling foreclosed property and provide us increased interest income.

· Nonperforming asset sales. As a part of the Bank’s workout program, the Bank continues to accept short sales of residential property by borrowers where such properties are sold at a loss and the proceeds of such sales are paid to us when this action represents the least costly resolution for the Company. Also, when necessary, in order to reduce the expenses of the foreclosure process, including the sale of foreclosed property, the Bank may sell certain nonperforming loans through national loan sales of distressed assets, which may mitigate future losses. During ~~2016~~2017, the Bank did not sell any nonperforming assets through bulk distressed asset sales and does not intend to use bulk distressed asset sales in the near future.

Credit risk management. The Bank is committed to enhancing credit administration by improving internal risk management processes. In 2010, an independent risk committee of the Bank’s Board of Directors was established to evaluate and monitor system, market and credit risk. In 2012, the Bank established a broad problem asset resolution program and developed enhanced asset workout plans for each criticized asset.

6157

Strengthening Our Retail Franchise By Growing Noninterest-bearing Deposits and Reducing Our Overall Cost of Deposits. We believe a successful retail franchise results from a strong core customer base that focuses on noninterest-bearing deposits within an overall deposit strategy that offers interest rates that are competitive to its markets, but in line with the overall interest rate environment. Therefore, we remain committed to generating lower-cost and more stable noninterest-bearing deposits and offering our customers other deposit products with interest rates that are fair and meet their financial needs. The Bank complements its attractive deposit products with excellent customer service and a comprehensive marketing program. The Bank will continue to build a core customer base by offering noninterest-bearing and other non-maturity deposits to individuals, businesses and municipalities located in our market areas. Our noninterest-bearing deposits were $5963.79 million at December 31, ~~2016~~2017. ~~Total~~The average cost of deposits (interest expense on deposits as compared to total ~~average~~ average deposits) for the full year of ~~2016~~2017 was 0.6277%. In addition to improving our interest rate spread, noninterest-bearing deposits also contribute noninterest income from account related services.

Reducing Our Expense Base. ~~The~~In Company has historically operated with a high cost structure as it has implemented growth and new business activities. During the second quarter of 2015, in an effort to reduce interest expense, the Company executed multiple transactions to prepay $56.3 million of its repurchase agreements and $60.0 million of its FHLB advances, as well as completing a restructure of $50.0 million of its FHLB advances, which reduced the weighted average interest rate on our wholesale debt from 3.32% (immediately prior to the completion of such transactions) to 0.87% (as of the completion of such transactions). The weighted average interest rate on our wholesale debt was 1.26% as of December 31, 2016. Additionally, in order to improve the Company’s profitability, we continue to emphasize expense reduction initiatives in order to reduce operating costs that do not add value to our other business strategies. We intend to continue this focus in order to eliminate non-value added expenses and activities.

Critical Accounting Policies

Certain accounting policies are important to the presentation of the Company’s financial condition, because they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, without limitation, changes in interest rates, performance of the economy, financial condition of borrowers, and laws and regulations. Management believes that its critical accounting policies include: (i) determining the allowance and provision expense; (ii) measuring for impairment in TDRs; (iii) determining the fair value of investment securities; (iv) determining the fair value of OREO; and (v) accounting for deferred income taxes.

Allowance for Portfolio Loan Losses

An allowance is maintained to reflect probable incurred losses in the loan portfolio. The allowance is based on ongoing assessments of the estimated losses incurred in the loan portfolio and is established as these losses are recognized through provision expense charged to earnings. Generally, portfolio loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The reasonableness of the allowance is reviewed and established by management, within the context of applicable accounting and regulatory guidelines, based upon its evaluation of then-existing economic and business conditions affecting the Bank’s key lending areas. Senior credit officers monitor those conditions continuously and reviews are conducted quarterly with the Bank’s senior management and Board of Directors.

62The allowance was $8.6 million, or 1.1%, and $8.2 million, or 1.3%, of total portfolio loans outstanding at December 31, 2017 and 2016, respectively. The provision expense for each quarter of 2017, 2016 and 2015, and the total for the respective years is as follows:

The allowance was $8.2 million, or 1.3%, and $7.7 million, or 1.3%, of total loans outstanding at December 31, 2016 and 2015, respectively. The provision expense for each quarter of 2016, 2015 and 2014, and the total for the respective years is as follows:

	2017		2016		2015
	(Dollars in Millions)

First quarter	$	0.1	$	0.2	$	0.2
Second quarter		0.2		0.2		0.2
Third quarter		0.2		0.2		0.2
Fourth quarter		0.2		0.1		0.2
Total provision for portfolio loan losses ⁽¹⁾	$	0.7	$	0.6	$	0.8

	2016		2015		2014
	(Dollars in Millions)
First quarter	$	0.2	$	0.2	$	0.5
Second quarter		0.2		0.2		0.3
Third quarter		0.2		0.2		0.3
Fourth quarter		0.1		0.2		0.2
Total provision for portfolio loan losses (1)	$	0.6	$	0.8	$	1.3

(1)

May not foot due to rounding.

The amount of the allowance and related provision expense can vary over long-term and short-term periods. Changes in economic conditions, the composition of the loan portfolio, and individual borrower conditions can dramatically impact the required level of allowance, particularly for larger individually evaluated loan relationships, in relatively short periods of time. The allowance allocated to individually evaluated loan relationships was $0.5 million and $0.3 million at December 31, 2016 and 2015, respectively. Given the constantly shifting real estate market coupled with changes in borrowers’ financial condition, changes in collateral values, and the overall economic uncertainty that continues to persist, management believes there could be significant changes in individual specific loss allocations in future periods as these factors are difficult to predict and can vary widely as more information becomes available or as projected events change.58

The amount of the allowance and related provision expense can vary over long-term and short-term periods. Changes in economic conditions, the composition of the loan portfolio, and individual borrower conditions can dramatically impact the required level of allowance, particularly for larger individually evaluated loan relationships, in relatively short periods of time. The allowance allocated to individually evaluated loan relationships was $0.5 million at both December 31, 2017 and 2016, respectively. Given the constantly shifting real estate market coupled with changes in borrowers’ financial condition, changes in collateral values, and the overall economic uncertainty that continues to persist, management believes there could be significant changes in individual specific loss allocations in future periods as these factors are difficult to predict and can vary widely as more information becomes available or as projected events change.

The allowance is discussed in further detail in Note 1. Summary of Significant Accounting Policies of the Notes contained in this Report.

Troubled Debt Restructurings

Portfolio loans for which concessions have been granted as a result of the borrower’s financial difficulties are classified as a TDR and, consequently, an impaired loan. TDRs are measured for impairment based upon the present value of estimated future cash flows using the loan’s interest rate at inception of the loan or the appraised value of the collateral if the loan is collateral dependent. Impairment of homogeneous portfolio loans, such as one- to four-family residential loans, that have been modified as TDRs is calculated in the aggregate based on the present value of estimated future cash flows. Portfolio loans modified as TDRs with market rates of interest are classified as impaired portfolio loans. Once the TDR loan has performed for twelve months in accordance with the modified terms it is classified as a performing impaired loan. TDRs which do not perform in accordance with modified terms are reported as nonperforming portfolio loans. The policy for returning a nonperforming loan to accrual status is the same for any loan, irrespective of whether the loan has been modified. As such, loans which are nonperforming prior to modification continue to be accounted for as nonperforming loans (and are reported as impaired nonperforming loans) until they have demonstrated the ability to maintain sustained performance over a period of time, but no less than six months. Following this period such a modified loan is returned to accrual status and is classified as impaired and reported as a performing TDR.

Fair Value of Investment Securities

Investment securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in other comprehensive income (loss), net of tax. Investment securities held-to-maturity are carried at amortized cost. The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or model-based techniques that use significant assumptions not observable in the market (Level 3).

63Management evaluates investment securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The assessment of whether other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at the determination date. The Company recorded no OTTI for the years ended December 31, 2017, 2016 and 2015.

Management evaluates investment securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The assessment of whether other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at the determination date. The Company recorded no OTTI for the years ended December 31, 2016, 2015 and 2014.

The fair value of investment securities is discussed in further detail in Note 1. Summary of Significant Accounting Policies and Note 4. Fair Values of the Notes contained in this Report.

Fair Value of Other Real Estate Owned and Foreclosed Assets

Assets acquired by the Bank through or in lieu of loan foreclosure are initially recorded at fair value based on an independent appraisal, less estimated selling costs, at the date of foreclosure, establishing a new cost basis. If fair value declines subsequent to foreclosure, the asset value is written down through expense. Costs relating to improvement of property are capitalized, whereas costs relating to holding of the property are expensed.

Deferred Income Taxes

After previously converting to a federally-chartered savings bank, the Bank became a taxable organization and, after the Bank’s recent charter conversion, remains a taxable organization as a Florida state-chartered commercial bank. Income tax expense, or benefit, is the total of the current year income tax due, or refundable, and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary difference between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates and operating loss carryovers. The Company’s principal deferred tax assets result from the allowance for portfolio loan losses and operating loss carryovers. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Internal Revenue Code and applicable regulations are subject to interpretation with respect to the determination of the tax basis of assets and liabilities for credit unions that convert charters and become a taxable organization. Since the Bank’s transition to a taxable organization, the Company has recorded income tax expense based upon management’s interpretation of the applicable tax regulations. Positions taken by the Company in preparing our federal and state tax returns are subject to the review of taxing authorities, and the review by taxing authorities of the positions taken by management could result in a material adjustment to the financial statements.

All available evidence, both positive and negative, is considered when determining whether or not a valuation allowance is necessary to reduce the carrying amount to a balance that is considered more likely than not to be realized. The determination of the realizability of deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of such evidence.

Under the rules of IRC § 382, a change in the ownership of the Company occurred during the first quarter of 2013. During the second quarter of 2013, the Company became aware of the change in ownership based on applicable filings made by stockholders with the SEC. In accordance with IRC § 382, the Company determined the gross amount of net operating loss carryover that it could utilize was limited to approximately $325,000 per year.

The deferred tax asset is discussed in further detail in Deferred Income Taxes on page 66 and in Note 14. Income Taxes of the Notes contained in this Report.

64Comparison of Financial Condition at December 31, 2017 and 2016

Comparison of Financial Condition at December 31, 2016 and 2015

General

Total assets increased $5075.38 million, or 58.94%, to $~~907~~983.53 million at ~~December~~Deecmber 31, ~~2016~~2017, as compared to $~~857~~907.25 million at December 31, ~~2015~~2016. The increase in assets was funded primarily by increases in non-maturing deposits of $6665.72 million, ~~time~~an ~~deposits~~increase of $524.98 million, in Federal Home Loan Bank (FHLB) advances and stockholders’ equity of $6.3.7 million, as discussed below, partially offset by a ~~reduction~~decrease in time deposits of $1817.8 million. Net inportfolio ~~FHLB~~loans ~~advances~~increased ~~and~~ $10118.03 million, inwhile ~~repurchase~~cash ~~agreements. Cash~~ and cash equivalents ~~increased~~decreased $369.35 million, ~~net~~investment ~~portfolio~~securities ~~loans increased~~ decreased $3527.76 million, and other loans ~~increased $37.0 million, while investment securities~~ decreased $542.84 million. Total deposits increased $7247.64 million, or 137.15%, to $~~628~~675.48 million at December 31, ~~2016~~2017, from $~~555~~628.84 million at December 31, ~~2015~~2016. Noninterest-bearing demand accounts increased $124.52 million, ~~interest-bearing~~and savings and ~~demand~~money market accounts increased by $069.97 million, ~~savings~~while ~~and~~interest-bearing ~~money~~demand ~~market~~ accounts ~~increased~~decreased by $538.37 million, and time deposits ~~increased~~ decreased by $517.98 million during the year ended December 31, ~~2016~~2017. Total borrowings ~~decreased~~increased by $2824.8 million to $~~188~~213.75 million at December 31, ~~2016~~2017, from $~~217~~188.57 million at December 31, ~~2015~~2016, due to the aforementioned ~~decrease~~increase in FHLB advances ~~and~~during 2017, as the ~~aforementioned reduction~~Company supplemented its core deposit growth in ~~repurchase~~order ~~agreements~~to ~~during~~meet ~~2016~~its loan funding demand. Stockholders’ equity increased by $6.3.7 million to $8790.07 million at December 31, ~~2016~~2017, from $8087.70 million at December 31, ~~2015~~2016, primarily due to net income of $63.42 million, ~~partially~~and ~~offset by~~ other comprehensive ~~loss~~ income of $0.3 million for the year ended December 31, ~~2016~~2017.

~~Following are the summarized comparative balance sheets as of December 31, 2016 and 2015:~~60

	December 31,		December 31,		Increase / (Decrease)
	2016		2015		Amount			%
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	59,893	$	23,581	$	36,312			154.0	%
Investment securities		65,293		120,110		(54,817	)		(45.6	)%
Portfolio loans		647,407		611,252		36,155			5.9	%
Allowance for portfolio loan losses		8,162		7,745		417			5.4	%
Portfolio loans, net		639,245		603,507		35,738			5.9	%
Other loans (held-for-sale and warehouse loans held-for-investment)		87,724		50,665		37,059			73.1	%
Other Assets		55,304		59,335		(4,031	)		(6.8	)%
Total assets	$	907,459	$	857,198	$	50,261			5.9	%
Liabilities and stockholders’ equity:
Deposits:
Noninterest-bearing demand	$	59,696	$	47,208	$	12,488			26.5	%
Interest-bearing demand		106,004		105,159		845			0.8	%
Savings and money market		224,987		171,664		53,323			31.1	%
Time		237,726		231,790		5,936			2.6	%
Total deposits		628,413		555,821		72,592			13.1	%
Securities sold under agreements to repurchase		−		9,991		(9,991	)		(100.0	)%
Federal Home Loan Bank advances		188,758		207,543		(18,785	)		(9.1	)%
Accrued expenses and other liabilities		3,270		3,105		165			5.3	%
Total liabilities		820,441		776,460		43,981			5.7	%
Total stockholders’ equity		87,018		80,738		6,280			7.8	%
Total liabilities and stockholders’ equity	$	907,459	$	857,198	$	50,261			5.9	%

Following are the summarized comparative balance sheets as of December 31, 2017 and 2016:

	December 31,		December 31,		Increase / (Decrease)
	2017		2016		Amount			%
	(Dollars in Thousands)

Assets:
Cash and cash equivalents	$	50,409	$	59,893	$	(9,484	)		(15.8	)%
Investment securities		37,683		65,293		(27,610	)		(42.3	)%
Portfolio loans		766,106		647,407		118,699			18.3	%
Allowance for portfolio loan losses		8,600		8,162		438			5.4	%
Portfolio loans, net		757,506		639,245		118,261			18.5	%
Other loans (held-for-sale and warehouse loans held-for-investment)		85,310		87,724		(2,414	)		(2.8	)%
Other Assets		52,348		55,304		(2,956	)		(5.3	)%
Total assets	$	983,256	$	907,459	$	75,797			8.4	%

Liabilities and stockholders’ equity:
Deposits:
Noninterest-bearing demand	$	63,852	$	59,696	$	4,156			7.0	%
Interest-bearing demand		97,350		106,004		(8,654	)		(8.2	)%
Savings and money market		294,674		224,987		69,687			31.0	%
Time		219,927		237,726		(17,799	)		(7.5	)%
Total deposits		675,803		628,413		47,390			7.5	%
Federal Home Loan Bank advances		213,525		188,758		24,767			13.1	%
Accrued expenses and other liabilities		3,268		3,270		(2	)		(0.1	)%
Total liabilities		892,596		820,441		72,155			8.8	%
Total stockholders’ equity		90,660		87,018		3,642			4.2	%
Total liabilities and stockholders’ equity	$	983,256	$	907,459	$	75,797			8.4	%

Cash and Cash Equivalents

Cash and cash equivalents ~~increased~~decreased $369.35 million to $5950.94 million at December 31, ~~2016~~2017 from $2359.69 million at December 31, ~~2015~~2016. The Bank has increased contingent liquidity capacity and sources to meet potential funding requirements, including availability from the FHLB, the Federal Reserve Bank of Atlanta and other private institutional sources to fund the origination of loans, fund other interest-earning assets, and pay-off liabilities.

Investment Securities

Investment securities are comprised primarily of debt securities of U.S. government-sponsored enterprises and mortgage-backed securities. The investment portfolio decreased $5427.86 million to $6537.37 million at December 31, ~~2016~~2017, from $~~120~~65.13 million at December 31, ~~2015~~2016, primarily due to the ~~sale~~maturity of $7275.7 0 million of ~~investment securities during 2016, as the market provided an opportunity to sell certain investment securities, which had low fixed~~short-~~rate~~term ~~yields, at a net gain~~U.S. ~~These~~Treasury ~~strategic~~Bills ~~sales~~and ~~of investment securities have helped~~ the ~~Company~~sale ~~neutralize~~of ~~its interest rate sensitivity in a rising-rate environment~~$5.0 ~~The~~million ~~impact~~ of ~~these~~corporate ~~transactions~~debt ~~was~~during 2017, partially offset by the purchase of $3057.0 million of ~~investment~~short-term ~~securities~~U.S. ~~during~~Treasury ~~2016,~~Bills ~~while~~during ~~the remaining proceeds were used to fund loan growth~~2017.

AsAll of ~~December~~the ~~31,~~$37.7 ~~2016~~million and ~~2015, all of the~~ $65.3 million as ~~and~~of ~~$120.1~~December ~~million~~31, 2017 and 2016, respectively, of investment securities were classified as available-for-sale.

As of December 31, ~~2016~~2017, ~~no investment securities were pledged as collateral for the repurchase agreements or FHLB advances. Additionally,~~ $5025.48 million, or 77 68.25%, of the debt securities held by the Company ~~as of December 31, 2016,~~ were issued by U.S. government-sponsored entities and agencies, primarily Fannie ~~Mae~~ Mae and Freddie Mac, which are institutions the U.S. government has affirmed its commitment to support.

As of December 31, 2017, no investment securities were pledged as collateral for the FHLB advances or any other borrowings. As of December 31, 2017, $3.2 million of investment securities were pledged as collateral for public fund deposits.

Portfolio Loans

Below is a comparative composition of net portfolio loans as of December 31, ~~2016~~2017 and ~~2015~~2016, excluding loans held-for-sale and warehouse loans held-for-investment:

	December 31, 2016			% of Total Portfolio Loans			December 31, 2015			% of Total Portfolio Loans
	December 31, 2017			% of Total Portfolio Loans			December 31, 2016			% of Total Portfolio Loans
	(Dollars in Thousands)
Real estate loans:
One- to four-family	$	~~276~~286,~~193~~671			4337.17	%	$	276,~~286~~193			4543.81	%
Multi-family		7065,~~452~~419			118.06	%		8370,~~442~~452			1311.90	%
Commercial		~~104~~220,~~143~~282			1629.30	%		61104,~~613~~143			1016.23	%
Land		1713,~~218~~760			21.78	%		1617,~~472~~218			2.7	%
Total real estate loans		~~468~~586,~~006~~132			7377.12	%		~~437~~468,~~813~~006			7273.61	%
Real estate construction loans:
One- to four-family		228,~~687~~579			31.51	%		22,~~526~~687			3.75	%
Commercial		1417,~~432~~309			2.3	%		1214,~~527~~432			2.13	%
Acquisition and development		−–			−	%		−–			−	%
Total real estate construction loans		3725,~~119~~888			53.84	%		3537,~~053~~119			5.8	%
Other portfolio loans:
Home equity		3734,~~748~~477			54.95	%		4137,~~811~~748			65.9	%
Consumer		3934,~~232~~743			64.16	%		4439,~~506~~232			76.41	%
Commercial		5778,~~947~~451			910.13	%		4457,~~076~~947			79.31	%
Total other portfolio loans		~~134~~147,~~927~~671			2119.14	%		~~130~~134,~~393~~927			21.61	%
Total portfolio loans		~~640~~759,~~052~~691			100.0	%		~~603~~640,~~259~~052			100.0	%
Allowance for portfolio loan losses		(8,~~162~~600	)					(78,~~745~~162	)
Net deferred portfolio loan costs		5,~~685~~592						5,~~465~~685
Premiums and discounts on purchased loans, net		~~1,670~~823						21,~~528~~670
Portfolio loans, net	$	~~639~~757,~~245~~506					$	~~603~~639,~~507~~245

66Total portfolio loans increased $119.6 million, or 18.7%, to $759.7 million at December 31, 2017, as compared to $640.1 million at December 31, 2016, primarily due to originations of $106.0 million of commercial real estate loans and $20.3 million of multi-family loans, as well as the purchase of $18.3 million of portfolio loans, partially offset by principal amortization and increased prepayments of one- to four-family residential mortgages and home equity loans during the year ended December 31, 2017. The increase in prepayments on one- to four-family residential mortgages is consistent with the current low interest rate environment.

Total portfolio loans increased $36.8 million, or 6.1%, to $640.1 million at December 31, 2016, as compared to $603.3 million at December 31, 2015, primarily due to originations of $33.4 million of one- to four-family residential mortgages and $41.6 million of commercial real estate loans, as well as the purchase of $7.1 million of commercial real estate loans, partially offset by principal amortization and increased prepayments of one- to four-family residential mortgages and home equity loans during the year ended December 31, 2016. The increase in prepayments on one- to four-family residential mortgages is consistent with the current low interest rate environment.62

Total portfolio loans growth was also partially offset by gross loan charge-offs of $10.18 million and transfers to OREO of nonperforming loans of $01.36 million during ~~2016~~2017.

All portfolio loans originated to small businesses, including SBA and USDA loans originated internally and held-for-sale (SBA/USDA loans held-for-sale), are included in the commercial category of either the Company’s real estate loans, real estate construction loans or other portfolio loans. The Company sells the guaranteed portion of SBA/USDA loans held-for-sale upon completion of loan funding and approval by the SBA or USDA, as applicable. The unguaranteed portion of SBA/USDA loans held-for-sale, which remains in the commercial category of the Company’s real estate construction loans or other portfolio loans, was $1018.73 million and $710.7 million at December 31, ~~2016~~2017 and ~~2015~~2016, respectively. The Company plans to expand ~~this~~the SBA/USDA loans held-for-sale business line going forward.

Growth in mortgage origination, the SBA/USDA portfolio and other commercial business loan production is expected to exceed principal amortization and loan pay-offs in the near future, but we can give no assurances regarding such growth.

The composition of the Bank’s portfolio loans is ~~weighted~~significantly ~~toward~~comprised of one- to four-family residential mortgage loans. As of December 31, ~~2016~~2017, first mortgages (including ~~residential~~ residential construction loans) and home equity loans totaled $~~336~~329.67 million, or 5243.64% of total portfolio loans. Approximately $22.62 million, or 6064.04%, of loans recorded as home equity loans and $~~321~~317.5 million, or 9596.53%, of loans collateralized by one- to four-family residential properties were in a first lien position as of December 31, ~~2016~~2017.

The composition of first mortgages and home equity loans by state as of December 31, ~~2016~~2017 was as follows:

Florida

Georgia

Other States

Total

(Dollars in Thousands)

One- to four-family residential mortgages

~~201~~215,~~276~~362

47,~~489~~733

2723,~~428~~576

~~276~~286,~~193~~671

Home equity and lines of credit

1918,~~789~~507

1715,~~222~~161

~~737~~809

3734,~~748~~477

One- to four-family construction loans

218,~~966~~324

~~721~~255

−-

228,~~687~~579

~~243~~242,~~031~~193

6563,~~432~~149

2824,~~165~~385

~~336~~329,~~628~~727

6763

Allowance for Portfolio Loan Losses

The allowance was $8.26 million, or 1.31% of total portfolio loans, at December 31, ~~2016~~2017, compared to $78.72 million, or 1.3% of total portfolio loans, at December 31, ~~2015~~2016.

The ~~Company~~activity ~~increased its allowance component relating to qualitative factors by $3.4 million at December 31, 2016, compared with December 31, 2015, primarily~~ in ~~recognition~~ ~~of its continued growth in commercial real estate and other commercial loans during 2016. This additional qualitative component substantially offset~~ the ~~favorable~~allowance ~~effect~~for ~~from declining historical losses in~~ the 3-year ~~lookback~~ ~~period.~~ended ~~While components in the general allowance varied between~~ December 31, ~~2016~~2017 and ~~2015,~~2016 ~~the~~was ~~Company~~as ~~maintained a consistent overall level in its general allowance.~~follows:

The activity in the allowance for the year ended December 31, 2016 and 2015 was as follows:

	December 31, 2017			December 31, 2016
	(Dollars in Thousands)

Balance at beginning of year	$	8,162		$	7,745

Charge-offs:
Real estate loans:
One- to four-family		(82	)		(353	)
Multi-family		-			-
Commercial		-			-
Land		-			-
Real estate construction loans:
One- to four-family		-			-
Commercial		-			-
Acquisition and development		-			-
Other portfolio loans:
Home equity		(183	)		(141	)
Consumer		(411	)		(566	)
Commercial		(119	)		(91	)
Total charge-offs		(795	)		(1,151	)

Recoveries:
Real estate loans:
One- to four-family		235			561
Multi-family		-			-
Commercial		-			-
Land		5			32
Real estate construction loans:
One- to four-family		-			-
Commercial		-			-
Acquisition and development		-			-
Other portfolio loans:
Home equity		33			45
Consumer		240			310
Commercial		27			1
Total recoveries		540			949

Net charge-offs		(255	)		(202	)
Provision for portfolio loan losses		693			619
Balance at end of year	$	8,600		$	8,162

Net charge-offs to average outstanding portfolio loans		0.04	%		0.03	%

	December 31, 2016			December 31, 2015
	(Dollars in Thousands)
Balance at beginning of year	$	7,745		$	7,107
Charge-offs:
Real estate loans:
One- to four-family		(353	)		(313	)
Multi-family		−			−
Commercial		−			−
Land		−			(56	)
Real estate construction loans:
One- to four-family		−			−
Commercial		−			−
Acquisition and development		−			−
Other portfolio loans:
Home equity		(141	)		(146	)
Consumer		(566	)		(540	)
Commercial		(91	)		−
Total charge-offs		(1,151	)		(1,055	)
Recoveries:
Real estate loans:
One- to four-family		561			356
Multi-family		−			8
Commercial		−			51
Land		32			138
Real estate construction loans:
One- to four-family		−			−
Commercial		−			−
Acquisition and development		−			−
Other portfolio loans:
Home equity		45			56
Consumer		310			277
Commercial		1			−
Total recoveries		949			886
Net charge-offs		(202	)		(169	)
Provision for portfolio loan losses		619			807
Balance at end of year	$	8,162		$	7,745
Net charge-offs to average outstanding portfolio loans		0.03	%		0.04	%

Net charge-offs were virtually flat during the year ended December 31, 2017 compared with those in 2016, remaining very low at 0.04% of average portfolio loans in 2017 compared to 0.03% in 2016.

~~Net charge-offs were virtually flat during the year ended December 31, 2016 compared with those in 2015, remaining very low at 0.03% of average portfolio loans in 2016 compared to 0.04% in 2015.~~64

68Below is a comparative composition of nonperforming assets as of December 31, 2017 and 2016:

Below is a comparative composition of nonperforming assets (excluding TDRs) as of December 31, 2016 and 2015:

	December 31, 2017			December 31, 2016
	(Dollars in Thousands)
Nonperforming assets:
Real estate loans:
One- to four-family	$	1,136		$	1,533
Multi-family		-			-
Commercial		210			2,276
Land		5,510			5,548
Real estate construction loans:
One- to four-family		-			-
Commercial		-			-
Acquisition and development		-			-
Other portfolio loans:
Home equity		210			58
Consumer		97			237
Commercial		625			502
Total nonperforming loans		7,788			10,154
Other real estate owned		1,739			2,886
Total nonperforming assets	$	9,527		$	13,040

Nonperforming loans to total portfolio loans		1.02	%		1.57	%
Nonperforming assets to total assets		0.97	%		1.44	%

	December 31, 2016			December 31, 2015
	(Dollars in Thousands)
Nonperforming assets:
Real estate loans:
One- to four-family	$	1,533		$	2,932
Multi-family		−			−
Commercial		2,276			128
Land		5,548			44
Real estate construction loans:
One- to four-family		−			−
Commercial		−			−
Acquisition and development		−			−
Other portfolio loans:
Home equity		58			429
Consumer		237			423
Commercial		502			269
Total nonperforming loans		10,154			4,225
Other real estate owned		2,886			3,232
Total nonperforming assets	$	13,040		$	7,457
Nonperforming loans to total portfolio loans		1.6	%		0.7	%
Nonperforming assets to total assets		1.4	%		0.9	%

Nonperforming loans were $7.8 million, or 1.0% of total portfolio loans, at December 31, 2017, as compared to $10.1 million, or 1.6% of total portfolio loans, at December 31, 2016. The decrease in nonperforming loans was primarily due to nonperforming one- to four-family residential mortgages being reclassified to performing, as well as principal reductions and loan pay-offs of other existing nonperforming loans, partially offset by certain home equity loans and small business loans (included in commercial other portfolio loans) being classified as nonperforming.

~~Nonperforming~~During ~~loans~~the ~~were~~past ~~$10.1~~few ~~million~~years, ~~or 1.6%~~and ofcontinuing ~~total portfolio loans~~into 2017, atthe ~~December~~market ~~31,~~for ~~2016,~~disposing asof ~~compared~~nonperforming toassets ~~$4.2~~has ~~million,~~become ormore 0active.7% ofThese ~~total~~types ~~portfolio~~of ~~loans,~~transactions atmay ~~December 31,~~result ~~2015. The increase~~ in ~~nonperforming~~additional losses ~~loans~~over ~~was~~the ~~primarily~~amounts ~~due~~provided tofor ~~two~~in ~~performing~~the ~~loans,~~allowance; ~~totaling $7.5 million~~however, ~~becoming nonperforming, partially offset by~~ the ~~transfer~~Company ofcontinues ~~$0.3~~to ~~million~~monitor inand ~~nonperforming~~attempt ~~loans~~ to ~~OREO~~reduce ~~and~~nonperforming assets ~~principal~~through ~~reductions~~the ~~and~~least ~~loan~~costly ~~pay-offs~~means ~~of existing nonperforming loans~~possible. The ~~two~~allowance ~~loans~~is ~~which~~determined ~~became~~by ~~nonperforming~~the ~~were~~information ~~originated~~available ~~prior~~at to the ~~2008~~time ~~credit~~such ~~crisis, were excluded from~~determination ~~the~~is ~~bulk~~made ~~sale in 2013,~~ and ~~were~~reflects ~~already~~management’s ~~classified~~estimate asof ~~TDRs; however, both loans are carried below their respective collateral fair values and we do not anticipate any additional losses in resolving them~~loss.

~~During~~As ~~the~~of ~~past~~December ~~few years~~31, 2017 and ~~continuing through~~ 2016, ~~the~~all ~~market for disposing of~~ nonperforming ~~assets has become more active. These types of transactions may result in additional~~ ~~losses~~loans ~~over~~were ~~the~~classified ~~amounts~~as ~~provided~~nonaccrual ~~for in the allowance; however, the Company continues to monitor~~ and ~~attempt~~there towere ~~reduce~~no ~~nonperforming assets~~loans ~~through~~90 ~~the~~days ~~least~~past ~~costly~~due ~~means possible. The allowance is determined by the information available at the time such determination is made~~ and ~~reflects~~accruing ~~management’s estimate of loss~~interest.

AsOREO ofwas $1.7 million at December 31, ~~2016~~2017, ~~total nonperforming~~ ~~one-~~down ~~to four-family residential and home equity loans of~~ $1.62 million ~~was derived~~ from $12.79 million inat ~~contractual~~December ~~balances~~31, ~~that had~~2016, ~~been~~primarily ~~written-down~~due to the ~~estimated~~disposal ~~fair value~~ of ~~their~~a ~~collateral,~~$2.6 ~~less~~million ~~estimated~~foreclosed ~~selling~~propertyin the ~~costs,~~second atquarter ~~the~~of ~~date~~2017, ~~the~~which ~~applicable loan~~resulted ~~was~~in ~~classified~~a ~~as nonperforming~~$0.2 ~~Further~~million ~~declines~~loss, inand ~~the~~write-downs ~~fair~~of ~~value~~OREO of ~~the~~$0.1 ~~collateral~~million, orpartially aoffset ~~decision~~by the toforeclosure ~~sell~~of ~~such~~a ~~loans~~$1.6 ~~as distressed~~million ~~assets,~~property ~~could result~~ in ~~additional~~the ~~losses.~~fourth Asquarter of ~~December 31~~2017, ~~2016~~which ~~and~~was ~~December~~expected ~~31,~~to ~~2015,~~occur ~~all nonperforming loans were classified as nonaccrual~~ and ~~there~~had ~~were~~been nofully ~~loans~~reserved for 90prior ~~days~~to ~~past~~the ~~due and accruing interest~~foreclosure.

OREO was $2.9 million at December 31, 2016, down $0.3 million from $3.2 million at December 31, 2015, as the Company had sales of OREO of $0.6 million, which was partially offset by transfers from nonperforming loans into OREO of $0.3 million. The OREO balances at both December 31, 2016 and 2015 included a commercial real estate property, representing the majority of each balance. As of both December 31, 2016 and 2015, the carrying value of such commercial real estate property was $2.5 million. The Company recorded losses on foreclosed assets of $0.3 million and $0.6 million for the years ended December 31, 2016 and 2015, respectively.65

Impaired Loans

The following table shows impaired loans segregated by performing and nonperforming status and the associated allowance as of December 31, ~~2016~~2017 and December 31, ~~2015~~2016:

December 31, 2016

December 31, 2015

December 31, 2017

December 31, 2016

Balance

Allowance

Balance

Allowance

(Dollars in Thousands)

Performing

~~611~~61

~~218~~61

~~437~~611

−218

Nonperforming (1)

107,~~154~~788

~~260~~434

110,~~413~~154

83260

Troubled debt restructuring by category:

Performing troubled debt restructurings – commercial

~~308~~1,399

~~8,453~~308

~~218~~2

Performing troubled debt restructurings – residential

2623,~~229~~240

21,~~231~~902

2526,~~545~~229

2,~~076~~231

Total impaired loans

3732,~~302~~488

2,~~711~~404

3537,~~848~~302

2,~~378~~711

(1) Balances include nonperforming TDR loans of $85.29 million as of December 31, ~~2016~~2017 and nonperforming TDR loans of $18.02 million as of December 31, ~~2015~~2016. There were ~~$0.2~~no ~~million of~~ specific reserves for these nonperforming TDRs as of December 31, ~~2016~~2017, while there were no$0.2 million of specific reserves for these nonperforming TDRs as of December 31, ~~2015~~2016.

Impaired loans include large, non-homogeneous loans where it is probable that the Bank will not receive all principal and interest when contractually due. Impaired loans also include TDRs, which totaled $3430.89 million as of December 31, ~~2016~~2017, as compared to $3534.08 million at December 31, ~~2015~~2016. A portfolio loan that is modified as a TDR with a market rate of interest is classified as an impaired loan and reported as a nonperforming TDR in the year of restructure and until the loan has performed for 12 months in accordance with the modified terms. At December 31, ~~2016~~2017, approximately $2015.37 million of restructured loans, previously disclosed as being impaired and nonperforming TDRs, have demonstrated 12 months of performance under restructured terms and are reported as performing TDRs in this Report. The Company’s performing TDRs are still considered impaired.

Other Loans

Other loans was comprised of loans secured by one- to four-family residential homes originated internally (mortgage loans held-for-sale), SBA/USDA loans held-for-sale and warehouse loans held-for-investment.

The following table shows other loans, segregated by held-for-sale and warehouse loans held-for-investment, as of December 31, ~~2016~~2017 and ~~2015~~2016:

	December 31, 2016		December 31, 2015
	December 31, 2017		December 31, 2016
	(Dollars in Thousands)
Other loans:
Held-for-sale	$	73,~~147~~623	$	67,~~591~~147
Warehouse loans held-for-investment		8081,~~577~~687		4480,~~074~~577
Total other loans	$	8785,~~724~~310	$	5087,~~665~~724

Other loans ~~increased~~decreased $372.04 million, or 732.18%, to $8785.73 million at December 31, ~~2016~~2017, as compared to $5087.7 million at December 31, ~~2015~~2016, ~~primarily~~ due to ana ~~increase~~decrease in ~~both~~ originations of mortgage loans held-for-sale, ~~and~~offset by a slight increase in warehouse loans held-for-investment. The ~~increase~~decrease in mortgage loans held-for-sale and the slight increase in warehouse loans held-for-investment was primarily due to ~~our~~the generally slowing pace of mortgage refinancing nationwide, as well as the seasonality of mortgage lending. The Company’s overall balance sheet strategy, continues ~~which~~to ~~currently~~emphasize ~~emphasizes~~ originating certain loans, such as mortgages, to be sold, rather than to be held in our portfolio. ~~The increase in warehouse loans held-for-investment was primarily due to expanded relationships with current counterparties, as well as relationships with new counterparties.~~

7066

The Company internally originated $7237.38 million and sold $6951.73 million of mortgage loans held-for-sale during the year ended December 31, ~~2016~~2017. The Company internally originated $3572.3 million and sold $3769.7 million of mortgage loans held-for-sale during the year ended December 31, ~~2015~~2016. The gain recorded on sales of mortgage loans held-for-sale during ~~2016~~2017 and ~~2015~~2016 was $1.05 million (including a gain on the sale of a group of TDRs that were transferred into held-for-sale) and $01.80 million, respectively. During the year ended December 31, ~~2016~~2017, the Company internally originated $1310.64 million and sold $~~15.~~8.7 million of SBA/USDA loans held-for-sale, compared to originations of $313.96 million and ~~sales~~sold of $615.68 million during the year ended December 31, ~~2015~~2016. The gain recorded on sales and servicing of SBA/USDA loans held-for-sale during ~~2016~~2017 and ~~2015~~2016 was $1.0.7 million and $01.70 million, respectively. The Bank plans to expand its held-for-sale business lines going forward.

Loans originated and sold under the Company’s warehouse loans held-for-investment lending program were $1.81 billion and $1.81 billion, respectively, for the year ended December 31, ~~2016~~2017, as compared to originations and sales of $1.18 billion and $1.18 billion, respectively, for the year ended December 31, ~~2015~~2016. Loan sales under the warehouse loans held-for-investment lending program, which are done at par, earned interest on outstanding balances for ~~2016~~2017 and ~~2015~~2016 of $21.7 million and $12.97 million, respectively. For the year ended December 31, ~~2016~~2017, the weighted average number of days outstanding of warehouse loans held-for-investment was 1210 days. Due to the favorable interest rate environment, we expect that production of warehouse loans held-for-investment will continue to be a strategic focus of the Bank.

Deferred Income Taxes

~~Despite~~Tax ~~the~~Reform ~~Company~~was ~~being~~enacted inon aDecember ~~three-year~~22, ~~cumulative~~2017. ~~loss~~The ~~position~~Tax asReform ofreduced ~~June~~the ~~30,~~corporate ~~2015,~~income ~~based~~tax onrate ~~the~~to ~~assessment~~21% ~~during~~effective ~~the~~January ~~second~~1, ~~quarter~~2018 ofand ~~2015~~changed ofcertain ~~this~~other ~~fact~~provisions. ~~and~~Accounting guidance ~~all~~required the ~~other~~Company ~~positive~~ to remeasure its deferred tax assets and ~~negative~~deferred ~~evidence~~tax ~~bearing~~liabilities on the ~~likelihood~~date of ~~realization~~enactment of using the ~~Company’s~~new ~~deferred~~enacted tax ~~assets,~~rate. ~~management~~The ~~concluded it~~Company ishas ~~more~~recorded ~~likely~~additional ~~than~~expense ~~not~~of ~~that~~ $81.56 million to reflect changes that resulted from the enactment of the Tax Reform because of its net deferred tax ~~assets,~~asset ~~primarily~~position. ~~comprised~~As of ~~future~~both ~~tax~~December ~~benefits~~31, ~~associated with~~2017 ~~the~~and ~~allowance~~2016, ~~for~~the ~~portfolio~~Company evaluated ~~loan~~the ~~losses,~~expected ~~net~~realization ~~operating~~of ~~loss~~its ~~carryover~~federal and ~~net~~state ~~unrealized~~deferred ~~loss~~tax assets. Based on ~~securities~~these ~~available-for-sale~~evaluations, it was concluded that ~~will~~no bevaluation ~~realized~~allowance ~~based~~was ~~upon~~required ~~future~~for ~~taxable~~the ~~income.~~federal ~~Therefore~~and state deferred tax assets, ~~$8.5~~with ~~million~~the exception of the remaining deferred tax asset related to a capital loss carryover, which resulted in a valuation allowance ~~was~~of ~~reversed~~$102,000 ~~during~~and ~~the~~$27,000 ~~second quarter~~as of ~~2015~~December 31, 2017 and 2016, respectively.

AsThe offuture ~~December~~realization ~~31,~~of ~~2016,~~ the Company ~~evaluated~~’s ~~the expected realization of its~~ federal ~~and~~net ~~state~~operating ~~deferred~~loss ~~tax~~carryovers ~~assets.~~is ~~Based~~currently onlimited ~~this~~to ~~evaluation it was concluded that no valuation allowance was required for the federal and state deferred tax assets~~$325,000 ~~with~~per ~~the~~year. ~~exception~~The ofCompany ~~the~~expects ~~remaining deferred tax asset related~~ to afully ~~capital~~utilize ~~loss carryover, which resulted in a valuation allowance of~~ $27325,000 as of ~~December~~federal ~~31,~~net ~~2016.~~operating ~~The~~loss ~~valuation~~carryovers ~~allowance was~~in $02017.~~1 million as of December 31, 2015.~~

The future realization of the Company’s net operating loss carryovers is limited to $325,000 per year.

Deposits

Total deposits were $~~628~~675.48 million at December 31, ~~2016~~2017, an increase of $7247.64 million from $~~555~~628.84 million at December 31, ~~2015~~2016. The increase was comprised of an increase of $6665.72 million in non-maturing deposits, ~~and~~partially anoffset ~~increase~~by a decrease of $517.98 million in time deposits. ~~Additionally, the Company sold $13.7 million of deposits in a branch sale transaction during the second quarter of 2016.~~

Non-maturing deposits increased to $~~390~~455.79 million at December 31, ~~2016~~2017, due to a $124.52 million increase in noninterest-bearing demand deposits, and a $069.97 million increase in ~~interest-bearing~~savings ~~demand~~and money market deposits, ~~and~~partially offset by a $538.37 million ~~increase~~decrease in ~~savings~~interest-bearing ~~and~~demand ~~money market~~ deposits. The increase in non-maturing deposits was due to our continued strategy to grow core deposits, which includes a focus on the development of commercial relationships. Time deposits ~~increased~~decreased to $~~237~~219.79 million as of December 31, ~~2016~~2017, due to ana ~~increase~~decrease of $1834.75 million in brokered deposits, ~~related to~~ a ~~retail certificates~~ decrease of ~~deposit promotion and an increase of~~ $93.02 million in non-brokered ~~deposits,~~Internet ~~partially~~certificates ~~offset~~of bydeposit and a decrease of $158.47 million in our standard certificates of deposit, ~~and~~partially aoffset ~~decrease~~by an increase of $628.46 million in ~~non-brokered~~deposits ~~Internet~~related to a retail certificates of deposit promotion.

Management believes near term deposit growth will be moderate with an emphasis on core deposit growth. The Bank expects to continue to supplement its core deposit growth, if needed, with strategic retail certificates of deposit promotions, certificates of deposit sourced through a well-known national non-broker Internet deposit program, which has been successfully utilized in the past, brokered deposits or the creation of new business deposit products. Significant changes in the short-term interest rate environment could affect the availability of deposits in the markets we serve and, therefore, may cause the Bank to change its strategy.

Securities Sold Under Agreements to Repurchase

The Company had no outstanding balance on repurchase agreements as of December 31, ~~2016~~2017 and ~~had repurchase agreements with a carrying amount of $10~~2016.0 ~~million as of December 31, 2015.~~ Information concerning repurchase agreements as of and for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, is summarized as follows:

	December 31, 2016			December 31, 2015			December 31, 2014
	December 31, 2017			December 31, 2016			December 31, 2015
	(Dollars in Thousands)
Average daily balance outstanding during the period	$	82-		$	~~31,370~~82		$	6931,~~075~~370
Maximum month-end balance during the period	$	−-		$	~~66,300~~-		$	7866,300
Weighted average coupon interest rate during the period		~~0.80~~−	%		40.8980	%		4.9689	%
Weighted average coupon interest rate at end of period		−	%		~~0.80~~−	%		40.9480	%
Weighted average maturity (months)		−-			−-			30-

OnThe ~~June~~Company ~~22,~~had ~~2015,~~no ~~the~~investment ~~Company~~securities ~~prepaid $56.3~~posted ~~million~~as ofcollateral ~~repurchase~~under ~~agreements, representing~~ the ~~entire outstanding balance of~~ repurchase ~~agreements~~agreement as of ~~such~~December ~~date. Under the terms of the repurchase agreements~~31, ~~any~~2017 ~~prepayment~~and ~~prior to maturity would result in a prepayment penalty equal to the amount that the fair value exceeded the book value~~2016. ~~As such, the Company paid $5.2 million in prepayment penalties.~~

On June 26, 2015, the Company entered into a $10.0 million short-term variable rate repurchase agreement. Under the terms of this repurchase agreement, the instrument did not have a stated maturity date and would continue until terminated by either the Company or the counterparty. Additionally, the collateral required to be pledged by the Company was subject to an adjustment determined by the counterparty and was required to be pledged in amounts equal to the debt plus the adjustment. On July 1, 2015, the Company paid off $10.0 million of repurchase agreements, representing the entire outstanding balance of repurchase agreements as of such date. There was no penalty associated with the pay-off.

On December 29, 2015, the Company entered into a $10.0 million short-term variable rate repurchase agreement. Under the terms of this repurchase agreement, the instrument did not have a stated maturity date and would continue until terminated by either the Company or the counterparty. Additionally, the collateral required to be pledged by the Company was subject to an adjustment determined by the counterparty and was required to be pledged in amounts equal to the debt plus the adjustment. On January 4, 2016, the Company paid off $10.0 million of repurchase agreements, representing the entire outstanding balance of repurchase agreements as of such date. There was no penalty associated with the pay-off.

The Company had no investment securities posted as collateral under this new repurchase agreement as of December 31, 2016, while $10.1 million in investment securities were posted as collateral under this new repurchase agreement as of December 31, 2015.

Federal Home Loan Bank Advances

As of December 31, ~~2016~~2017 and ~~2015~~2016, advances from the FHLB were as follows:

	December 31, 2016		December 31, 2015
	December 31, 2017		December 31, 2016
	(Dollars in Thousands)
Maturity on February 10, 2016, fixed rate at 0.35%	$	−	$	20,000
Maturity on January 30, 2017, fixed rate at 0.61%	$	-	$	50,000
Maturity on June 20, 2016, fixed rate at 0.50%		−		55,000
Maturity on June 20, 2017, fixed rate 0.73%		-		833
Maturity on June 22, 2016, fixed rate at 0.54%		−		47,500
Maturity on June 20, 2017, fixed rate 0.91%		-		10,000
Maturity on January 30, 2017, fixed rate at 0.61%		50,000		−
Maturity on January 18, 2018, fixed rate at 1.42%		50,000		-
Maturity on June 20, 2017, fixed rate 0.73%		833		2,500
Maturity on June 20, 2017, fixed rate 0.91%		10,000		10,000
Maturity on June 19, 2018, fixed rate at 1.31%		10,425		10,425
Maturity on June 20, 2019, fixed rate at 1.27%		21,500		32,500
Maturity on December 23, 2019, adjustable rate at 2.43% (1)		−		20,000
Maturity on June 8, 2021, fixed rate at 2.59%		20,000		20,000
Maturity on June 23, 2020, adjustable rate at 2.23% (1)		−		15,000
Maturity on June 8, 2021, fixed rate at 2.58%		15,000		15,000
Maturity on June 23, 2020, adjustable rate at 2.16% (1)		−		15,000
Maturity on June 8, 2021, fixed rate at 2.58%		15,000		15,000
Maturity on June 8, 2021, fixed rate at 2.59%		20,000		−
Daily rate credit, no maturity date, adjustable rate at 1.59% as of December 31, 2017 and at 0.80% as of December 31, 2016		101,600		65,000
Maturity on June 8, 2021, fixed rate at 2.58%		15,000		−
Total	$	213,525	$	188,758
Maturity on June 8, 2021, fixed rate at 2.58%		15,000		−
Daily rate credit, no maturity date, adjustable rate at 0.80% as of December 31, 2016 and at 0.49% as of December 31, 2015		65,000		10,000
Prepayment penalties (2)		−		(1,382	)
Total	$	188,758	$	207,543

~~(1)~~The AsFHLB advances had a ~~result~~weighted-average maturity of ~~the~~10 ~~prepayment~~months and ~~restructure~~a ofweighted-average ~~three~~rate ~~advances,~~of ~~totaling $50~~1.077% ~~million~~at December 31, on2017. ~~June~~The ~~22,~~Company ~~2015,~~had $3405.56 million ofin ~~deferred~~portfolio ~~prepayment~~loans ~~penalties~~posted as ~~were~~collateral ~~factored~~for ~~into~~these ~~the~~advances ~~new~~as ~~interest rate~~ of ~~three~~December ~~advances~~31, ~~totaling $50~~2017.~~0 million, granted on June 22, 2015.~~

~~(2)~~The Bank’s remaining borrowing capacity with the FHLB was $63.3 million at December 31, 2017. The ~~prepayment~~FHLB ~~penalties~~requires asthat the Bank collateralize the excess of the fair value of the FHLB advances over the book value with cash and investment securities. In the event the Bank prepays advances prior to maturity, it must do so at the fair value of such FHLB advances. As of December 31, ~~2015~~2017, ~~were~~fair ~~amortized~~value ~~through~~exceeded ~~June~~the ~~2016~~book value of the individual advances by $0.4 million, which was collateralized by portfolio loans (included in the $405.6 million discussed above). The Bank has the ability to supplement its loan collateral with investment securities as needed to secure the FHLB borrowings or prepay advances to reduce the amount of collateral required to secure the debt. Unpledged investment securities available for collateral amounted to $34.1 million as of December 31, 2017.

~~The~~See ~~FHLB~~“Liquidity” ~~advances~~discussion ~~had a weighted-average maturity~~below ofin 16this ~~months~~MD&A ~~and~~for afurther ~~weighted-average~~information ~~rate~~regarding ofthe ~~1.26%~~Company’s atFHLB ~~December 31~~advances, ~~2016.~~as ~~The~~well ~~Company~~as ~~had~~information ~~$371.1~~regarding ~~million~~the ~~in portfolio loans posted~~Company’s asother ~~collateral~~liquidity ~~for these advances as of December 31, 2016~~sources.

The Bank’s remaining borrowing capacity with the FHLB was $92.1 million at December 31, 2016. The FHLB requires that the Bank collateralize the excess of the fair value of the FHLB advances over the book value with cash and investment securities. In the event the Bank prepays advances prior to maturity, it must do so at the fair value of such FHLB advances. As of December 31, 2016, fair value exceeded the book value of the individual advances by $1.1 million, which was collateralized by portfolio loans (included in the $371.1 million discussed above). The Bank has the ability to supplement its loan collateral with investment securities as needed to secure the FHLB borrowings or prepay advances to reduce the amount of collateral required to secure the debt. Unpledged investment securities available for collateral amounted to $41.2 million as of December 31, 2016.68

Stockholders’ Equity

Stockholders’ equity increased by $6.3.7 million to $8790.07 million at December 31, ~~2016~~2017, from $8087.70 million at December 31, ~~2015~~2016, primarily due to net income of $63.42 million~~, partially~~ ~~offset~~and by other comprehensive ~~loss~~income of $0.3 million for the year ended December 31, ~~2016~~2017. The other comprehensive ~~loss~~income during ~~2016~~2017, which ~~increased~~reduced the Company’s accumulated other comprehensive loss as of December 31, ~~2016~~2017, was primarily due to a ~~negative~~positive change in the fair value of investment securities as interest rates ~~increased~~affecting at the ~~end~~fair ofvalue ~~2016, and was also affected by the sale~~ of ~~investment~~such ~~securities~~investments ~~during~~decreased ~~2016, resulting in realized gains~~during 2017.

The Company’s equity to assets ratio decreased to 9.2% at December 31, 2017, compared with 9.6% at December 31, 2016. As of December 31, 2017, the Bank’s total risk based capital to risk-weighted assets ratio was 12.53%, common equity tier 1 capital to risk-weighted assets ratio was 11.43%, tier 1 capital to risk-weighted assets ratio was 11.43% and tier 1 capital to adjusted assets ratio was 9.67%. These ratios as of December 31, 2016 were 14.83%, 13.58%, 13.58% and 9.44%, respectively. The decrease in risk-weighted capital ratios at December 31, 2017, compared with December 31, 2016, reflected an increase in risk-weighted assets due to growth in portfolio loans and a decrease in cash and cash equivalents and investment securities, as well as an increase in the risk weighting of certain portfolio loan categories, partially offset by an increase in equity due to accumulated earnings. The charge to remeasure net deferred tax assets, together with merger related expenses, reduced the Company’s Tier 1 (core) capital ratio as of December 31, 2017, by approximately 20 basis points. The Bank’s capital classification under PCA defined levels as of December 31, 2017 was well-capitalized.

The Company continues to monitor strategies to preserve capital to support our expected growth, including the continued suspension of cash dividends and its stock repurchase program. Resumption of these programs is not expected to occur in the near term.

Comparison of Results of Operations for the Years Ended December 31, 2017 and 2016

General

Net income for the year ended December 31, 2017, was $3.2 million, as compared to net income of $6.4 million for the year ended December 31, 2016. The Company’s return on average total assets ratio and return on average stockholders’ equity ratio (both annualized) were 0.36% and 3.50%, respectively, for the year ended December 31, 2017, compared with 0.72% and 7.54%, respectively, for the year ended December 31, 2016. Net income for the year ended December 31, 2017, decreased $3.2 million as compared to net income in 2016, primarily due to a decrease in noninterest income of $2.2 million, an increase in noninterest expense of $0.5 million and an increase in income tax expense of $0.9 million, partially offset by an increase in net interest income of $0.5 million.

Net interest income increased during the year ended December 31, 2017, as compared to the year ended December 31, 2016, primarily due to the impact of increased portfolio loans and other loans outstanding, higher interest rates on investment securities, and decreased interest expense for FHLB advances, partially offset by lower interest rates on portfolio loans, the impact of lower balances in investment securities and increased interest expense on deposits. Noninterest income decreased during the year ended December 31, 2017, as compared to the year ended December 31, 2016, primarily due to lower gains on the sale of investment securities, lower gains on the sale of portfolio loans, reduced service charges and fees, and a decrease in miscellaneous operating income related to an escrow account that was forfeited in 2016 in connection with an OREO sale, partially offset by higher gains on the sale of loans held-for-sale. Noninterest expense increased during the year ended December 31, 2017, as compared to the year ended December 31, 2016, primarily due to an increase in compensation and benefits, increased data processing expenses associated with efforts to improve the Company’s IT infrastructure, an increase in occupancy and equipment expense, and the aforementioned merger-related costs, partially offset by the positive impact of an adjustment to the rate of accrual for FDIC insurance premiums, reducing the amount accrued for the full year, and a decrease in collection expense.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table sets forth certain information for the years ended December 31, 2017 and 2016. The average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years presented.

	Year Ended December 31,
	2017								2016
	Average Balance		Interest			Average Yield / Cost			Average Balance		Interest			Average Yield / Cost
	(Dollars in Thousands)								(Dollars in Thousands)

Interest-earning assets:
Loans (1)	$	758,635	$	32,812			4.33	%	$	725,595	$	31,681			4.37	%
Investment securities (2)		43,548		978			2.25	%		75,364		1,591			2.11	%
Other interest-earning assets (3)		40,738		582			1.43	%		47,054		617			1.31	%
Total interest-earning assets		842,921		34,372			4.08	%		848,013		33,889			4.00	%
Noninterest-earning assets		40,302								43,565
Total assets	$	883,223							$	891,578

Interest-bearing liabilities:
Interest-bearing demand accounts	$	110,265	$	497			0.45	%	$	103,309	$	454			0.44	%
Savings deposits		58,986		71			0.12	%		58,975		63			0.11	%
Money market accounts		211,423		1,936			0.92	%		132,923		875			0.66	%
Time deposits		223,986		2,666			1.19	%		229,815		2,215			0.96	%
Securities sold under agreements to repurchase		-		-			−	%		82		1			1.56	%
Federal Home Loan Bank advances		117,216		2,208			1.88	%		223,399		3,808			1.70	%
Other borrowings (4)		1		-			1.21	%		41		1			1.63	%
Total interest-bearing liabilities		721,877		7,378			1.02	%		748,544		7,417			0.99	%
Noninterest-bearing liabilities		70,801								57,944
Total liabilities		792,678								806,488
Total stockholders’ equity		90,545								85,090
Total liabilities and stockholders’ equity	$	883,223							$	891,578

Net interest income			$	26,994							$	26,472
Net interest spread							3.06	%							3.01	%
Net interest-earning assets	$	121,044							$	99,469
Net interest margin (5)							3.20	%							3.12	%
Average interest-earning assets to average interest-bearing liabilities				116.77	%							113.29	%

(1)

Includes portfolio loans and other loans. Calculated net of deferred loan fees. Nonaccrual loans included as loans carrying a zero yield.

(2)

Calculated based on carrying value. State and municipal investment securities yields have not been adjusted to full tax equivalents, as the numbers would not change materially from those presented in the table.

(3)

Includes FHLB stock at cost and term deposits with other financial institutions.

(4)

Interest expense on other borrowings during the year ended December 31, 2017, was less than $500.

(5)

Net interest income divided by average interest-earning assets.

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income for major components of interest-earning assets and in interest expense for major components of interest-bearing liabilities for the year ended December 31, 2017 as compared to the year ended December 31, 2016. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume multiplied by the old interest rate; (2) changes in interest rate multiplied by the old volume; and (3) changes not solely attributable to interest rate or volume, which have been allocated proportionately to the change due to volume and the change due to interest rate.

	Increase / (Decrease)
	Due to Volume			Due to Rate			Total Increase / (Decrease)
	(Dollars in Thousands)
Interest-earning assets:
Loans (1)	$	1,431		$	(300	)	$	1,131
Investment securities		(709	)		96			(613	)
Other interest-earning assets		(87	)		52			(35	)
Total interest-earning assets		635			(152	)		483

Interest-bearing liabilities:
Interest-bearing demand accounts		31			12			43
Savings deposits		-			8			8
Money market accounts		638			423			1,061
Time deposits		(57	)		508			451
Securities sold under agreements to repurchase		(1	)		-			(1	)
Federal Home Loan Bank advances		(1,966	)		366			(1,600	)
Other borrowings		(1	)		-			(1	)
Total interest-bearing liabilities		(1,356	)		1,317			(39	)

Net interest income	$	1,991		$	(1,469	)	$	522

(1)

Includes portfolio loans and other loans. Calculated net of deferred loan fees. Nonaccrual loans included as loans carrying a zero yield.

Loan growth and the decrease in wholesale borrowings, partially offset by the decrease in investment securities, have been the primary contributors to the increase in net interest income in 2017. Decreased loan yields and increased deposit costs, and increased borrowing rates resulted in the unfavorable variance due to rate. In general, the prolonged low interest rate environment has resulted in net interest margin compression broadly for the banking industry, including the Company.

Interest Income

Total interest income increased $0.5 million to $34.4 million for the year ended December 31, 2017, as compared to $33.9 million for the year ended December 31, 2016, due to higher balances in portfolio loans and higher interest rates on investment securities, partially offset by the decrease in loan yields on portfolio loans and lower balances in investment securities. Interest income on loans increased to $32.8 million for the year ended December 31, 2017 from $31.7 million for the year ended December 31, 2016. This increase was due to an increase in the average balance of loans, which increased $33.0 million to $758.6 million for the year ended December 31, 2017 from $725.6 million for the year ended December 31, 2016, partially offset by a decrease in average yield on loans of 4 basis points to 4.33% for the year ended December 31, 2017.

Interest income earned on investment securities decreased $0.6 million to $1.0 million for the year ended December 31, 2017 from $1.6 million for the year ended December 31, 2016. This decrease was primarily due to a decrease in the average balance of investment securities of $31.8 million to $43.6 million during the year ended December 31, 2017, partially offset by higher interest rates on investment securities during the same period.

Interest Expense

Interest expense was flat at $7.4 million for year ended December 31, 2017, from $7.4 million for the year ended December 31, 2016, due to the decrease in interest expense on FHLB advances, offset by increased interest expenses on deposits. The increase in interest expense on deposits in 2017, as compared to 2016, was primarily due to higher average rates paid on deposits and an increase in the average balance in such deposits. The average cost of deposits, including noninterest-bearing deposits, increased 15 basis points to 0.77% for the year ended December 31, 2017, as compared to 0.62% for the year ended December 31, 2016. The decrease in interest expense on FHLB advances for the year ended December 31, 2017, as compared to the year ended December 31, 2016, was due to a decrease in the average balance of FHLB advances, resulting from the Bank’s aggressive strategies to increase funding from core deposits, partially offset by an increase in average rates paid on such advances.

The Bank’s overall cost of funds, including noninterest-bearing deposits, was 0.93% for the year ended December 31, 2017, slightly up from 0.92% for the year ended December 31, 2016, primarily due to an increase in the average rates paid on interest-bearing deposits and the average balance in such deposits, as well as an increase in interest rates related to FHLB advances, offset by the lower average balances related to FHLB advances and increased noninterest-bearing deposits.

Net Interest Income

Net interest income increased $0.5 million to $27.0 million for the year ended December 31, 2017, from $26.5 million for the year ended December 31, 2016, due to the increase in portfolio loans, higher interest rates on investment securities, and decreased interest expense for FHLB advances, partially offset by lower interest rates on portfolio loans, the impact of lower balances in investment securities and an increase in interest expense on deposits.

Our net interest rate spread, which is the difference between the interest rate earned on interest-earning assets and the interest rate paid on interest-bearing liabilities, increased 5 basis points to 3.06% for the year ended December 31, 2017, as compared to 3.01% for the year ended December 31, 2016. Our net interest margin, which is net interest income expressed as a percentage of our average interest-earning assets, increased 8 basis point to 3.20% for the year ended December 31, 2017, as compared to 3.12% for the year ended December 31, 2016. The increase in the net interest rate spread and net interest margin primarily reflected the positive impact on interest income from increasing balances in portfolio loans and other loans, the positive impact on interest income from higher interest rates on investment securities, and the positive impact on interest expense from declining high fixed-interest rate debt balances, partially offset by the negative impact on interest income from declining interest rates on portfolio loans, the negative impact on interest income from lower balances in investment securities, and the negative impact on interest expense from higher average rates paid on deposits and an increase in the average balance in such deposits.

Provision for Portfolio Loan Losses

Provision expense was $0.7 million and $0.6 million during the years ended December 31, 2017 and 2016, respectively. The low level of provision expense during each of the years ended December 31, 2017 and 2016, primarily reflected solid economic conditions in the Company’s markets, which have led to lower levels of charge-offs in recent years. The Company had net charge-offs of $0.3 million and $0.2 million during the years ended December 31, 2017 and 2016, respectively, representing 0.04% of average portfolio loans in 2017 and 0.03% of average portfolio loans in 2016.

Noninterest Income

The components of noninterest income for the years ended December 31, 2017 and 2016 were as follows:

	December 31,		December 31,		Increase / (Decrease)
	2017		2016		Amount			Percentage
	(Dollars in Thousands)

Service charges and fees	$	1,773	$	2,320	$	(547	)		(23.6	)%
Gain (loss) on sale of securities available-for-sale		409		1,321		(912	)		(69.0	)%
Gain on sale of portfolio loans		38		314		(276	)		(87.9	)%
Gain on sale of loans held-for-sale		2,228		1,966		262			13.3	%
Bank owned life insurance earnings		470		465		5			1.1	%
Interchange fees		1,311		1,356		(45	)		(3.3	)%
Other		756		1,505		(749	)		(49.8	)%
	$	6,985	$	9,247	$	(2,262	)		(24.5	)%

Noninterest income for the year ended December 31, 2017 decreased $2.2 million to $7.0 million, as compared to $9.2 million for the year ended December 31, 2016. The decrease in noninterest income for the year ended December 31, 2017, compared with that of the year ended December 31, 2016, primarily reflected lower gains on the sale of investment securities, lower gains on the sale of portfolio loans, reduced service charges and fees, and a decrease in miscellaneous operating income related to an escrow account that was forfeited in 2016 in connection with an OREO sale, partially offset by higher gains on the sale of loans held-for-sale.

For the year ended December 31, 2017, gains on sales of mortgage loans held-for-sale were $1.8 million (including a gain of $0.6 million on the sale of a group of TDRs that were transferred into held-for-sale), deferred fees on mortgage loans held-for-sale were $0.3 million, gains on sales of SBA/USDA loans held-for-sale were $0.5 million and net gains recognized for the servicing of SBA/USDA loans held-for-sale were $0.2 million. By comparison, for the year ended December 31, 2016, gains on sales of mortgage loans held-for-sale was $1.6 million, deferred fees on mortgage loans held-for-sale was $0.6 million, gains on sales of SBA/USDA loans held-for-sale was $0.8 million and net gains recognized for the servicing of SBA/USDA loans held-for-sale was $0.2 million.

The Company expects gains on sales of loans held-for-sale to increasingly contribute towards our noninterest income in the future, as the Company continues to emphasize the business activity of internally originating mortgage loans to be sold and participation in government programs relating to commercial business loans originated to be sold.

Noninterest Expense

The components of noninterest expense for the years ended December 31, 2017 and 2016 were as follows:

	December 31,		December 31,		Increase / (Decrease)
	2017		2016		Amount			Percentage
	(Dollars in Thousands)

Compensation and benefits	$	13,867	$	13,703	$	164			1.2	%
Occupancy and equipment		2,399		2,295		104			4.5	%
FDIC insurance premiums		384		607		(223	)		(36.7	)%
Foreclosed assets, net		280		335		(55	)		(16.4	)%
Data processing		2,316		2,209		107			4.8	%
Outside professional services		2,035		1,985		50			2.5	%
Collection expense and repossessed asset losses		399		503		(104	)		(20.7	)%
Merger related expenses		454		-		454			n/a
Other		3,425		3,413		12			0.4	%
	$	25,559	$	25,050	$	509			2.0	%

~~The~~Noninterest ~~Company’s~~expense ~~equity~~increased to$0.5 ~~assets ratio~~million ~~increased~~ to 9$25.6% atmillion ~~December~~for ~~31,~~the ~~2016,~~year ~~from~~ended ~~9.4% at~~ December 31, ~~2015. As of December 31~~2017, ~~2016,~~from ~~the Bank’s total risk based capital to risk-weighted assets ratio was 14~~$25.~~83%, Common Equity Tier~~ 1 ~~capital~~million tofor ~~risk-weighted~~the ~~assets~~year ~~ratio~~ended ~~was 13.58%, Tier 1 capital to risk-weighted assets ratio was 13.58% and Tier 1 capital to adjusted assets ratio was 9.44%. These ratios as of~~ December 31, ~~2015 were 13~~2016.~~91%,~~ ~~12.66%, 12.66% and 9.49%, respectively.~~ The increase in noninterest ~~capital~~expense ~~ratios~~during asthe ofyear ended December 31, ~~2016~~2017, compared with ~~those~~that as of the year ended December 31, ~~2015~~2016, ~~was~~ primarily reflected ~~due to~~ an increase in ~~capital~~compensation and ~~an increase in cash and cash equivalents~~benefits, ~~which resulted~~increased indata aprocessing ~~decrease~~expenses inassociated ~~risk-weighted~~with ~~assets~~efforts ~~and~~to ~~adjusted~~improve ~~total assets; however,~~ the ~~Bank expects to utilize these funds to fund~~Company’s ~~loans~~IT ~~during~~infrastructure, ~~the~~an ~~first quarter of 2017. Prior to the~~ increase in ~~capital~~occupancy ~~ratios~~and ~~late~~equipment ~~in 2016~~expense, and the ~~general~~aforementioned ~~decline~~merger-related incosts, ~~capital~~partially ~~ratios~~offset ~~during~~by the ~~majority~~positive impact of ~~2016~~an ~~primarily~~adjustment ~~reflected~~to ~~growth in~~ the ~~Bank's~~rate ~~balance~~of ~~sheet,~~accrual ~~especially~~for ~~with~~FDIC ~~respect~~insurance ~~to portfolio loans~~premiums, ~~which~~ ~~resulted~~reducing inthe anamount ~~increase~~accrued infor ~~risk-weighted~~the full ~~assets~~year, and ~~adjusted~~a ~~total~~decrease ~~assets, partially offset by an increase~~ in ~~capital.~~collection ~~The Bank’s capital classification under PCA defined levels as of December 31, 2016 was well-capitalized~~expense.

~~The~~With the Company’s ~~continues~~strengthened tocapital and ~~monitor~~asset ~~strategies to~~quality ~~preserve~~positions, ~~capital~~management ~~including~~expects ~~the~~to ~~continued~~maintain ~~suspension~~its lower levels of ~~cash~~risk-related ~~dividends~~operating ~~and~~expenses, ~~its~~including ~~stock~~regulatory assessments, ~~repurchase~~FDIC ~~program.~~insurance ~~Resumption~~costs ofand ~~these programs~~director is& ~~not~~officer ~~expected~~insurance costs, as well as to ~~occur~~continue inoperating ~~the~~with ~~near~~lower ~~term~~levels of foreclosed asset and collection expenses.

Income Tax

The Company recorded $4.6 million and $3.6 million in income tax expense for the years ended December 31, 2017 and 2016, respectively. The Company’s effective tax rate was 59.0% and 36.1% for the years ended December 31, 2017 and 2016, respectively. In the fourth quarter of 2017, the Company recorded $1.6 million in income tax expense to remeasure its net deferred tax assets upon the enactment of lower corporate tax rates with the Tax Reform. Effective tax rates commencing January 1, 2018, are expected to decrease with the 14% reduction in the maximum corporate tax rate. The future realization of the Company’s net operating loss carryovers is limited to $325,000 per year. Income taxes are discussed in further detail in Deferred Income Taxes on page 66 and in Note 14. Income Taxes of the Notes contained in this Report.

Comparison of Results of Operations for the Years Ended December 31, 2016 and 2015

General

Net income for the year ended December 31, 2016, was $6.4 million, as compared to net income of $7.7 million for the year ended December 31, 2015. The Company’s return on average total assets ratio and return on average stockholders’ equity ratio (both annualized) were 0.72% and 7.54%, respectively, for the year ended December 31, 2016, compared with 1.00% and 9.94%, respectively, for the year ended December 31, 2015. Net income for the year ended December 31, 2016, decreased $1.3 million as compared to net income in 2015, primarily due to the reversal of $8.5 million of the Company’s valuation allowance against its deferred tax assets in the second quarter of 2015, partially offset by $5.2 million of penalties associated with the early prepayment of some of the Company's wholesale debt, also in the second quarter of 2015. Net income also benefited from an increase in net interest income of $5.4 million and an increase in noninterest income of $2.4 million.

Net interest income increased during the year ended December 31, 2016, as compared to the year ended December 31, 2015, primarily due to the impact of increased portfolio loans and other loans outstanding and decreased interest expense for repurchase agreements and FHLB advances, partially offset by lower interest rates on portfolio loans, the impact of lower balances in investment securities and increased interest expense on deposits. Noninterest income increased during the year ended December 31, 2016, as compared to the year ended December 31, 2015, primarily due to higher gains on the sale of investment securities, higher gains on the sale of both loans held-for-sale and portfolio loans, as well as the gain from the extinguishment of FHLB advances, the gain on the sale of the Garden City branch and the income from a forfeited escrow account related to an OREO sale in 2015 (which are all included in Other noninterest income), partially offset by a decrease in service charges and fees, and a decrease in interchange fees. Noninterest expense decreased during the year ended December 31, 2016, as compared to the year ended December 31, 2015, primarily due to penalties associated with the prepayment of some of the Company's high-cost wholesale debt during the second quarter of 2015, partially offset by increased incentive compensation costs associated with the Company's continuing growth strategies.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table sets forth certain information for the years ended December 31, 2016 and 2015. The average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years presented.

	Year Ended December 31,
	2016								2015
	Average Balance		Interest			Average Yield / Cost			Average Balance		Interest			Average Yield / Cost
	(Dollars in Thousands)								(Dollars in Thousands)
Interest-earning assets:
Loans (1)	$	725,595	$	31,681			4.37	%	$	553,398	$	26,705			4.83	%
Investment securities (2)		75,364		1,591			2.11	%		129,240		2,680			2.07	%
Other interest-earning assets (3)		47,054		617			1.31	%		33,246		411			1.24	%
Total interest-earning assets		848,013		33,889			4.00	%		715,884		29,796			4.16	%
Noninterest-earning assets		43,565								55,219
Total assets	$	891,578							$	771,103
Interest-bearing liabilities:
Interest-bearing demand accounts	$	103,309	$	454			0.44	%	$	65,057	$	105			0.16	%
Savings deposits		58,975		63			0.11	%		62,087		86			0.14	%
Money market accounts		132,923		875			0.66	%		112,381		607			0.54	%
Time deposits		229,815		2,215			0.96	%		191,804		1,628			0.85	%
Securities sold under agreements to repurchase		82		1			1.56	%		30,996		1,541			4.97	%
Federal Home Loan Bank advances		223,399		3,808			1.70	%		178,706		4,719			2.64	%
Other borrowings		41		1			1.63	%		14		−			1.56	%
Other borrowings (4)		41		1			1.63	%		14		-			1.56	%
Total interest-bearing liabilities		748,544		7,417			0.99	%		641,045		8,686			1.35	%
Noninterest-bearing liabilities		57,944								52,438
Total liabilities		806,488								693,483
Total stockholders’ equity		85,090								77,620
Total liabilities and stockholders’ equity	$	891,578							$	771,103
Net interest income			$	26,472							$	21,110
Net interest spread							3.01	%							2.81	%
Net interest-earning assets	$	99,469							$	74,839
Net interest margin (4)							3.12	%							2.95	%
Net interest margin (5)							3.12	%							2.95	%
Average interest-earning assets to average interest-bearing liabilities				113.29	%							111.67	%

(1)

Includes portfolio loans and other loans. Calculated net of deferred loan fees. Nonaccrual loans included as loans carrying a zero yield.

(2)

(3)

Includes FHLB stock at cost and term deposits with other financial institutions.

(4) ~~Net~~Interest ~~interest~~expense ~~income~~on ~~divided~~other byborrowings ~~average~~during ~~interest-earning~~the ~~assets~~year ended December 31, 2015, was less than $500.

(5)

Net interest income divided by average interest-earning assets.

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income for major components of interest-earning assets and in interest expense for major components of interest-bearing liabilities for the year ended December 31, 2016 as compared to the year ended December 31, 2015. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume multiplied by the old interest rate; (2) changes in interest rate multiplied by the old volume; and (3) changes not solely attributable to interest rate or volume, which have been allocated proportionately to the change due to volume and the change due to interest rate.

	Increase / (Decrease)
	Due to Volume			Due to Rate			Total Increase / (Decrease)
	(Dollars in Thousands)
Interest-earning assets:
Loans (1)	$	7,704		$	(2,728	)	$	4,976
Investment securities		(1,137	)		48			(1,089	)
Other interest-earning assets		180			26			206
Total interest-earning assets		6,747			(2,654	)		4,093
Interest-bearing liabilities:
Interest-bearing demand accounts		89			260			349
Savings deposits		(4	)		(19	)		(23	)
Money market accounts		122			146			268
Time deposits		349			238			587
Securities sold under agreements to repurchase		(912	)		(628	)		(1,540	)
Federal Home Loan Bank advances		1,007			(1,918	)		(911	)
Other borrowings		−-			1			1
Total interest-bearing liabilities		651			(1,920	)		(1,269	)
Net interest income	$	6,096		$	(734	)	$	5,362

(1)

Includes portfolio loans and other loans. Calculated net of deferred loan fees. Nonaccrual loans included as loans carrying a zero yield.

Loan growth has been the primary contributor to the increase in net interest income in 2016. Decreased loan yields, partially offset by lower borrowing costs resulted in the unfavorable variance due to rate. In general, the prolonged low interest rate environment has resulted in net interest margin compression broadly for the banking industry, including the Company.

Interest Income

Total interest income increased $4.1 million to $33.9 million for the year ended December 31, 2016, as compared to $29.8 million for the year ended December 31, 2015, due to higher balances in portfolio loans and other loans outstanding, partially offset by the decrease in interest rates on portfolio loans and lower balances in investment securities. Interest income on loans increased to $31.7 million for the year ended December 31, 2016 from $26.7 million for the year ended December 31, 2015. This increase was due to an increase in the average balance of loans, which increased $172.2 million to $725.6 million for the year ended December 31, 2016 from $553.4 million for the year ended December 31, 2015, partially offset by a decrease in average yield on loans of 46 basis points to 4.37% for the year ended December 31, 2016.

The average balance of loans increased due to an increase in portfolio loans and other loans outstanding. Originations of portfolio loans increased during the year ended December 31, 2016, resulting in increased interest income on portfolio loans outstanding and additional fee income. Originations of warehouse loans held-for-investment increased during the year ended December 31, 2016, partially offset by a decrease in the weighted average number of days outstanding for warehouse loans held-for-investment during 2016, resulting in increased interest income and additional fee income. The increase in originations of warehouse loans held-for-investment is the result of an increase in home purchase and refinance volume, and increased volume related to our expanded relationships with current counterparties, as well as relationships with new counterparties.

Interest income earned on investment securities decreased $1.1 million to $1.6 million for the year ended December 31, 2016 from $2.7 million for the year ended December 31, 2015. This decrease was primarily due to a decrease in the average balance of investment securities of $53.9 million to $75.4 million during the year ended December 31, 2016.

Interest Expense

Interest expense declined by $1.3 million to $7.4 million for year ended December 31, 2016 from $8.7 million for the year ended December 31, 2015, due to the decrease in interest expense on repurchase agreements and FHLB advances, partially offset by increased interest expenses on deposits. The increase in interest expense on deposits in 2016, as compared to 2015, was primarily due to higher average rates paid on deposits and an increase in the average balance in such deposits. The average cost of deposits, including noninterest-bearing deposits, increased 11 basis points to 0.62% for the year ended December 31, 2016, as compared to 0.51% for the year ended December 31, 2015. The decrease in interest expense on repurchase agreements in 2016, as compared to 2015, was primarily due to the repayment of outstanding repurchase agreement balances in the second quarter of 2015 and during the year ended December 31, 2016. The decrease in interest expense on FHLB advances for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was primarily due to lower average rates paid on FHLB advances resulting from the Bank’s aggressive strategies to manage interest rates, which were partially offset by an increase in the average balance of such advances.

The Bank’s overall cost of funds, including noninterest-bearing deposits, was 0.92% for the year ended December 31, 2016, down from 1.26% for the year ended December 31, 2015, primarily due to the lower average balances and interest rates related to repurchase agreements, as well as lower interest rates on FHLB advances and increased noninterest-bearing deposits, partially offset by higher average balances in FHLB advances and an increase in the average rates paid on deposits and the average balance in such deposits. The restructuring and refinancing transaction in the first nine months of 2015 substantially reduced the weighted average interest rate, and related interest expense, on borrowings for the year ended December 31, 2016 as compared to the year ended December 31, 2015.

Net Interest Income

Net interest income increased $5.4 million to $26.5 million for the year ended December 31, 2016, from $21.1 million for the year ended December 31, 2015, due to the increase in portfolio loans and other loans outstanding and decreased interest expense for repurchase agreements and FHLB advances, partially offset by lower interest rates on portfolio loans, the impact of lower balances in investment securities and an increase in interest expense on deposits.

Our net interest rate spread, which is the difference between the interest rate earned on interest-earning assets and the interest rate paid on interest-bearing liabilities, increased 20 basis points to 3.01% for the year ended December 31, 2016, as compared to 2.81% for the year ended December 31, 2015. Our net interest margin, which is net interest income expressed as a percentage of our average interest-earning assets, increased 17 basis point to 3.12% for the year ended December 31, 2016, as compared to 2.95% for the year ended December 31, 2015. The increase in the net interest rate spread and net interest margin primarily reflected the positive impact on interest income from increasing balances in portfolio loans and other loans and the positive impact on interest expense from declining high fixed-interest rate debt balances, partially offset by the negative impact on interest income from declining interest rates on portfolio loans, as well as the negative impact on interest income from lower balances in investment securities.

Provision for Portfolio Loan Losses

Provision expense was $0.6 million and $0.8 million during the years ended December 31, 2016 and 2015, respectively. The low level of provision expense during each of the years ended December 31, 2016 and 2015, primarily reflected solid economic conditions in the Company’s markets, which have led to lower levels of charge-offs in recent years. The Company had net charge-offs of $0.2 million for each of the years ended December 31, 2016 and 2015, representing 0.03% and 0.04% of average portfolio loans, respectively.

Noninterest Income

The components of noninterest income for the years ended December 31, 2016 and 2015 were as follows:

	December 31,		December 31,			Increase / (Decrease)
	2016		2015			Amount			Percentage
	(Dollars in Thousands)
Service charges and fees	$	2,320	$	2,747		$	(427	)		(15.5	)%
Gain (loss) on sale of securities available-for-sale		1,321		(9	)		1,330			14,777.8	%
Gain on sale of portfolio loans		314		−-			314			n/a
Gain on sale of loans held-for-sale		1,966		1,570			396			25.2	%
Bank owned life insurance earnings		465		480			(15	)		(3.1	)%
Interchange fees		1,356		1,563			(207	)		(13.2	)%
Other		1,505		499			1,006			201.6	%
	$	9,247	$	6,850		$	2,397			35.0	%

Noninterest income for the year ended December 31, 2016 increased $2.4 million to $9.2 million as compared to $6.8 million for the year ended December 31, 2015. The increase in noninterest income during 2016, as compared with 2015, was primarily due to higher gains on the sale of investment securities, higher gains on the sale of both loans held-for-sale and portfolio loans, as well as the gain from the extinguishment of FHLB advances, the gain on the sale of the Garden City branch and the income from a forfeited escrow account related to an OREO sale in 2015 (which are all included in Other in the table above).

For the year ended December 31, 2016, gains on sales of mortgage loans held-for-sale was $1.6 million, deferred fees on mortgage loans held-for-sale was $0.6 million, gains on sales of SBA/USDA loans held-for-sale was $0.8 million and net gains recognized for the servicing of SBA/USDA loans held-for-sale was $0.2 million. By comparison, for the year ended December 31, 2015, gains on sales of mortgage loans held-for-sale was $0.9 million, deferred fees on mortgage loans held-for-sale was $0.1 million, gains on sales of SBA/USDA loans held-for-sale was $0.6 million and net gains recognized for the servicing of SBA/USDA loans held-for-sale was $0.1 million.

The Company ~~expects~~expected gains on sales of loans held-for-sale to contribute significantly towards ~~our~~ noninterest income in the future, as the Company ~~continues~~continued to emphasize the ~~business~~ business activity of internally originating mortgage loans to be sold and participation in government programs relating to commercial ~~business~~ business loans originated to be sold.

Noninterest Expense

The components of noninterest expense for the years ended December 31, 2016 and 2015 were as follows:

	December 31,		December 31,		Increase / (Decrease)
	2016		2015		Amount			Percentage
	(Dollars in Thousands)
Compensation and benefits	$	13,703	$	12,457	$	1,246			10.0	%
Occupancy and equipment		2,295		2,133		162			7.6	%
FDIC insurance premiums		607		677		(70	)		(10.3	)%
Foreclosed assets, net		335		643		(308	)		(47.9	)%
Data processing		2,209		1,828		381			20.8	%
Outside professional services		1,985		1,801		184			10.2	%
Collection expense and repossessed asset losses		503		464		39			8.4	%
Securities sold under agreements to repurchase and Federal Home Loan Bank advances prepayment penalties		−-		5,188		(5,188	)		(100.0	)%
Other		3,413		3,751		(338	)		(9.0	)%
	$	25,050	$	28,942	$	(3,892	)		(13.4	)%

Noninterest expense decreased $3.9 million to $25.1 million for the year ended December 31, 2016 from $29.0 million for the year ended December 31, 2015. The decrease in noninterest expense during 2016, as compared with 2015, primarily reflected the penalties associated with the prepayment of some of the Company's high-cost wholesale debt during the second quarter of 2015, partially offset by an increase in incentive compensation costs and occupancy costs, both associated with the Company’s continuing growth strategies and increased technology costs, resulting from an increase in data processing costs associated with loan and deposit growth.

With the Company’s strengthened capital and asset quality positions, management ~~expects~~expected to maintain its lower levels of risk-related operating expenses, including regulatory assessments, FDIC insurance costs, accounting costs and director & officer insurance costs, as well as to continue operating with lower levels of foreclosed asset and collection expenses.

Income Tax

The Company recorded $3.6 million in income tax expense for the year ended December 31, 2016 and recorded $9.5 million in income tax benefit for the year ended December 31, 2015. The Company’s effective tax rate was 36.1% for the year ended December 31, 2016. The $9.5 million income tax benefit for the year ended December 31, 2015, substantially reflected the reversal of a deferred tax asset valuation allowance. The future realization of the Company’s net operating loss carryovers is limited to $325,000 per year. Income taxes are discussed in further detail in Deferred Income Taxes on page 7166 and in Note 14. Income Taxes of the Notes contained in this Report.

~~Comparison~~Selected ofQuarterly ~~Results~~Financial ~~of Operations for the Years Ended December 31, 2015 and 2014~~Data

General

	Quarters Ended December 31, 2017									Quarters Ended December 31, 2016
		4			3		2		1		4		3		2		1
		(Dollars in Thousands, Except Share Information)
Total interest and dividend income	$	9,352		$	8,711	$	8,421	$	7,888	$	8,705	$	8,482	$	8,506	$	8,196
Total interest expense		2,134			1,958		1,770		1,516		1,589		1,620		2,102		2,106
Net interest income		7,218			6,753		6,651		6,372		7,116		6,862		6,404		6,090
Provision for portfolio loan losses		235			167		191		100		50		220		199		150
Net interest income after provision for portfolio loan losses		6,983			6,586		6,460		6,272		7,066		6,642		6,205		5,940
Total noninterest income		1,270			1,235		1,919		2,561		1,940		2,197		2,549		2,561
Total noninterest expense		6,368			6,145		6,496		6,550		5,976		6,366		6,630		6,078
Income before income tax expense		1,885			1,676		1,883		2,283		3,030		2,473		2,124		2,423
Income tax expense		2,501			561		691		806		1,028		917		788		899
Net income (loss)	$	(616	)	$	1,115	$	1,192	$	1,477	$	2,002	$	1,556	$	1,336	$	1,524
Income (loss) per common share:
Basic	$	(0.04	)	$	0.07	$	0.08	$	0.10	$	0.13	$	0.10	$	0.09	$	0.10
Diluted	$	(0.04	)	$	0.07	$	0.08	$	0.10	$	0.13	$	0.10	$	0.09	$	0.10
Dividends declared per common share	$	-		$	-	$	-	$	-	$	-	$	-	$	-	$	-

Net income for the year ended December 31, 2015 was $7.7 million, as compared to net income of $1.3 million for the year ended December 31, 2014. The net income for the year ended December 31, 2015 increased $6.4 million as compared to the net income in the same period in 2014, primarily due to the reversal of $8.5 million of the Company’s valuation allowance against its deferred tax assets, as well as an increase in net interest income of $3.5 million, a reduction in the provision expense of $0.5 million and an increase in noninterest income of $0.4 million, partially offset by an increase in noninterest expense of $7.5 million.Liquidity

~~Net~~The ~~interest~~Company ~~income~~maintains ~~increased~~a ~~during~~liquidity ~~the year~~position ~~ended~~it ~~December~~believes ~~31,~~will ~~2015~~adequately asprovide ~~compared~~funding tofor ~~the~~loan ~~same~~demand ~~period~~and indeposit ~~2014,~~run-off ~~primarily~~that ~~due~~may tooccur in the ~~impact~~normal course of ~~increased~~business. The ~~portfolio~~Company ~~loans~~relies ~~and~~on ~~other loans~~a ~~outstanding,~~number ~~higher~~of ~~interest~~different ~~rates~~sources onof funds ~~invested~~ in ~~investment~~order ~~securities~~to ~~and~~meet ~~decreased~~its ~~interest~~liquidity ~~expense~~demands. ~~for~~The ~~deposits~~Company’s primary ~~and~~sources ~~repurchase~~of ~~agreements,~~funds ~~partially~~are ~~offset~~increases byin ~~lower~~deposit ~~interest~~accounts ~~rates~~and oncash ~~portfolio~~flows ~~loans,~~from ~~the~~loan ~~impact~~payments, sales of ~~lower~~residential ~~balances~~and inSBA/USDA ~~investment~~loans in ~~securities~~the ~~and~~secondary ~~increased~~market, ~~interest~~sales ~~expense~~of oninvestment ~~FHLB~~securities, ~~advances~~and borrowings. ~~Noninterest~~The ~~income~~scheduled ~~increased~~amortization ~~during~~of ~~the~~loans ~~year~~and ~~ended~~investment ~~December 31~~securities, ~~2015~~ as ~~compared~~well toas ~~the~~proceeds ~~same~~from ~~period in 2014~~borrowings, ~~primarily~~are ~~due~~generally topredictable ~~higher~~sources ~~gains~~of onfunds. ~~the~~In ~~sale~~addition, ofwarehouse loans held-for-~~sale, partially offset by a~~investment ~~decrease~~repay inrapidly, ~~gains~~with onan ~~the~~average ~~sale~~duration of ~~portfolio~~approximately ~~loans~~10 ~~and~~days ~~gains on the sale of securities available-for-sale. Noninterest expense increased~~ during the year ended December 31, ~~2015~~2017 asand ~~compared~~with torepayments ~~the~~generally funding ~~year~~advances. ~~ended~~Other ~~December~~funding 31sources, ~~2014~~however, ~~primarily~~such ~~due~~as toinflows ~~prepayment~~from ~~penalties associated~~new ~~with~~deposits, ~~the~~mortgage ~~prepayment~~ and ~~restructure~~investment ofsecurities ~~wholesale~~prepayments and ~~debt,~~mortgage asloan ~~well~~sales asare anless ~~increase~~predictable ~~in compensation~~ and ~~benefits,~~greatly ~~data~~influenced ~~processing and~~by ~~foreclosed~~market ~~asset~~interest ~~expenses~~rates, ~~partially~~economic ~~offset~~conditions byand ~~lower FDIC insurance costs~~competition.

We expect the Company’s primary sources of funds to continue to be sufficient to meet demands, although we can give no assurances. The Bank has contingent liquidity capacity available to meet potential funding requirements, including availability from the FHLB, the Federal Reserve Bank of Atlanta and other institutional sources as discussed below. Management increased, and plans to continue to increase, the Bank’s higher interest-earning assets, using cash and cash equivalents as the funding source, due to the low interest rate environment on alternative investment options. Management expects that cash and cash equivalents will continue to be at a lower level throughout 2018.

As of December 31, 2017, the Bank had additional borrowing capacity of $63.3 million with the FHLB. The Bank’s borrowing capacity with the Federal Reserve Bank of Atlanta, as of December 31, 2017, included the ability to borrow up to approximately $23.8 million under the Primary Credit program, based solely on the current amount of loans the Bank has designated for pledging with the Federal Reserve Bank of Atlanta, and $10.0 million of daylight overdraft capacity. Additionally, as of December 31, 2017, the Bank had liquidity sources through a $10.0 million line of credit for repurchase and reverse repurchase transactions, as well as one $20.0 million, one $17.0 million, one $10.0 million, and three $5.0 million lines of credit, all with private financial institutions. As of December 31, 2017, the Bank had no outstanding borrowings against the Primary Credit program, the daylight overdraft capacity or any of the aforementioned lines of credit with private financial institutions. Unpledged investment securities were approximately $34.1 million as of December 31, 2017.

~~Average~~The ~~Balances~~Company utilizes brokered deposits to meet funding needs at interest rates typically equal to or less than the Bank’s local market rates. As of December 31, ~~Net~~2017, the ~~Interest~~Bank ~~Income~~had brokered deposits of $74.9 million, ~~Yields~~and ~~Earned~~expects it will continue to utilize such deposits, as necessary, to supplement retail deposit production. Additionally, the Company utilizes a non-brokered Internet certificate of deposit listing service to meet funding needs at interest rates typically equal to or less than the Bank’s local market rates. As of December 31, 2017, the Bank had deposits from this service of $5.9 million, and ~~Rates~~expects ~~Paid~~it will continue to utilize the program, as necessary, to supplement retail deposit production.

~~The~~Threats ~~following~~to ~~table~~our ~~sets~~liquidity position and capital ~~forth~~levels ~~certain~~include ~~information~~rapid ~~for~~declines in deposit balances due to market volatility caused by major changes in interest rates or negative public perception about the ~~years~~Bank ~~ended~~or ~~December~~the ~~31,~~financial ~~2015~~services ~~and~~industry ~~2014~~in general. ~~The~~In ~~average~~addition, ~~yields~~the ~~and~~amount ~~costs~~of ~~are~~investment ~~derived~~securities that bywould ~~dividing income~~otherwise orbe ~~expense~~available byto meet liquidity needs is limited due to the ~~average~~collateral ~~balance~~requirements of ~~assets~~our orlong-term ~~liabilities~~debt. Specifically, ~~respectively~~the Bank’s repurchase agreements, ~~for~~which did not have an outstanding balance at December 31, 2017, have collateral requirements in excess of the ~~years~~debt. ~~presented~~Additionally, the collateral requirements of the FHLB debt are supplemented with investment securities collateral and the Bank is required to collateralize any prepayment penalty amount using investment securities.

	Year Ended December 31,
	2015								2014
	Average Balance		Interest			Average Yield / Cost			Average Balance		Interest			Average Yield / Cost
	(Dollars in Thousands)								(Dollars in Thousands)
Interest-earning assets:
Loans (1)	$	553,398	$	26,705			4.83	%	$	442,678	$	24,200			5.47	%
Investment securities (2)		129,240		2,680			2.07	%		175,914		3,520			2.00	%
Other interest-earning assets (3)		33,246		411			1.24	%		56,419		415			0.74	%
Total interest-earning assets		715,884		29,796			4.16	%		675,011		28,135			4.17	%
Noninterest-earning assets		55,219								37,410
Total assets	$	771,103							$	712,421
Interest-bearing liabilities:
Interest-bearing demand accounts	$	65,057	$	105			0.16	%	$	67,844	$	162			0.24	%
Savings deposits		62,087		86			0.14	%		66,936		167			0.25	%
Money market accounts		112,381		607			0.54	%		103,576		498			0.48	%
Time deposits		191,804		1,628			0.85	%		169,473		1,662			0.98	%
Securities sold under agreements to repurchase		30,996		1,541			4.97	%		69,108		3,474			5.03	%
Federal Home Loan Bank advances		178,706		4,719			2.64	%		118,879		4,549			3.83	%
Other borrowings		14		−			1.56	%		−		−			−	%
Total interest-bearing liabilities		641,045		8,686			1.36	%		595,816		10,512			1.76	%
Noninterest-bearing liabilities		52,438								46,326
Total liabilities		693,483								642,142
Total stockholders’ equity		77,620								70,279
Total liabilities and stockholders’ equity	$	771,103							$	712,421
Net interest income			$	21,110							$	17,623
Net interest spread							2.81	%							2.41	%
Net interest-earning assets	$	74,839							$	79,195
Net interest margin (4)							2.95	%							2.61	%
Average interest-earning assets to average interest-bearing liabilities				111.67	%							113.29	%

During 2017, cash and cash equivalents decreased $9.5 million to $50.4 million as of December 31, 2017, as compared to $59.9 million as of December 31, 2016, due to the continued deployment of funds, as the Bank remains focused on its strategy to increase portfolio loans and other higher yielding assets. For 2017, cash used in investing activities of $104.4 million exceeded cash provided by financing activities of $72.2 million and cash provided by operating activities of $22.7 million. Primary sources of cash flows included proceeds from repayment of warehouse loans held-for-investment of $1.1 billion, proceeds from FHLB advances of $737.2 million, proceeds from the maturities and payments of investment securities of $79.9 million, proceeds from sales of loans held-for-sale of $65.0 million, net increases in deposits of $47.4 million and proceeds from the redemption of FHLB stock of $24.1 million. Primary uses of cash flows included funding of warehouse loans held-for-investment of $1.1 billion, the repayment of FHLB advances of $712.4 million, net increases in portfolio loans of $121.7 million (excluding the purchase of such loans), the purchase of investment securities of $57.1 million, originations of loans held-for-sale of $48.2 million, the purchase of FHLB stock of $25.2 million and the purchase of portfolio loans of $18.3 million.

~~(1)~~During ~~Includes~~2016, ~~portfolio~~cash ~~loans~~and cash equivalents increased $36.3 million to $59.9 million as of December 31, 2016, as compared to $23.6 million as of December 31, 2015. For 2016, cash provided by financing activities of $55.9 million and ~~other~~cash provided by operating activities of $13.0 million exceeded cash used in investing activities of $32.6 million. Primary sources of cash flows included proceeds from repayment of warehouse loans held-for-investment of $1.8 ~~Calculated~~billion, proceeds from FHLB advances of $1.5 billion, proceeds from sales of loans held-for-sale of $89.1 million, net increases in deposits of ~~deferred~~$86.0 ~~loan~~million, ~~fees~~proceeds from the sale of investment securities of $74.0 ~~Nonaccrual~~million and proceeds from the sale of portfolio loans of $31.3 million. Primary uses of cash flows included asfunding of warehouse loans ~~carrying~~held-for-investment aof $1.8 ~~zero~~billion, ~~yield~~the repayment of FHLB advances of $1.5 billion, originations of loans held-for-sale of $85.9 million and net increases in portfolio loans of $62.9 million (excluding the purchase of such loans).

(During 2015, cash and cash equivalents increased $1.2) ~~Calculated~~million ~~based~~to on$23.6 ~~carrying~~million ~~value~~as of December 31, 2015, as compared to $22.4 ~~State~~million as of December 31, 2014. For 2015, cash provided by financing activities of $142.6 million and ~~municipal~~cash provided by operating activities of $2.6 million exceeded cash used in investing activities of $144.0 million. Primary sources of cash flows included proceeds from repayment of warehouse loans held-for-investment of ~~securities~~$1.1 ~~yields~~billion, ~~have~~proceeds ~~not~~from ~~been~~FHLB ~~adjusted~~advances toof ~~full~~$488.9 ~~tax~~million, ~~equivalents~~net increases in deposits of $115.0 million, asproceeds from sales of loans held-for-sale of $46.0 million, proceeds from repurchase agreements of $20.0 million, proceeds from the ~~numbers~~redemption ~~would~~of FHLB ~~not~~stock ~~change~~of ~~materially~~$18.3 million and proceeds from ~~those~~maturities ~~presented~~and payments of investment securities of $17.0 million. Primary uses of cash flows included funding of warehouse loans held-for-investment of $1.1 billion, the repayment of FHLB advances of $403.7 million, the purchase of portfolio loans of $101.4 million, the repayment of repurchase agreements of $76.3 million, net increases in portfolio loans of $59.3 million (excluding the ~~table~~purchase of such loans), originations of loans held-for-sale of $39.2 million and the purchase of FHLB stock of $21.6 million.

(3) Includes FHLB stock at cost and term deposits with other financial institutions.

(4) Net interest income divided by average interest-earning assets.

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income for major components of interest-earning assets and in interest expense for major components of interest-bearing liabilities for the year ended December 31, 2015 as compared to the year ended December 31, 2014. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume multiplied by the old interest rate; (2) changes in interest rate multiplied by the old volume; and (3) changes not solely attributable to interest rate or volume, which have been allocated proportionately to the change due to volume and the change due to interest rate.

	Increase / (Decrease)
	Due to Volume			Due to Rate			Total Increase / (Decrease)
	(Dollars in Thousands)
Interest-earning assets:
Loans (1)	$	5,569		$	(3,064	)	$	2,505
Investment securities		(964	)		124			(840	)
Other interest-earning assets		(214	)		210			(4	)
Total interest-earning assets		4,391			(2,730	)		1,661
Interest-bearing liabilities:
Interest-bearing demand accounts		(6	)		(51	)		(57	)
Savings deposits		(11	)		(70	)		(81	)
Money market accounts		44			65			109
Time deposits		204			(238	)		(34	)
Securities sold under agreements to repurchase		(1,895	)		(38	)		(1,933	)
Federal Home Loan Bank advances		1,850			(1,680	)		170
Other borrowings		−			−			−
Total interest-bearing liabilities		186			(2,012	)		(1,826	)
Net interest income	$	4,205		$	(718	)	$	3,487

(2) Includes portfolio loans and other loans. Calculated net of deferred loan fees. Nonaccrual loans included as loans carrying a zero yield.

Interest Income

Total interest income increased $1.7 million to $29.8 million for the year ended December 31, 2015, as compared to $28.1 million for the year ended December 31, 2014, due to the impact of higher balances in portfolio loans and other loans outstanding and higher interest rates on funds invested in investment securities, partially offset by the decrease in interest rates on portfolio loans and lower balances in investment securities. Interest income on loans increased to $26.7 million for the year ended December 31, 2015 from $24.2 million for the year ended December 31, 2014. This increase was due to an increase in the average balance of loans, which increased $110.7 million to $553.4 million for the year ended December 31, 2015 from $442.7 million for the year ended December 31, 2014, partially offset by a decrease in average yield on loans of 64 basis points to 4.83% for the year ended December 31, 2015.

The average balance of loans increased due to an increase in portfolio loans and other loans outstanding. Originations of portfolio loans increased during the year ended December 31, 2015, resulting in increased interest income on portfolio loans outstanding and additional fee income. Originations of warehouse loans held-for-investment increased during the year ended December 31, 2015, partially offset by a slight decrease in the weighted average number of days outstanding for warehouse loans held-for-investment during the same period, resulting in increased interest income and additional fee income. The increase in originations of warehouse loans held-for-investment is the result of an increase in home purchase and refinance volume, three loan participation agreements that the Company entered into with Customers Bank at the end of the first quarter of 2015 and other relationships with new counterparties.

Interest income earned on investment securities decreased $0.8 million to $2.7 million for the year ended December 31, 2015 from $3.5 million for the year ended December 31, 2014. This decrease was primarily due to a decrease in the average balance of investment securities of $46.7 million to $129.2 million during the year ended December 31, 2015.

Interest Expense

Interest expense declined by $1.8 million to $8.7 million for year ended December 31, 2015 from $10.5 million for the year ended December 31, 2014, due to the decrease in interest expense on deposits and repurchase agreements, partially offset by increased interest expenses on FHLB advances. The decrease in interest expense on deposits in 2015 as compared to 2014, was primarily due to lower average rates paid on time deposits, partially offset by an increase in the average balance in such deposits. The average cost of deposits, including noninterest-bearing deposits, decreased 4 basis points to 0.51% for the year ended December 31, 2015 as compared to 0.55% for the year ended December 31, 2014. The decrease in interest expense on repurchase agreements in 2015, as compared to 2014, was primarily due to the repayment of $66.3 million in outstanding repurchase agreement balances during the second quarter of 2015. The repayment consisted of $10.0 million related to a maturity on June 11, 2015 and $56.3 million related to a prepayment on June 22, 2015, which represented the entire balance of such borrowings at the time of prepayment. Additionally, the Company borrowed $10.0 million against a new repurchase agreement on two separate occasions, once at the end of the second quarter of 2015 and once at the end of the fourth quarter of 2015, both times at a substantially lower interest rate. The borrowing during the second quarter of 2015 was paid off early in the third quarter of 2015. These transactions resulted in a decrease in the average balance in, and average rates paid on, repurchase agreements. The increase in interest expense on FHLB advances for the year ended December 31, 2015, as compared to the year ended December 31, 2014, was primarily due to an increase in the average balance of FHLB advances, partially offset by lower average rates paid on such advances.

The Bank’s overall cost of funds, including noninterest-bearing deposits, was 1.26% for the year ended December 31, 2015 down from 1.65% for the year ended December 31, 2014, due to the lower cost of deposits and repurchase agreements and the lower average rates paid on FHLB advances. The Bank’s cost of funds remained slightly elevated relative to the current interest rate environment due to the structured rates associated with some of the FHLB advances which were at interest rates above market rates. However, the Company's successful efforts during the second quarter of 2015 to lower the effective interest rate on its wholesale debt was expected to reduce interest expense going forward by approximately $5.0 million annually starting in the second quarter of 2016.

Net Interest Income

Net interest income increased $3.5 million to $21.1 million for the year ended December 31, 2015 from $17.6 million for the year ended December 31, 2014, due to the increase in portfolio loans and other loans outstanding, higher interest rates on funds invested in investment securities, and decreased interest expense for deposits and repurchase agreements, partially offset by lower interest rates on portfolio loans, the impact of lower balances in investment securities and an increase in interest expense on FHLB advances.

Our net interest rate spread, which is the difference between the interest rate earned on interest-earning assets and the interest rate paid on interest-bearing liabilities, increased 40 basis points to 2.81% for the year ended December 31, 2015 as compared to 2.41% for the year ended December 31, 2014. Our net interest margin, which is net interest income expressed as a percentage of our average interest-earning assets, increased 34 basis point to 2.95% for the year ended December 31, 2015 as compared to 2.61% for the year ended December 31, 2014. The increase in the net interest rate spread primarily reflected the positive impact on interest income from increasing balances in portfolio loans and other loans, higher interest rates on funds invested in investment securities and the positive impact on interest expense from declining high fixed-interest rate debt balances, partially offset by the negative impact on interest income from declining interest rates on portfolio loans, as well as the negative impact on interest income from lower balances in investment securities.

Provision for Portfolio Loan Losses

Provision expense was $0.8 million and $1.3 million during the years ended December 31, 2015 and 2014, respectively. The decline in the provision expense during the year ended December 31, 2015, as compared to the same period in 2014 primarily reflected improving economic conditions in the Company’s markets, which have led to a decline in net charge-offs over the past 12 months, partially offset by loan growth.

The Company had net charge-offs of $0.2 million for the year ended December 31, 2015 as compared to $1.1 million for the year ended December 31, 2014. The decrease in net charge-offs in 2015, as compared to 2014 was primarily due to a decrease in charge-offs in one- to four-family residential and home equity loans, collateral-dependent commercial real estate property, and commercial business loans. Typically, the Company’s policy to charge-down one- to four-family first mortgages and home equity loans to the estimated fair value of the collateral at the time the loan becomes nonperforming will impact net charge-offs. Consistent with this policy, net charge-offs for the year ended December 31, 2014, included $0.4 million of partial charge-offs. However, net charge-offs did not include any partial charge-offs for the year ended December 31, 2015 due to improving economic conditions in the Company’s markets.

Noninterest Income

The components of noninterest income for the years ended December 31, 2015 and 2014 were as follows:

	December 31,			December 31,		Increase / (Decrease)
	2015			2014		Amount			Percentage
	(Dollars in Thousands)
Service charges and fees	$	2,747		$	2,786	$	(39	)		(1.4	)%
Gain (loss) on sale of securities available-for-sale		(9	)		205		(214	)		(104.4	)%
Gain on sale of portfolio loans		−			114		(114	)		(100.0	)%
Gain on sale of loans held-for-sale		1,570			864		706			81.7	%
Bank owned life insurance earnings		480			447		33			7.4	%
Interchange fees		1,563			1,521		42			2.8	%
Other		499			502		(3	)		(0.6	)%
	$	6,850		$	6,439	$	411			6.4	%

Noninterest income for the year ended December 31, 2015 increased $0.4 million to $6.8 million as compared to $6.4 million for the year ended December 31, 2014. The increase in noninterest income during 2015 as compared with 2014 was primarily due to an increase in gains on the sale of loans held-for-sale, partially offset by a decrease in gains on the sale of portfolio loans and gains on the sale of securities available-for-sale.

For the year ended December 31, 2015, gains on sales of mortgage loans held-for-sale was $882,000, deferred fees on mortgage loans held-for-sale was $103,000, gains on sales of SBA loans held-for-sale was $587,000 and net gains recognized for the servicing of SBA loans held-for-sale was $84,000. By comparison, for the year ended December 31, 2014, gains on sales of mortgage loans held-for-sale was $180,000, deferred fees on mortgage loans held-for-sale was $5,000, gains on sales of SBA loans held-for-sale was $632,000 and net gains recognized for the servicing of SBA loans held-for-sale was $57,000.

The Company expected gains on sales of loans held-for-sale to contribute significantly towards our noninterest income in the future, as the Company continued to emphasize the business activity of internally originating mortgage loans to be sold and participation in government programs relating to commercial business loans originated to be sold.

Noninterest Expense

The components of noninterest expense for the years ended December 31, 2015 and 2014 were as follows:

	December 31,		December 31,		Increase / (Decrease)
	2015		2014		Amount			Percentage
	(Dollars in Thousands)
Compensation and benefits	$	12,457	$	10,582	$	1,875			17.7	%
Occupancy and equipment		2,133		1,935		198			10.2	%
FDIC insurance premiums		677		1,206		(529	)		(43.9	)%
Foreclosed assets, net		643		245		398			162.4	%
Data processing		1,828		1,436		392			27.3	%
Outside professional services		1,801		1,692		109			6.4	%
Collection expense and repossessed asset losses		464		530		(66	)		(12.5	)%
Securities sold under agreements to repurchase and Federal Home Loan Bank advances prepayment penalties		5,188		−		5,188			n/a
Other		3,751		3,843		(92	)		(2.4	)%
	$	28,942	$	21,469	$	7,473			34.8	%

Noninterest expense increased $7.5 million to $29.0 million for the year ended December 31, 2015 from $21.5 million for the year ended December 31, 2014. The increase in noninterest expense during 2015 as compared with 2014 primarily reflected the penalties associated with the prepayment of some of the Company's high-cost wholesale debt during the second quarter of 2015, as well as an increase in compensation and benefits, primarily due to an increase in headcount to support the Company’s growth initiatives, data processing and foreclosed asset expenses, primarily due to an $0.5 million OREO write-down in December 2015, partially offset by lower FDIC insurance costs.

With the Company’s strengthened capital position, management expected to maintain its lower levels of risk-related operating expenses, including regulatory assessments, FDIC insurance costs, accounting costs and director & officer insurance costs, as well as to continue operating with lower levels of foreclosed asset and collection expenses.

Income Tax

The Company recorded $9.5 million in income tax benefit for the year ended December 31, 2015 and recorded no income tax expense for the year ended December 31, 2014. The future realization of the Company’s net operating loss carryovers is limited to $325,000 per year. Income taxes are discussed in further detail in Deferred Income Taxes on page 71 and in Note 14. Income Taxes of the Notes contained in this Report.

Liquidity

The Company maintains a liquidity position it believes will adequately provide funding for loan demand and deposit run-off that may occur in the normal course of business. The Company relies on a number of different sources of funds in order to meet its liquidity demands. The Company’s primary sources of funds are increases in deposit accounts and cash flows from loan payments, sales of residential and SBA/USDA loans in the secondary market, sales of investment securities, and borrowings. The scheduled amortization of loans and investment securities, as well as proceeds from borrowings, are generally predictable sources of funds. In addition, warehouse loans held-for-investment repay rapidly, with an average duration of approximately 12 days during the year ended December 31, 2016 and with repayments generally funding advances. Other funding sources, however, such as inflows from new deposits, mortgage and investment securities prepayments and mortgage loan sales are less predictable and greatly influenced by market interest rates, economic conditions and competition.

We expect the Company’s primary sources of funds to continue to be sufficient to meet demands, although we can give no assurances, and the Bank has contingent liquidity capacity available to meet potential funding requirements, including availability from the FHLB, the Federal Reserve Bank of Atlanta and other institutional sources as discussed below. Management increased, and plans to continue to increase, the Bank’s higher interest-earning assets, using cash and cash equivalents as the funding source, due to the low interest rate environment on alternative investment options. Consequently, the Bank’s average balance of cash and cash equivalents has remained low, at $36.8 million during the year ended December 31, 2016, compared with $42.2 million during the year ended December 31, 2015, and consistent with this strategy, management expects that cash and cash equivalents will continue to be at a lower level throughout 2017.

As of December 31, 2016, the Company had additional borrowing capacity of $92.1 million with the FHLB. The Company’s borrowing capacity with the Federal Reserve Bank of Atlanta, as of December 31, 2016, included the ability to borrow up to approximately $26.6 million under the Primary Credit program, based solely on the current amount of loans the Company has designated for pledging with the Federal Reserve Bank of Atlanta, and $10.0 million of daylight overdraft capacity. Additionally, as of December 31, 2016, the Company had liquidity sources through one $17.0 million, one $10.0 million, and four $5.0 million lines of credit, all with private financial institutions. As of December 31, 2016, the Bank had no outstanding borrowings against the Primary Credit program, the daylight overdraft capacity or any of the aforementioned lines of credit with private financial institutions. A $10.0 million line of credit for repurchase and reverse repurchase transactions was utilized late in the fourth quarter of 2015, and was fully repaid early in January 2016. Unpledged investment securities were approximately $41.2 million as of December 31, 2016.

The Company utilizes brokered deposits to meet funding needs at interest rates typically equal to or less than the Bank’s local market rates. As of December 31, 2016, the Bank had brokered deposits of $84.0 million, and expects it will continue to utilize such deposits, as necessary, to supplement retail deposit production. Additionally, the Company utilizes a non-brokered Internet certificate of deposit listing service to meet funding needs at interest rates typically equal to or less than the Bank’s local market rates. As of December 31, 2016, the Bank had deposits from this service of $9.2 million, and expects it will continue to utilize the program, as necessary, to supplement retail deposit production.

Threats to our liquidity position and capital levels include rapid declines in deposit balances due to market volatility caused by major changes in interest rates or negative public perception about the Bank or the financial services industry in general. In addition, the amount of investment securities that would otherwise be available to meet liquidity needs is limited due to the collateral requirements of our long-term debt. Specifically, the Bank’s repurchase agreements, which did not have an outstanding balance at December 31, 2016, have collateral requirements in excess of the debt. Additionally, the collateral requirements of the FHLB debt are supplemented with investment securities collateral and the Bank is required to collateralize any prepayment penalty amount using investment securities.

During 2016, cash and cash equivalents increased $36.3 million to $59.9 million as of December 31, 2016, as compared to $23.6 million as of December 31, 2015, due to the sale of investment securities, partially offset by the continued deployment of funds, as the Bank remains focused on its strategy to increase portfolio loans and other higher yielding assets. For 2016, cash provided by financing activities of $57.3 million and cash provided by operating activities of $12.4 million exceeded cash used in investing activities of $33.4 million. Primary sources of cash flows included proceeds from repayment of warehouse loans held-for-investment of $1.8 billion, proceeds from FHLB advances of $1.5 billion, proceeds from sales of loans held-for-sale of $89.1 million, net increases in deposits of $86.0 million, proceeds from the sale of investment securities of $74.0 million and proceeds from the sale of portfolio loans of $31.3 million. Primary uses of cash flows included funding of warehouse loans held-for-investment of $1.8 billion, the repayment of FHLB advances of $1.5 billion, originations of loans held-for-sale of $85.9 million and net increases in portfolio loans of $62.9 million (excluding the purchase of such loans).

During 2015, cash and cash equivalents increased $1.2 million to $23.6 million as of December 31, 2015, as compared to $22.4 million as of December 31, 2014, due to the effective deployment of capital throughout 2015, as the Bank remains focused on its strategy to increase portfolio loans and other higher yielding assets. For 2015, cash provided by financing activities of $142.6 million and cash provided by operating activities of $2.6 million exceeded cash used in investing activities of $144.0 million. Primary sources of cash flows included proceeds from repayment of warehouse loans held-for-investment of $1.1 billion, proceeds from FHLB advances of $488.9 million, net increases in deposits of $115.0 million, proceeds from sales of loans held-for-sale of $46.0 million, proceeds from repurchase agreements of $20.0 million, proceeds from the redemption of FHLB stock of $18.3 million and proceeds from maturities and payments of investment securities of $17.0 million. Primary uses of cash flows included funding of warehouse loans held-for-investment of $1.1 billion, the repayment of FHLB advances of $403.7 million, the purchase of portfolio loans of $101.4 million, the repayment of repurchase agreements of $76.3 million, net increases in portfolio loans of $59.3 million (excluding the purchase of such loans), originations of loans held-for-sale of $39.2 million and the purchase of FHLB stock of $21.6 million.

During 2014, cash and cash equivalents decreased $91.8 million from $114.2 million as of December 31, 2013 to $22.4 million as of December 31, 2014, as a part of the Bank’s strategy to increase portfolio loans and other higher yielding assets which resulted in a reduction of cash and cash equivalents. For 2014, cash used in operating activities, investing activities, and financing activities totaled $16.5 million, $43.0 million, and $32.3 million, respectively. Primary sources of cash flows were from repayment of warehouse loans held-for-investment of $444.1 million, proceeds from FHLB advances of $95.0 million, proceeds from the sale of securities available-for-sale of $69.4 million, proceeds from maturities and payments of investment securities of $21.7 million, and proceeds from the sale of loans held-for-sale of $14.2 million. Primary uses of cash flows included funding of warehouse loans held-for-investment of $457.5 million, the repayment of FHLB advances of $81.3 million, the purchase of portfolio loans of $61.7 million, the purchase of securities available-for-sale of $44.0 million, the repayment of repurchase agreements of $26.5 million, net decreases in deposits of $19.3 million, and the origination of loans held-for-sale of $16.3 million.

Capital Resources

At December 31, ~~2016~~2017, stockholders’ equity totaled $8790.07 million. During ~~2016~~2017 the Company’s Board of Directors declared no dividends. Future cash dividend payments by the Company and the amount thereof will depend on a number of factors, including financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors that the Company’s Board of Directors may deem relevant and will also be substantially dependent on cash dividends the Company receives from its subsidiary, the Bank. As of December 31, ~~2016~~2017, the Company held anno ~~immaterial amount of~~ treasury stock. The Company suspended its share repurchase program in March 2009. Initiation of future share repurchase programs is dependent on liquidity, opportunities for alternative investments, and capital requirements.

The Bank’s actual and required capital levels and ratios as of December 31, ~~2016~~2017 were as follows:

	Actual					Required to be Well- Capitalized Under Prompt Corrective Action
	Amount		Ratio			Amount		Ratio
	(Dollars in Millions)
December 31, 2016
December 31, 2017
Total capital (to risk weighted assets)	$	9298.83		1412.8353	%	$	6278.65		10.00	%
Common equity tier 1 capital (to risk weighted assets)		8589.07		1311.5843	%		4051.70		6.50	%
Tier 1 capital (to risk weighted assets)		8589.07		1311.5843	%		5062.18		8.00	%
Tier 1 capital (to adjusted total assets)		8589.07		9.4467	%		4546.04		5.00	%

The Bank’s capital classification under PCA defined levels as of December 31, ~~2016~~2017 was well-capitalized.

Inflation

The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets and our profitability, management also believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that, generally, neither the timing nor the magnitude of inflationary changes in the consumer price index (CPI) coincides with changes in interest rates. The price of one or more components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or on the cost of those goods and services normally purchased by us. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds. In years of low inflation and low interest rates, the opposite may occur.

8681

Off-Balance Sheet Arrangements

Neither the Company nor the Bank is currently participating in any material transaction that generates relationships with unconsolidated entities or financial partnerships, including variable interest entities, and neither the Company nor the Bank has any material retained or contingent interest in such entities or assets. As of December 31, ~~2016~~2017, we did not have material financial guarantee contracts that are reasonably likely to adversely affect our results of operations, financial condition, or cash flows. However, as a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations are not “off-balance sheet arrangements,” as defined in SEC rules, and although they represent our potential future cash requirements, a significant portion of those commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we enter into commitments to sell mortgage loans. For additional information regarding commitments to extend credit and unused lines of credit, see Note 13. Commitments and Contingencies of the Notes contained in this Report.

Future Accounting Pronouncements

See Note 2. Impact of Certain Accounting Pronouncements of the Notes contained in this Report for a discussion of recently issued or proposed accounting pronouncements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Bank is subject to interest rate risk to the extent that its interest-bearing liabilities, primarily deposits, re-price more rapidly or at different rates than its interest-earning assets. In order to address the potential for adverse effects of material prolonged increases or decreases in interest rates on our results of operations, management has adopted an asset and liability management policy. The Board of Directors sets the asset and liability policy for the Company, which is implemented by the Bank’s ALCO. The purpose of the ALCO is to communicate, coordinate and control asset and liability management consistent with our business plan and board-approved policies. The ALCO establishes and monitors the volume and mix of assets and funding sources taking into account the Company’s relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, and profitability goals.

The ALCO meets quarterly to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate exposure limits versus current projections pursuant to income simulations. The ALCO recommends appropriate strategy changes based on these quarterly reviews. The ALCO is also responsible for reviewing and reporting the effects of the asset and liability policy implementation and strategies to the Board of Directors at least quarterly. A key element of our asset and liability management plan is to protect net earnings by managing the maturity or re-pricing mismatch between our interest-earning assets and interest rate-sensitive interest-bearing liabilities. Historically, the Company has sought to reduce exposure to its earnings through the use of adjustable rate assets, the sale of certain fixed rate loans in the secondary market, and by extending funding maturities through the use of the FHLB advances and repurchase agreements.

In part, the Bank measures its exposure to interest rate risk using an analytical model referred to as Net Portfolio Value (NPV) that estimates the value of the net cash flows of interest-earning assets and interest-bearing liabilities under different interest rate scenarios. The Bank also measures interest rate risk by estimating the impact of interest rate changes on its “net interest income” which is defined as the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for a rolling forward 12- and 24-month period using historical data for assumptions such as loan prepayment rates and deposit decay rates, the current term structure for interest rates, and current deposit and loan offering rates. We then calculate what the net interest income would be for the same period in the event of an instantaneous 100, 200 and 300 basis point increase or a 100 basis point decrease in market interest rates. Given the current relatively low level of market interest rates, the Bank does not consider interest rate decreases of greater than 100 basis points in either of the two models used to measure interest rate risk.

8782

The Bank’s estimated exposure to interest rate risk as of December 31, 2017 and 2016 is as follows:

														Net Present Value as a Percentage of Present Value of Assets (3)		~~Net Present Value as a Percentage of Present Value of Assets (3)~~						Net Interest Income		~~Net Interest Income~~
						Estimated Increase / (Decrease) in Net Present Value		~~Estimated Increase / (Decrease) in Net Present Value~~																		Estimated Increase / (Decrease) in Net Interest Income		~~Estimated Increase / (Decrease) in Net Interest Income~~
Change in Interest Rates – Basis Points (1)		Estimated Net Present Value (2)		~~Estimated Net Present Value (2)~~		Amount		~~Amount~~		Percent		~~Percent~~		Estimated Net Present Value Ratio (4)		~~Estimated Net Present Value Ratio (4)~~		Estimated Increase / (Decrease) – Basis Points		~~Estimated Increase / (Decrease) – Basis Points~~		Estimated Net Interest Income		~~Estimated Net Interest Income~~		Amount		~~Amount~~		Percent		~~Percent~~
(Dollars in Thousands)
	As of December 31, 2016:
As of December 31, 2017:
+300	~~+300~~	$	104,464	$	~~87,247~~	$	(15,489	$)	~~(24,235~~	)	(12.9	)%	~~(21.7~~	)%	11.37	%	~~10.36~~	%	(87	)	~~(192~~	)$	26,179	$	~~24,754~~	$	(3,557	$)	~~(1,454~~	)	(12.0	)%	~~(5.5~~	)%
+200	~~+200~~		110,782		~~97,614~~		(9,171	)	~~(13,868~~	)	(7.6	)%	~~(12.4~~	)%	11.80	%	~~11.28~~	%	(44	)	~~(100~~	)	27,391		~~25,271~~		(2,345	)	~~(937~~	)	(7.9	)%	~~(3.6~~	)%
+100	~~+100~~		116,812		~~105,848~~		(3,141	)	~~(5,634~~	)	(2.6	)%	~~(5.1~~	)%	12.17	%	~~11.92~~	%	(7	)	~~(36~~	)	28,588		~~25,768~~		(1,148	)	~~(440~~	)	(3.9	)%	~~(1.7~~	)%
0	0		119,953		~~111,482~~		-		-		-		-		12.24	%	~~12.28~~	%	-		-		29,736		~~26,208~~		-		-		-		-
-100	~~-100~~		117,397		~~108,611~~		(2,556	)	~~(2,871~~	)	(2.1	)%	~~(2.6~~	)%	11.76	%	~~11.75~~	%	(48	)	~~(53~~	)	29,713		~~26,435~~		(23	)	~~227~~		(0.1	)%	~~0.9~~	%
As of December 31, 2016:
+300		$	87,247			$	(24,235	)			(21.7	)%			10.36	%			(192	)		$	24,754			$	(1,454	)			(5.5	)%
+200			97,614				(13,868	)			(12.4	)%			11.28	%			(100	)			25,271				(937	)			(3.6	)%
+100			105,848				(5,634	)			(5.1	)%			11.92	%			(36	)			25,768				(440	)			(1.7	)%
0			111,482				-				-				12.28	%			-				26,208				-				-
-100			108,611				(2,871	)			(2.6	)%			11.75	%			(53	)			26,435				227				0.9	%

(1)

Assumes an instantaneous uniform change in interest rates at all maturities.

(2)

NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. Discount rates are unique to each class of asset and liability and are principally estimated as spreads over wholesale rates.

(3)

Present Value of Assets (PVA) represents the discounted present value of incoming cash flows on interest-earning assets.

(4)

NPV Ratio represents NPV divided by PVA.

The Company’s liabilities re-price faster than its assets, therefore, as interest rates rise, net interest income would decrease at a greater rate than if interest rates decline. Additionally, in an upward rate environment, net present value of the Company’s cash flows would decline, and the level of such decline would tend to exceed the level of decline in a downward rate environment. This tendency is due to several factors including, but not limited to, the percentage of fixed rate residential and commercial loans, the retail and wholesale funding mix, and extension risk in the assets. ~~The~~Overall, ~~decrease in~~ the Company’s ~~liability~~ sensitivity atremains ~~the~~moderately ~~end~~liability ofsensitive ~~2016~~with ~~reflects~~modest amargin ~~change~~compression expected in ~~asset~~a ~~allocation~~rising ~~from~~interest ~~investment~~rate ~~securities~~environment; ~~into~~however, ~~warehouse~~the ~~loans~~Company’s ~~held-for-investment~~sensitivity continues ~~and~~to ~~interest-bearing cash~~move ~~along~~towards ~~with~~a more neutral position due to an increase in ~~inelastic~~adjustable ~~retail~~rate loans and core deposits, as well as longer initial term on wholesale funding borrowings. ~~Overall,~~The relative improvement in the ~~Company’s~~effects ~~sensitivity~~of ~~remains~~rate ~~moderately~~shocks ~~liability~~on NPV at December 31, 2017, ~~sensitive~~compared with ~~modest~~December ~~margin~~31, ~~compression~~2016, ~~expected~~relates into athe ~~rising~~improved ~~interest~~mix of adjustable rate ~~environment~~loans and growth in noninterest-bearing demand deposits and capital levels.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in net portfolio value and net interest income. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value and net interest income information presented above assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or re-pricing of specific assets and liabilities. Accordingly, although interest rate-risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

8883

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Atlantic Coast Financial Corporation (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance, based on an appropriate cost-benefit analysis, regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2016~~2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on management’s assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, ~~2016~~2017.

The Company’s independent registered certified public accounting firm, Dixon Hughes Goodman LLP, has issued a report on the effectiveness of the Company’s internal control over financial reporting. This report appears on page 9185 of this Annual Report on Form 10-K.

8984

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors ~~and Stockholders~~of

Atlantic Coast Financial Corporation

WeOpinion ~~have~~on ~~audited~~ the ~~accompanying~~Consolidated ~~consolidated balance sheet of Atlantic Coast~~ Financial Corporation and Subsidiary (Atlantic Coast) as of December 31, 2016, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of Atlantic Coast’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.Statements

We ~~conducted~~have ~~our~~audited ~~audit~~the inaccompanying ~~accordance with the~~consolidated ~~standards~~balance sheets of ~~the~~Atlantic ~~Public~~Coast ~~Company~~Financial ~~Accounting~~Corporation ~~Oversight~~and ~~Board~~subsidiary (~~United~~the ~~States~~Company). ~~Those~~as ~~standards~~of ~~require~~December ~~that~~31, we2017 ~~plan~~ and ~~perform~~2016, the related ~~audit~~consolidated tostatements ~~obtain~~of ~~reasonable~~operations, ~~assurance~~comprehensive ~~about~~income, ~~whether~~stockholders' ~~the~~equity, ~~financial~~and ~~statements~~cash ~~are~~flows, ~~free~~for ofthe ~~material~~years ~~misstatement.~~then Anended, ~~audit includes~~and ~~examining,~~the onrelated anotes ~~test~~(collectively ~~basis,~~referred ~~evidence~~to ~~supporting~~as the ~~amounts~~financial ~~and~~statements). ~~disclosures~~In inour opinion, the financial statements. Anpresent ~~audit~~fairly, in ~~also~~all ~~includes assessing~~material respects, the ~~accounting~~financial ~~principles~~position ~~used~~of ~~and~~the ~~significant~~Company ~~estimates~~as ~~made~~of byDecember ~~management~~31, as2017 ~~well~~and as2016, ~~evaluating~~and the ~~overall~~results ~~financial~~of their operations ~~statement~~and ~~presentation.~~their Wecash ~~believe~~flows ~~that~~for ~~our~~the ~~audit~~years ~~provides~~then aended, ~~reasonable~~in ~~basis~~conformity ~~for~~with ~~our~~U.S. ~~opinion~~generally accepted accounting principles.

InWe ~~our~~also ~~opinion~~have audited, ~~the~~in ~~consolidated~~accordance ~~financial~~with the ~~statements~~standards ~~referred~~of tothe ~~above~~Public ~~present~~Company ~~fairly,~~Accounting inOversight ~~all~~Board ~~material~~(United ~~respects~~States) (PCAOB), the ~~financial~~Company's ~~position~~internal ofcontrol ~~Atlantic~~over ~~Coast~~financial reporting as of December 31, ~~2016~~2017, ~~and~~based ~~the~~on ~~results~~criteria ofestablished ~~their~~in ~~operations~~Internal ~~and~~Control ~~their~~- ~~cash~~Integrated ~~flows~~Framework ~~for~~(2013) issued by the ~~year~~Committee ~~then~~of ~~ended,~~Sponsoring inOrganizations ~~conformity~~of ~~with~~the ~~accounting~~Treadway ~~principles generally~~Commission ~~accepted~~and inour ~~the~~report ~~United~~dated ~~States~~March of16, ~~America~~2018 expressed an unqualified opinion thereon.

WeBasis ~~also~~for ~~have~~Opinion audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Atlantic Coast’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2017, expressed an unqualified opinion thereon.

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company's auditor since 2016.

Atlanta, Georgia

March 1416, ~~2017~~2018

9085

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors ~~and Stockholders~~of

Atlantic Coast Financial Corporation

WeOpinion ~~have audited the internal control over financial reporting of Atlantic Coast Financial Corporation and Subsidiary (Atlantic Coast) as of December 31, 2016, based~~ on ~~criteria established in~~ Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Atlantic Coast’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting~~. Our responsibility is to express an opinion on the Atlantic Coast’s internal control over financial reporting based on our audit.~~

We ~~conducted~~have ~~our~~audited ~~audit~~Atlantic inCoast ~~accordance~~Financial ~~with the~~Corporation ~~standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan~~ and ~~perform~~subsidiary’s ~~the audit~~internal tocontrol ~~obtain~~over ~~reasonable~~financial ~~assurance~~reporting ~~about~~as ~~whether~~of ~~effective~~December ~~internal~~31, ~~control~~2017, ~~over~~based ~~financial~~on ~~reporting~~criteria ~~was~~established ~~maintained~~ in ~~all material~~Internal ~~respects.~~Control—Integrated ~~Our~~Framework ~~audit~~(2013) ~~included~~issued ~~obtaining~~by anthe ~~understanding~~Committee of ~~internal~~Sponsoring ~~control~~Organizations ~~over~~of ~~financial reporting, assessing~~ the ~~risk~~Treadway ~~that~~Commission. aIn ~~material~~our ~~weakness exists~~opinion, ~~and~~Atlantic ~~testing~~Coast ~~and~~Financial ~~evaluating~~Corporation ~~the design~~ and ~~operating~~subsidiary ~~effectiveness~~(the ofCompany) ~~internal~~maintained, ~~control~~in ~~based~~all onmaterial ~~the~~respects, ~~assessed~~effective ~~risk.~~internal ~~Our~~control ~~audit~~over ~~also~~financial ~~included~~reporting ~~performing~~as ~~such~~of ~~other~~December ~~procedures~~31 as2017, webased ~~considered~~on ~~necessary~~criteria established in ~~the~~Internal ~~circumstances.~~Control—Integrated Framework We(2013) ~~believe~~issued ~~that our~~by ~~audit~~the ~~provides~~Committee aof ~~reasonable~~Sponsoring ~~basis~~Organizations ~~for~~of ~~our~~the ~~opinion~~Treadway Commission.

AWe ~~company's~~also ~~internal~~have ~~control~~audited, ~~over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes~~ in accordance with ~~generally accepted accounting principles. A company's internal~~the ~~control~~standards ~~over~~of ~~financial~~the ~~reporting~~Public ~~includes~~Company ~~those~~Accounting ~~policies~~Oversight ~~and~~Board ~~procedures~~(United ~~that~~States) (iPCAOB) ~~pertain to the maintenance of records that~~, ~~in reasonable detail, accurately and fairly reflect~~ the ~~transactions~~consolidated ~~and~~financial ~~dispositions~~statements of ~~the assets of the company; (ii) provide reasonable~~Atlantic ~~assurance~~Coast ~~that~~Financial ~~transactions~~Corporation ~~are~~and ~~recorded~~subsidiary as ~~necessary to permit preparation~~ of ~~financial~~December ~~statements in accordance with generally accepted accounting principles~~31, 2017 and ~~that~~2016 ~~receipts~~ and ~~expenditures~~for of the ~~company~~years ~~are~~then ~~being~~ended, ~~made only in accordance with authorizations of management~~ and ~~directors~~our ofreport ~~the company; and (iii) provide reasonable assurance regarding prevention or timely detection of~~dated ~~unauthorized~~March ~~acquisition~~16, ~~use~~2018, orexpressed ~~disposition~~an ofunqualified ~~the~~opinion ~~company's assets that could have a material effect~~ on ~~the~~those consolidated financial statements.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Atlantic Coast maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Atlantic Coast as of December 31, 2016 and for the year then ended, and our report dated March 14, 2017, expressed an unqualified opinion thereon.

Atlanta, Georgia

March 1416, ~~2017~~2018

9186

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Atlantic Coast Financial Corporation

We have audited the accompanying consolidated ~~balance sheet of Atlantic Coast Financial Corporation and its subsidiary as of December 31, 2015, and the related consolidated~~ statements of operations, comprehensive income, stockholders' equity, and cash flows for the ~~years~~year ended December 31, 2015 ~~and 2014~~. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our ~~audits~~audit.

We conducted our ~~audits~~audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our ~~audits~~audit ~~provide~~provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the ~~financial~~results ~~position~~ of ~~Atlantic~~operations ~~Coast Financial Corporation~~ and ~~its~~cash ~~subsidiary~~flows as of ~~December~~Atlantic ~~31,~~Coast Financial ~~2015,~~Corporation and ~~the~~its ~~results~~subsidiary ~~of their operations and their cash flows~~ for the ~~years~~year ended December 31, 2015 ~~and 2014~~, in conformity with U.S. generally accepted accounting principles.

Miami, Florida

March 16, 2016

9287

ATLANTIC COAST FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, ~~2016~~2017 and ~~2015~~2016

(Dollars in Thousands, Except Share Information)

	2016		2015
	2017		2016
ASSETS
Cash and due from financial institutions	$	3,~~744~~432	$	63,~~108~~744
Short-term interest-earning deposits		5646,~~149~~977		1756,~~473~~149
Total cash and cash equivalents		5950,~~893~~409		2359,~~581~~893
Securities available-for-sale		6537,~~293~~683		~~120~~65,~~110~~293
Portfolio loans, net of allowance of $8,162 in 2016 and $7,745 in 2015		639,245		603,507
Portfolio loans, net of allowance of $8,600 in 2017 and $8,162 in 2016		757,506		639,245
Other loans:
Held-for-sale		73,~~147~~623

Filing Compare · Atlantic Coast Financial CORP